Friday, November 14, 2014

Paul Krugman, Trickle Down Price Inflation and the Ultimate Death of Krugmanization

By Robert Wenzel

Paul Krugman is flipping out over a recent commentary by hedge fund operator Paul Singer:
Sometimes the absurdity of what passes for economic wisdom surpasses even my highly adapted expectations. I really, truly expected that even Wall Street would consider PeterPaul Singer’s hyperinflation in the Hamptons rant embarrassing, and try to pretend that it never happened. But no; apparently it’s being passed around eagerly by traders and big shots who think it’s the greatest thing since sliced foie gras.
Singer actually nailed it. He writes:

There is a current set of delusions that is powerful and dangerous: that monetary debasement can be infinitely pursued without consequences; that the financial system is now solid and sound; that the low volatility and high prices of stocks, high-end real estate and bonds are real; that bonds are a safe haven; and that large financial institutions which get into trouble in the future can be unwound in a much safer way than they could be in 2008. We have discussed each of these elements in the pages of this report and previous ones in an attempt to reveal the fallacy and unsustainability of such beliefs. But, as stated above, they will only enter the history books as mass delusions if they are unmasked in the future as unjustifiable and erroneous beliefs at the time they were held. We think that test will be met, perhaps soon.
And this is just sweet:
The believers in the wisdom of this central-banker-centric economic world have been crowing and gloating that those (like us) who have raised concerns about the risks posed by the post-crisis, monetary-dominated policy mix (inflation, distortions, growing inequality, lower growth) are just “wrong” and should apologize for a “massive error.” This, shall we say, “Krugmanization” of a substantial portion of the economics profession and punditocracy is in its triumphalist phase, and whether its smug non-stop “victory lap” ultimately represents an embarrassing high-water mark is for subsequent events to reveal.
Krugie links to an attack on the analysis via Wapo.  The attack includes this quote from the Singer paper:
 Check out London, Manhattan, Aspen and East Hampton real estate prices, as well as high-end art prices, to see what the leading edge of hyperinflation could look like.
The WaPo title from where this is quoted is titled:  This billionaire thinks the Fed is missing the hyperinflation in the Hamptons: The prices of houses in the Hamptons and high-end art are the "leading edge of hyperinflation."

WaPo goes on:

That's right: Paul Singer thinks Weimar-style inflation might be coming because he has to pay more for his posh vacation homes and art pieces.
Now, it's true, if you're a billionaire who's interested in decorating your high-end real estate with high-end art, then, yes, your personal inflation rate is higher than others. But tough luck. (I'm pretty sure you'll manage). The Fed, you see, isn't worried about the Billionaire Price Index.
The implication here is that Singer is only concerned about inflation in the Hampton's., where the billionaires play. WaPo, in other words, is distorting Singer's point. Singer nowhere is saying that the Hampton's crowd can't afford to pay the soaring prices, or that he is particularly concerned for those that have to pay these prices. He is rather saying that Hampton prices are a leading indicator, It is where price inflation starts. It is, in fact, extremely insightful when he writes that it is the "leading edge of hyperinflation."

This Singer observation shouldn't be mocked as WaPo and Krugie do. It is a correct warning.

Accelerating inflation starts with assets held by the operators who receive new Fed printed money first. For sure, this is the Wall Street crowd, which in the summer also becomes the Hampton's crowd.

That price inflation does not develop through the entire economy at the same time, is a key insight of Austrian School Business Cycle Theory. In a sense, it can be understood that price inflation at the general consumer level is a trickle down phenomena that first starts by operators in the capital goods sector.

When viewed from this perspective, Singer's observation is not outrageous, in the sense that WaPo and Krugie, would have you believe. It is a very important warning. It is Singer saying, "Hey, rapidly accelerating price inflation has already hit at the level of the masters of the universe. It is sure to trickle down and this should be a great concern to all."

When this price inflation acceleration does trickle down, it will, of course, put Krugmanization to death. You never want to be on the wrong side of the trickle.

 Robert Wenzel is Editor & Publisher at and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics


  1. It all makes a lot of sense when you look at it from the perspective that the left is driven, more than anything else, by envy.

  2. Excellent coverage of this feud. Checking EPJ, I'll never miss a mainstream Krugie battle.