Saturday, December 13, 2014

How Desperate Can Paul Krugman Get?

In an attack on Ambrose Evans-Pritchard, Krugman writes:
Ambrose Evans-Pritchard, in an otherwise coherent description of Europe’s deflation risk, approvingly quotes Tim Congdon blithely declaring that monetary reflation in a liquidity trap is no problem:
The interest rate is totally irrelevant. What matters is the quantity of money. Large scale money creation is a very powerful weapon and can always create inflation.
Sure. Just look, in the accompanying chart, at the rate of M1 growth in the US versus the Fed’s preferred measure of inflation. Feel the power! Seriously, how can an alleged expert be talking straight monetarism at this point in history?
He put this chart up at the post:

But who the hell uses the very narrow M1 as a measure of the money supply?

I don't know of any economists that does. In fact, some even think the broader M2  does not cover all the potential elements of the money supply. Here's how one economist explains it:
[H]ere’s an even more basic question: what is money, anyway? It’s not a new question, but I think it has become even more pressing in recent years.

Surely we don’t mean to identify money with pieces of green paper bearing portraits of dead presidents. Even Milton Friedman rejected that, more than half a century ago. For one thing, a lot of those pieces of green paper are pretty much inert — sitting outside the United States, in the hoards of drug dealers and such. For another, checking accounts are clearly a close substitute for cash in hand.

Friedman and Schwartz dealt with this by proposing broader aggregates –M1, which adds checking accounts, and M2, which adds a broader range of deposits. And circa 1960 you could argue that those aggregates were good enough.

But now we have a large shadow banking system, in which things like repo serve much the same function as deposits; M3 used to capture some of that, but the Fed discontinued it, in part I think because it wasn’t clear which repo belonged there, and data on repo not involving primary dealers is scattered. Whatever.

The truth is that these days — with credit cards, electronic money, repo, and more all serving the purpose of medium of exchange — it’s not clear that any single number deserves to be called “the” money supply....

But if you’re determined to view economic affairs through a sort of paleo-monetarist lens, focused on the evils of “printing money”, you’re going to have a hard time in the modern world, where the definition of money is increasingly vague.

Yeah, you guessed it. The quote above is from Krugman in a post he wrote in December 2010.

So why is Krugman using the M1 measure that no economist uses?  Could it be to distort his point against Pritchard in his favor because M2 growth is nowhere near as strong as M2 growth? This is what the difference between truth and desperation looks like:

To be sure, there is more to price inflation than simply the quantity of money that is being printed. I discuss this regularly in the EPJ Daily Alert.  The desire by the public to hold cash balances is very important and is the element that can, in practice generally only in the short term, dilute the impact of new money coming into the system having an impact on consumer prices.

But, my point here is about the Krugman desperation distortion machine, and not about the intricacies of  increased money supply and the when and how it will translate into higher prices.

1 comment:

  1. Dear Bob,
    Another classic method of obfuscation is to plot the two items on the same scale. Thus, between 2011 and 2012 it appears that the price index in the plot doubled from about 1.2 to 2.4 following the 4X increase in M1. If the price index had its own scale the correlation would have appeared to be quite strong.