Wednesday, January 2, 2013

Krugman Warns Price Inflation Threat is Coming

Paul Krugman is out with a fascinating post, Debt in a Time of Zero.

In a somewhat convoluted fashion (at one point he discusses issuing a trillion dollar platinum coin to payoff debt), he pretty much admits that price inflation is a real threat and that the Fed will have to fight it by shrinking the money supply. He writes (my bold).
It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. 
Thus, the most that Krugman can argue is the timing of developing price inflation threat, and perhaps severity. But, is Krugman more concerned than he lets on? Has he planted this inflation warning so that he can in the future point back and say, "Yes, as the start of 2013, I was fully aware that inflation would come to haunt"? And then blame accelerating price inflation on the failure  of the Fed to respond in quick enough fashion?

Further, does he seriously think the Fed is going to be able to "pull back" on the monetary base, without massive upheaval in the bond market? Here, Krugman is missing the BIG upheval that's coming, even though he may be starting to fear the price inflation.


  1. Definitely CYA. He's a master of nuanced verbal diarhea (sic).

  2. Do NOT let him get away with Academic Weasel Wording.
    He advocated MASSIVE confetti manufacturing for a L-O-N-G time.

    Will he try to state that "merely huge" increases in the money supply (that he criticized as "not being enough") caused the inflation that his calls for humongous M$ growth would NOT HAVE caused?

    This guy is NUTS! (But we knew that)


  3. Basically, the Fed is going to cause the Greatest Depression by shrinking the money supply in the middle of a shock to a depressed economy. And then Krugman is going to say "Look, I predicted this well in advance - give me another Nobel Prize!"

    1. "is going to cause"?

      Or did already? Just prolonging the after-effects now.

      In an older EPJ post I read where city services being suddenly lessened or eliminated could mean your city is headed towards bankruptcy.

      Last year all the cities around me were exclaiming how they were in the black with road salt.

      This year, after the first late in the year snowfall, they Very uncharacteristically didn't plow the roads much, or lay any salt in areas they usually do in a number of cities nearby.

      I wonder if it means they are going bankrupt?
      Nahh, they just re-did all those streets and sewers and put in the new playground equipment at the park almost no one uses.

      - IndividualAudienceMember

  4. "Has he planted this inflation warning so that he can in the future point back and say, "Yes, as the start of 2013, I was fully aware that inflation would come to haunt"?"

    Partly, yes.

    "Here, Krugman is missing the BIG upheval that's coming, even though he may be starting to fear the price inflation."

    In this we might start getting a clue into which camp the various mouthpieces fall: the purposefully deceitful, who knew all along the catastrophe that QE and deficits would bring yet preached the goodness anyway; or the clueless useful idiots, upon whom truth may be slowly leaking into their mainstream brains.

    Krugman's wobbling knees suggest he might be in the second camp.

  5. So, if high inflation hits by June 2013, does that rehabilitate Bob Murphy and the Austrian School?

    1. The Austrian school wasn't hurt at all anyway. The problem is some Austrian economists stupidly trying to put a set date on it even though they KNOW that's not possible.

    2. The issue also revolves around the credit markets. There are so many dependencies. Government action and inaction, corporate decisions, consumer decisions, etc.

      You can't predict when it's going to happen, only that if under certain conditions X happens, then we will have Y.

      I think what took everyone by surprise was the dynamics of this recession didn't quite follow the standard model of money printing that we were all used to. I feel that Mike (Mish) Shedlock correctly identified early on that credit was the big monkey wrench. The Fed can print all it wants, but if business and people don't want it / won't use it, you're not going to get the classic inflation model until they do.

      You already had massive credit outstanding, and coupled with the job losses and business failures, no one could take advantage of what was being offered.

      Now, what's been happening are a few factors that have impacting this: 1) Fannie and Freddie have been manipulating the short and foreclosure inventories (by not allowing shorts below "market" values and holding back auctions) so that the supply of cheap homes has been severely curtailed in the top troubled markets where the real-estate bubble popped. 2) Given the lowest interest rates we've ever seen, this is prompting another real-estate bubble that Bob has correctly identified. 3) People are going back to school because of the poor job situation, and doing so by taking out student loans. Not only are we setting up for another boom / bust in housing, but a double whammy in credit with school loans. Kids and adults are over paying for education and graduating without the income to pay the loans. 4) This on top of sovereign debt structural issues.

