Friday, January 6, 2012

Further Improvement in Unemployment Confuses Keynesians

The U.S. unemployment rate fell to 8.5 percent last month and nonfarm payrolls rose by 200,000, according to the Bureau of Labor Statistics.

The hiring gains cap a six-month stretch in which the economy generated 100,000 jobs or more in each month. That hasn't happened since April 2006, before the start of the financial crisis.

Paul Krugman-like Keynesians remain totally confused. Keynesian economists surveyed by Dow Jones Newswires had forecast a gain of only 155,000 in payrolls and a jobless rate of 8.7%.

 Just last month while the hiring was going on Krugman wrote that we we are under depression conditions:
....under depression conditions — which is what we have now — inflation is very much a positive thing.
As for his call for more inflation, Krugman's last word on that was that he was worried about deflation, he is going to get smacked around big time in early 2012 with price inflation that will rocket even the silly core inflation index he watches.

Alreay, gasoline prices are starting the year off with a bang.They are at the highest-ever level for the start of a new year, ever.

The average U.S. price for a gallon of regular unleaded stood at nearly $3.28 on Jan. 1, according to AAA Daily Fuel Gauge Report.

That’s over 20 cents above the year-ago price and almost 63 cents above 2010’s starting level.

Bottom line, since Krugman doesn't understand how money impacts an economy, at major turns he tends to be way out of whack on his forecasts. Only Austrian business cycle theorists understand the manner in which central bank money manipulation can impact an economy. Bernanke money printing has been super-aggressive. This is behind the manipulated turnaround in the economy that was spotted first here at EPJ. The price inflation is coming.



  1. Robert you seem to be just about the only Austrian who has predicted the recent 'boom' that we are experiencing. But how can you be sure that we will have significant price inflation?

    As stated by Rothbard on 210 of The Mystery of Banking, prices don't actually have to increase during an expansionary period:

    "The fact that wholesale prices [during the 1820s boom] remained about the same over this period does not mean that the monetary inflation had no ill effects. As “Austrian” business cycle theory points out, any bank credit inflation creates a boom-and-bust cycle; there is no need for prices actually to rise. Prices did not rise because an increased product of goods and services offset the monetary expansion. Similar conditions precipitated the great crash of 1929. Prices need not rise for an inflationary boom, followed by a bust, to be created. All that is needed is for prices to be kept up by the artificial boom, and be higher than they would have been without the monetary expansion. Without the credit expansion, prices would have fallen during the 1820s, as they would have a century later, thereby spreading the benefits of a great boom in investments and production to everyone in the country."

    It seems that though the money supply has risen in recent years, prices have generally remained stable. Wouldn't this point towards a future horizontal price level prior to the bust?

  2. Hi Daniel,

    My name is Daniel too. I believe the Fed can continue to expand the money supply without short-term serious consequence with regard to inflation. This is based on the fact that other countries hold our dollars as reserves. Maybe thats why were not seeing the inflation as fast as we thought.

  3. Daniel (#1),

    You're entirely confusing MB versus the money supply. Yes, the Fed has increased MB by astronomical figures, but prices can care less about the monetary base, prices only care about the money that is being traded and deposited. Right around June/July the money that was created all of the past few years began to be lent out, thus increasing deposits (ref. FRB).

    The Fed can literally create as much liquidity as they want, there are no limits. However, prices of both production goods and consumer goods do not display the inflationary changes until that money parked at the Fed begins to get into the economy and be bid against goods. While M2 has leveled off a little, the deposit growth over the past 6 months is more than enough to bid the prices of goods up. Further, it is my belief (and, I think the belief of R. Wenzel) that M2 will continue to grow in the coming months.

    Now, Daniel (#2) brings up a great point. Our current banking system transgresses national boundaries-- the western central banks of the world often work together. In either case, it is quite clear that there are many dollars outside of our economy and that holding dollars has no return. What the government and the Fed is attempting to do right now is to devalue the dollar in order to increase exports (in accordance with the Law of Supply on nominal prices). However, one must remain cognizant of the fact that if exports increase, then that means that dollars must come back to the US.

    It is pretty clear to anybody that understands the ABCT, as well as foreign trade, that there are going to be quite a bit more dollars floating around our economy than there was in the past. This means price inflation.

  4. Oh, I forgot to mention that Rothbard's analysis is based upon the difference between the production of actual goods and the production of new money. Of course, with a commodity money, the production of new money would be dependent upon the capabilities of the market to produce more of the money commodity. In our current system, money is merely a digit, a number on an account.

    I would be willing to bet a substantial sum that the monetary base has growth many more times than our productivity. Further, that monetary base can be multiplied through lending and deposits, to the point that it can grow by a factor of 10 of what the monetary base is. Of course, lending and deposits aren't moving nearly fast enough to reach that factor, but they certainly aren't limited by market time-preference either (ZIRP is still in effect).

  5. Thanks for the responses. Hmmm... so you are saying that while the monetary base has expanded over the past 4 years or so, it hasn't been until relatively recently that the money supply has increased?

    I am looking at the M2 numbers from the Fed website ( here is the yearly inflation:

    Dec 2007-08: 10%
    Dec 2008-09: 3%
    Dec 2009-10: 3%
    Dec 2011-10: 9%

    Isn't inflation for the past year quite typical? There was 10% monetary inflation 4 years ago, yet this did not result in 10% price inflation. This is why I was mentioning Rothbard, who stated that prior to a bust there need not be price inflation.

    Why do you think that things will be different this time, with respect to prices?

    Daniel #1