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Source link: http://archive.mises.org/10041/krugman-inflation-not/

Krugman: Inflation? Not!

May 29, 2009 by

In today’s column, Paul Krugman now insists that not only should we not fear inflation, but we don’t even have to worry about it at all, at least in the short term. As is his style, Krugman wraps a Big Lie around a tiny kernel of truth.

First, the self-pronounced Great One claims that anyone who even says the “I-word” is engaging in scare talk. Banks might be flush with reserves, he notes, but lending is way down. (Funny how that happens when government demonizes the healthy firms and props up the sick ones.)

Second, Krugman forgets that there is another inflation card to be played, and that is the Federal Reserve purchasing bonds directly from the Treasury and the Treasury spending the money from there. In fact, Krugman has endorsed the use of inflation as a way to give the economy “traction.”

In his book, The Return of Depression Economics, Krugman states that most economic problems can be “solved” by governments printing more money. To Krugman, money is nothing more than a governmental creation that can — and should — be manipulated by the state whenever Great Minds like Krugman declare it.

Here is someone who attacks gold as money, not simply because governments cannot manufacture new gold to give an economy “traction,” but also because things like gold (or any monetary standard) come with expectations of honesty, integrity, and holding to promises. That, according to Krugman, is silly:

I’ve just reread Eichengreen and Temin, The Gold Standard and the Great Depression, which does a great job of showing how the “gold mentality” — what they call mentalite, with an accent — paralyzed policymakers. (The longer-form version, with more personal color, is Liaquat Ahamad’s Lords of Finance.)

What E&T show is that circa 1930 key decision-makers had spent so many years equating adherence to gold not just with prosperity, but with morality, decency, civilization itself, that they couldn’t even contemplate breaking with that orthodoxy — even in the face of total catastrophe.

I think we’re more flexible now. But my sense is that the mystique of finance is playing a somewhat similar role.

One cannot minimize what he is saying, for it goes to the heart of Krugman’s view of economics. In that view, people and their choices are to be manipulated and coerced whenever the government declares it. Now, Krugman seems to believe that only governments can prevent economic disaster. Others, like me, hold that governments generally are the cause of economic disaster, and that certainly holds true in the current crisis.


Dennis May 29, 2009 at 10:46 am

A major, perhaps the major, reason why Krugman and those like him support the scientifically unjustifiable, nonsensical policies that they do is because it confers to them, as well-placed technical advisors to the politicians, tremendous power and influence and excellent monetary compensation.

Krugman and his like are not economic scientists, but court economists.

Bogart May 29, 2009 at 10:47 am

It is like any government program:
It is not a problem until its a problem.

Think about the disaster of Medicare. Right now it isn’t a problem. So if we just wait longer maybe it won’t be a problem in the future.

I wish these clowns would feel this way about Global Warming that isn’t a problem at all.

Joe O. May 29, 2009 at 10:49 am

“In his book, The Return of Depression Economics, Krugman states that most economic problems can be “solved” by governments printing more money.”

I’m sorry but everytime I read that particular phrase I just start laughing and can not finish the rest of the article because of it. That method didn’t work with the Continental dollar, it didn’t work in Weimar Germany, it didn’t work in Argentina, it didn’t work in Hungary, nor in Yugoslavia, it is not working in Zimbabwe and it will not work now. May I suggest that the writer place that phrase at the end for a possible joke punchline because it really is funny. ;)

Alex Fabijanic May 29, 2009 at 11:34 am

“I wish these clowns would feel this way about Global Warming that isn’t a problem at all.”

Well, but the thing is that everything is turned upside-down in their version of the reality. Man-made Keynesian economic disasters “just happen” naturally. And those that really do just happen in nature (e.g. global warming) are man-made. Anything goes as long as government can perpetuate the myth of its necessity and role as as savior.

Bruno May 29, 2009 at 1:42 pm

But what happens when we are living in hazardous, exceptional times? What happens when, and if, we are at war, for example? Shouldn’t the government have some kind of leverage (bad choice of words, perhaps) for bad times?

In the war of independence, didn’t the government issued bonds in order to finance the war effort, bonds that were never really payed back? Yet, it was the necessary thing to do. There was no other way.

Sometimes, extraordinary powers are necessary. Even if the ultimate culprit of the present crysis is the government.

Kevin May 29, 2009 at 2:03 pm

Krugman is a preacher, artist and magician with skills on par with any Las Vegas stage act, con artist or sham faith healer. While I find his very existence disturbing and irritating, I can’t help but marvel at his ability to string together, time after time, article after article, totally incorrect and illogical garbage and get paid handsomely for it.

In his writing, basic questions aren’t asked about his assumptions. Arguments against his policy recommendations are hobbled because he routinely and intentionally fails to paint the whole picture and correctly state the counter arguments. Any logical model put forth in his popular writing can usually be dismantled with basic economic knowledge.