      If this all hits at once, I fear this will make the great depression look like a walk in the park. We haven't seen nothing yet, as those that lord over us have done nothing but kick the can, or worse.

      On the other hand, we can just pull a Japan and stagnate for decades. We're fundamentally different countries with different structures. Plus the $ is the world reserve currency, so that prolongs our ability to get away with debasement at everyone else's expense. It's easy to use Austrian Theory to see all the fundamental problems and know the outcomes, it's a whole 'nother story to predict sovereign activity and dates.

  6. Krugman advocates for massive deficit spending and stimulus, and then warns that these policies could be potentially inflationary down the road. You're right, he's just looking to have something that he can point to when it does hit the fan. Quite simply, he's trying to eat his cake and have it too.

  7. Please correct me if I'm wrong (and I HOPE I'm wrong) but if interest rates rise (even slightly) won't that cause a major bust in the bond market?

    If someone like Slugman is forecasting it, it means he sees it coming...and we all know what happens when people like that see it coming. He did see e housing bubble implosion...a few months before it happened.

    If bonds melt down, won't the ripple effect bankrupt most of the banks and holding companies (insurance, pension, etc.) and cause a major...dislocation. Maybe?

  8. "to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought."

    So I wonder what sucker Uncle Sam has got lined up to buy Federal debt denominated in rapidly decreasing dollars?


    I almost feel like Krugman is becoming schizophrenic. One minute he's telling Murphy to shut down his website and renounce his economic ideology over the lack of short term inflation(related to the stupid CPI metric) and just a few days later he's predicting inflation.

    Well, aside from the laundry list of character flaws & intellectually disengenuine statements Krugman puts on display fairly regularly we can at least say that the man has some very big balls.

    Very big indeed, and brass none the less, which is going up in value over the long haul. So we know he'll be "ok" when things get a little crazy, all he'll have to do is cut them off once the party starts.


    1. "So I wonder what sucker Uncle Sam has got lined up to buy Federal debt denominated in rapidly decreasing dollars?"

      African nations?

      That's part of why troops are being sent there?

      They are turning Africa into the new China, so...

      - IndividualAudienceMember

    2. I need to correct the comment about Krugman wanting Murphy to shut his site down, it was DeLong, not Krugman.

      My apologies to everyone. Most of my comment stands anyway in light of Krugman beating on those predicting significant inflation(like Murphy) for so long before his sudden/recent wavering.

  9. "I’ve had communications from a number of people asking an interesting question....why does the Federal government have to borrow at all? Why can’t it just print money to pay its bills?"

    It's only an "interesting" question to a complete moron. Man, these MMT people are dense. And Krugman seems to think that the only problem with the idea is that legally the money has to be created by the Fed. A trillion dollar platinum coin, what a joke!

    1. I think it's the wrong path to be calling people asking questions, "Morons." The reality is the super majority of people today do not understand economic theory, let alone Austrian Theory. They are products of generations of propaganda spewed from the government controlled media and public school system.

      There's a difference between people like Krugman and those who are ignorant of economics. Krugman is a mouthpiece of the very statist system that has nutured the environment we are now in. Him and those like him have a very real interest in the status-quo.

      Those who are ignorant of economics are looking for answers because they fundamentally don't grasp the concepts. They are looking to Krugman because he is put forth by the status-quo as an expert in order to skew the results and bias the public towards more statism. There is a very real design here.

      We (Austrians, Libertarians, etc.) need to embrace this ignorance with open arms and offer an alternative to the propaganda tools the state offers. Bob,, Lew Rockwell, etc. do a great job of this.

      Education of the masses is the key. It was just a couple hundred years ago that enough people knew better. If you want change, you need to set an example by changing the hearts and minds of those who don't understand and need a real education to help them.

      Being condescending to those who truly don't understand doesn't do anything but help the state continue down its path of enslaving those it lords over.

    2. Take it easy. If you read his statement closely, my understanding was that HE (Krugman) found the question interesting, not necessarily the people initiating the "communications". I didn't directly call anyone a moron, except maybe Krugman, but many of these MMT people understand pretty well how the Federal Reserve System works and they think the problems are that the Fed is a "private" entity and that the central banks are earning interest. Anybody who still thinks we can make ourselves prosperous by simply declaring worthless things to be valuable is just willfully ignorant.

      Other than that, I agree with everything you said.