Sunday, May 19, 2013

Krugman's Faulty Understanding of Austerity

By, Chris Rossini

Paul Krugman is talking Austerity:
...if the real problem is that we overspent and lived beyond our means, we should be working harder, not throwing millions of people into unemployment.
The words that he uses are very general and don't really define the real problem. "We overspent" and lived "beyond our means" is very fuzzy. It virtually says nothing.

I'll define it more specifically. The real problem, is that the Federal Reserve acts as a price fixer that falsifies interest rates. It hampers the market's role in balancing savings and investments throughout the economy.

Borrowing and investments, that would not have be made under normal market conditions, are made thanks to the Fed's forcing down of rates. (Think dot-coms, fiber optics lining the ocean floor, houses, neighborhoods, and skyscrapers going up with reckless abandon). These malinvestments occur economy-wide (i.e., not just in some niche industry).

That's "the real problem"; and it's much more precise than Krugman's sloppy "we overspent" nonsense.

A key thing to remember is that the malinvestments themselves are revealed after the Fed starts raising interest rates again. So if you take today (for example) Krugman and his opinion-molding buddies will point out record corporate profits, rising stock prices, a rebound in housing prices, and lots of different charts and statistics to show you how everything is going fine and dandy.

But the truth is the exact opposite. Right now is when the damage is being done. Where specifically will be revealed to us at a later date.

Contrary to what Krugman's buddy Joe Weisenthal likes to say, the Fed is not providing "training wheels" for the market. The market, which is much more powerful than governments and their central banks, is in no need of training wheels.

When the malinvestments are ultimately revealed, Krugman says "we should be working harder" and "not throwing millions of people into unemployment". Working hard has nothing to do with anything, and unemployment is, unfortunately, necessary to help fix the problem that the Fed has created.

The liquidation of bad investments are a necessity. Why should people continue to create things that are at odds with consumer desires. Should governments have kept the horse and buggy makers in business even though consumers wanted cars instead? Unemployment is a part of the constantly changing market. The Fed caused an increase in hiring that should have not occurred. So in every logical sense, those people have to be let go.

In order to solve the real problem, a stop must be put to the process of artificial rates which sets in motion the whole boom/bust cycle.

That responsibility lies solely with The Federal Reserve. It's time to end it.

Follow @ChrisRossini


  1. It is the fractional reserve banking system itself that is at the heart of the boom and bust cycle. It was David Huume and David Ricardo who realized it back in the 19th century, according to Rothbard. However, Rothbard went on to explain that, they had no theory as to why the bust is not isolated but pervasive among businessman and entrepreneurs (who otherwise are good forcasters) and why it begins in the capital goods market rather than consumer goods. And here is where the artificial lowering and manipulation of interest rates explains these other two phenomenon.

  2. I would argue that unemployment is not necessary to fix the problem, but rather, a change in the type of employment. There may be temporary unemployment increases while malinvestments are liquidated, but as the economy fixes itself, there will be new employment in the industries that grow as a result. Government is not only increasing malinvestment, but malemployment. And just as it may take some time for capital to find the "correct" place to be, the same will happen with employees. Currently, people are being wrongly steered by a manipulated market into developing skills in industries that are unsustainably large. By trying to solve unemployment, they are only ensuring more unemployment in the future. But the point is, this unemployment would only be temporary if the government didn't try to fix it. The more they try to fix it, the more long-term it becomes. Many people have been going back to school to learn skills to gain employment, but how many of them are currently putting their effort into learning the wrong skills? That is another thing we won't know until after the malinvestments are evident.