Whenever reading to Krugman, it is important to remember what he is: A partisan hack without ethics.

terrymac May 29, 2009 at 2:11 pm

Should we grant governments exceptional powers in times of war to print money? We should not. If a war truly is justifiable, people will find a way to pay for it. Printing money only enables the government to get away with vastly inefficient programs, at the cost of deceiving people and destroying the value of their currency. Ever notice that prices rise in wartime? This is always blamed on “war profiteers”; shouldn’t we rather point the finger at those “wartime printing powers” which create excess currency? Are not rising prices the normal consequence of increasing the money supply faster than production would warrant?

Lastly, we have considerable historical evidence that governments are entirely too ready to create “emergencies” which warrant their “emergency powers.”

Bruno May 29, 2009 at 3:29 pm

Saying that “if a war if truly justifiable, people will find a way to pay for it” is a magic argument. You could apply it for almost anything. And yet it says nothing. What if a war is justifiable and necessary, but most people do not have the means to pay for it? Then the government has to print money, or indebt itself, in order to pay for the war, even if it means impoverishing its citizens and crippling the economy.

Besides, if you were correct, then you should regret the war of independence, and hail former king George III. Because the war was funded through fiat money and non-honored bonds.

As for the historical argument, however, I partially agree with you. But I still believe in checks on government, specially constutitional checks. You have to remember that when the USA government started to wage wars around the globe, the first of them was waged against Spain in 1898; and it wasn’t, as the wars the came next also weren’t, waged against the will of the people. The people claimed for it. Just one day after the japanese attack on Pearl Harbor, six million americans tried to enlist in the army…and even Vietnam was a popular war, until the media turned against the government.
Do not just blame the government, as an institution, for wars. Blame the people first, for governments are only a reflection of the innermost people’s desires.

Chris May 29, 2009 at 4:04 pm

You’re late to the party in 1898. Don’t forget the Barbary wars.

Speaking of which, Jefferson agrees with you.
“Though much an enemy to the system of borrowing, yet I feel strongly the necessity of preserving the power to borrow. Without this, we might be overwhelmed by another nation, merely by the force of its credit.”

but that’s tempered by

“…that we shall all consider ourselves unauthorized to saddle posterity with our debts, and morally bound to pay them ourselves…”

If we have borrowed future generations into slavery we have lost the war anyway.

Marius Z May 29, 2009 at 6:52 pm

Pearl Harbor and US entering WWII did not happen in a vacuum, there was plenty of media hype and propaganda to go around, like today.

Maybe we just found a way to World Peace: if you want to wage war, you gotta pay cash. None of this money printing business. Whaddya say?

Gil May 29, 2009 at 8:54 pm

The American War of Independence probably was a waste of time – Australia didn’t rebel against the Crown, went with the flow and is in pretty much the same position. Besides how many imagine the complaints of ye olde Libertarians just after Independence saying something “I was fighting against the British government to abolish government not install an American Government which is pretty much the same thing”?

newson May 29, 2009 at 10:10 pm

gil says:
“The American War of Independence probably was a waste of time – Australia didn’t rebel against the Crown, went with the flow and is in pretty much the same position.”

well, no. australia has never had the same attachment to liberty as the us, probably because we did go with the flow. if the americans are sliding towards our more collectivist mentality, it’s precisely because they’ve lost much of their old spirit of self-reliance and hatred of the yoke.

ryanb_a3 May 30, 2009 at 12:16 am

Am I just plain crazy? Although I commonly disagree with him, I’ve always held a modicum of respect for Krugman (because I rationalize in my mind that what he says is what he thinks he can get away with as partisan hackery to benefit “his” party agenda rather that a true reflection of what this man MUST know to be true), but ever since I saw that face off against George Will on This Week where he totaly glazes over one of the more significant aspects of production while speaking about the Great Depression (yes, the one where Krugman allegedly “took Will to school”) I’ve begun to question the basic intellectual ability of this man. Don’t say the “I” word? After what has been done to this date? Does anyone really think that inflation is improbable? Does anyone really believe that any economic magistry will be able to possibly stop the inevitable inflation coming? Honestly, that’s not a rhetorical question. Is there any back-door escape route from this economic calamity?

Gil May 30, 2009 at 12:51 am

How exactly does Australia have a collectivist mentality that the Americans don’t? I thought Australia does stuff a decade or two after the U.S.A. Yanks grump that the welfare state appeared in the 1930s but the welfare state started in the 1970s for Australia. Besides, how were Americans necessarily more ‘laissez-faire’ than the Brits or even the Australians as most of the West was a sort of laissez-faire during the 1800s? It was said that an American visiting Manchester during the Industrial Revolution and was disgusted as the pollution and the state of the children who had to work in the factories and said “Thank God I wasn’t born in Manchester!” The American Revolution doesn’t seem much about freedom as much not wanting to have to answer to higher power in another nation. After all, the U.S. was the last Western nation to make slavery illegal.

P.M.Lawrence May 30, 2009 at 1:29 am

“After all, the U.S. was the last Western nation to make slavery illegal”.

Wrong, actually. Brazil was later (since it used a gradualist approach to abolition, there were still some slaves quite late), and I think Spain (e.g. in Cuba) was a bit later too.

