Monday, June 16, 2014

Krugman on Inflation

File for future reference when the price inflation hits.

Paul Krugman writes:
There was a fairly characteristic argument over dinner last night about when the Fed should tighten. I’m in the camp that says it should wait until we see wages rising at least at pre-crisis rates. The other side says that wages are a lagging indicator, and if it waits that long the Fed will be behind the curve.
My answer to this is that I’m much more worried about a slide into a Japan-style trap of low or negative inflation than I am of a return to 70s-style stagflation, and that the big risk is that the Fed will tighten much too soon.


  1. Yes, the last thing we want is for stuff we need to live on to get - gasp - less expensive! The horrors!

    But to the Krugmanites, we all think that something getting cheaper means we will wait to purchase now anticipating even cheaper prices later, as if we'd rather starve and walk everywhere now knowing food and gas will be a bargain next week.

    The Keynesians are either monumentally stupid for believing such nonsense, or they're simply running cover for the bankers and government, who are the primary beneficiaries of easy money. Meanwhile, our cost of living rises and our savings are being eroded through reckless monetary and fiscal policies.

  2. Sound or Unsound?

    As follow-up to last week’s quarterly “flow of funds” analysis, I’ll take a brief look at the Rest of World (“ROW”) category. ROW now holds an incredible $22.971 TN of U.S. Financial Assets. To put this number into some perspective, ROW holdings began the nineties at $1.874 TN. Ballooning U.S. Credit and attendant unprecedented Current Account Deficits saw ROW holdings surge $4.335 TN, or 230%, during the nineties. Over the past 22 years, ROW holdings of U.S. Financial Assets have inflated $21 TN, or over 1,000%. Essentially, the U.S. has unrelentingly flooded the world with dollar balances. This helps explain a lot.

    The consequences of the massive inflation/devaluation of the world’s reserve currency have for a long time been readily apparent. For starters, our huge trade deficits with Japan and U.S. pressure for the Japanese to stimulate domestic demand played a prevailing role in Japan’s fateful late-eighties Bubble. The Greenspan Fed’s early-nineties stimulus measures then supported the inflation of myriad foreign Bubbles, certainly including Mexico 1992-1994. The Mexican bailout then ensured catastrophic “Terminal Phase” Bubble excess throughout the Asian Tiger “Miracle” Economies in 1996. An unstable global financial “system” nurtured serial major Bubbles, including Russia, Argentina, Iceland, Brazil, etc. throughout the nineties.

    After ending the ‘90s at $6.209 TN, ROW holdings of U.S. Financial Assets doubled (again) in just over six years. The mortgage finance Bubble period (2002-2007) saw ROW holdings surge $8.7 TN, or 116%, to $16.2 TN. It’s my view that the historic dollar devaluation during this period played a major role in precarious Bubble excess throughout the Eurozone (especially at the periphery). The crisis year 2008 saw U.S., European and global financial chaos. During that year, ROW holdings dropped an unprecedented $813bn to $15.386 TN.

    In the 21 quarters since the end of 2008, ROW holdings have jumped $7.585 TN, or 49%. The world was once again literally flooded with dollars. The global government finance Bubble thesis posits that these dollar balances (coupled with speculative flows) inundated the emerging markets, fueling unprecedented Credit expansion, financial Bubbles and economic malinvestment. China, in particular, succumbed to Bubble Dynamics on an historic scale.

    I have what should be a rather basic question: Is global finance sound or unsound? Is contemporary “money” and Credit sound? The issue of sound money and Credit has occupied a lot of thinking and written pages over centuries. Today, everyone seemingly couldn’t care less. Anyone that argues against conventional thinking on the subject is considered a wacko.