Despite the fact that indicators continue to suggest that Bernanke's money printing is impacting the economy and that price inflation is likely the next development, Keynesian Paul Krugman wants the Fed to continue to keep interest rates near zero, which means more money printing.
Krugman writes:
Aha. Greg Mankiw tells us that when you apply the coefficients for his suggested simple Taylor rule (a rule for setting the Fed funds rate), it shows the desired rate closing in on zero from below, suggesting that the end of the liquidity trap may be near.. If nothing else, we’ve learned that the liquidity trap is neither a figment of our imaginations nor something that only happens in Japan; it’s a very real threat, and if and when it ends we should nonetheless be guarding against its return — which means that there’s a very strong case both for a higher inflation target, and for aggressive policy when unemployment is high at low inflation.Krugman is right that the Fed is not likely to raise interest raise anytime soon. However, he is dead wrong that this is a good thing. Price inflation is never a good thing, but especially at the early stages of a recovery, when prices are likely to start accelerating anyway.
The bottom line is that the Fed almost surely won’t, and very surely shouldn’t, start raising interest rates any time soon.
His advise will comeback to haunt him, on this, just like so much of his commentary does.
How can you have serious price inflation when you have stagnant or declining wages?
ReplyDeleteAny inflation seen as such will be transitory and will wear off if the economy slips into a recession.
Bernanke is actually making deflation even worse by lowering interest rates, because bond speculators make a killing with risk-free profit.
"How can you have serious price inflation when you have stagnant or declining wages?"
DeleteQuick answer: Not everyone's wages are declining, or at the same rate. Look at who gets the money first from money-printing and who keeps their jobs the longest.
Any recovery will be nominal, not real.
ReplyDeleteWhen Bernanke and his colleagues worldwide started printing in post-subprime discovery in August 2007, followed by a stop in printing during the global food scare of spring 2008, Krugman missed both developments.
ReplyDeleteHe then missed the money printing leading to a rally from March 2009.
Then he missed the money printing from late summer 2011.
And now he argues for a Austrian boom through extension of zero interest rates and more QE?
I am confused. Does he believe that money printing creates a fake boom or does he actually believe that money printing creates real growth?