But the whole Australia welfare thing started much earlier (one key date is the “Harvester decision” of the early 20th century, effectively setting up a minimum wage system through judicial activism). The submission to authority thing goes right back to the nature of Australia’s establishment as a government enterprise; that goes further than just the influence of the convict system.

newson May 30, 2009 at 3:09 am

to gil:
“It is not the bad qualities, but the good qualities of these alien races that make them so dangerous to us. It is their inexhaustible energy, their power of applying themselves to new tasks, their endurance and low standard of living that make them such competitors.”

this is from alfred deakin, our second prime minister, touting the benefits of the white australia policy, which was another example of the protectionist, collectivist attitudes that were prevalent following the shearers’ strike and industrial unrest in the 1890′s. p.m. lawrence’s example is a good one. i’m surprised anyone would be surprised about my contention.

newson May 30, 2009 at 3:19 am

besides, gil, “susso” (the dole) existed in australia during the depression. read “weevils in the flour” (wendy lowenstein): you could be reading “grapes of wrath”.

Gil May 30, 2009 at 3:26 am

Newson, my original grump was about you stating “. . . Australia has never had the same attachment to liberty as the U.S., probably because we did go with the flow. If the Americans are sliding towards our more collectivist mentality . . .”

I’m not stating that Australia had a nice history however if the Yanks take a step back their history isn’t exactly pretty either. However, what does it mean that “Australians don’t have the same attachment to liberty”? Does it matter that the Australian Constitution doesn’t have equivalent statements to the U.S. Constitution’s 1st and 2nd Amendments? Alternatively, how exactly are Australians “collective” in a way Americans aren’t? So Australian have laws for minimum wages too, and . . .? Some Aussies and Yanks get misty-eyed about the concept of Social Justice, so . . .? The progression of the West from the 1800s sorta-laissez-faire to the 1900s welfare state happened fairly similarly across the West. Now had you said “the American are being as welfare-statist as the Swedes” I could understand where you might be coming from.

newson May 30, 2009 at 3:49 am

to gil:
well, fighting a war for independence and drafting a constitution expressly designed to limit centralization of power is a fairly good start. people in australia were arguably much freer in those in the earlier years of the nation only because the state was so much smaller and had difficulty imposing its will, not because of some ideological barrier.

no, i don’t resile from my original statement. even today’s much degraded america is far less steeped in egalitarianism than australia. haven’t you got bored of hearing how selfish, dog-eat-dog the americans are, and how lucky we are?

zombiehero May 30, 2009 at 8:06 am

Keynesianism is made by an elitist for elitists.
Krugman is a man will a huge ego, only dwarfed by our current President.
Keynesianism fits his personality because he can use his Nobel and Keynesian voodoo, that the “little people” can never understand to give him a sense of undo importance.

Treat Krugman like what he is, an egomaniac.

jason4liberty May 31, 2009 at 10:04 am

Hard money is what made war limited. Unlimited deficit financing through the printing press or bond issue is what made war total. The war of 1812 was ended in 1815 because the US could not finance more spend.

It is also important to note that printing additional new money does not make new things. It just gives the government the ability to purchase those things that exist with new money (or new access to the existing capital structure), before the increase in price caused by inflation takes hold. My point is that the thing had to exist before the warring state can purchase it. With sufficient will from the population, the accumulated capital that the government accesses by deficit financing could have been directed to the ends government directs it to, but without the deception and unlimited scale that modern finance lends. There was a time when the population distrusted monarchs, and the monarchs limited ability to finance war led to limited war. Unlike our current situation.

Hard money serves as an important check on the ability of the state to enslave and destroy the population. Anyone who doesn’t believe that has their time focus set too short. Fiat money and fraudulant finance only have the capability to destroy – long term.

Bob Roddis May 31, 2009 at 7:50 pm

I’d like Krugman and the other Keynesian noodle-brains to explain how the dilution of the money supply by the central bank and the stealing of purchasing power of others holding the old money is not theft. I’d like them to explain how such a continuous dilution of purchasing power will not invariably wreak havoc with the free market price information system, especially the long term investment price system. Finally, since it is undeniable that the Fed did nothing to fix the 1921 depression while spending and taxes were slashed at the same time, I would like them to set forth the historical, evidentiary and logical basis for their theories about curing depressions and recessions.

I’m holding my breath.

Robbrian June 1, 2009 at 6:38 am

Bruno and Chris:

Krugman the opportunist has egomania which in most cases drives out critical analysis, substituting it with “what I think you should know” sophistry.

Let’s begin with the notion of just printing money. While it appears to be a panacea, it cannot be done in isolation. If you print you must also destroy. Bond holders must be told to redeem interest bearing bonds, notes and bills in exchange for currency. Then the interest bearing instruments must never be issued agaian. This monetization does not produce inflation because M3 has not changed.

As is the case now, there must be idle labor and a demand for capital, to absorb the new money. When demand for goods and services and the supply of same are in balance and new money enters the economy inflation is not far behind.

A second point that Krugman and others fail to properly discuss is the role of fiat money in a system where there are no interest charges to the Federal Government to fund its budget. The example I like is that represented by Abraham Lincoln’s “Greenbacks.” He rebuffed Eastern Bankers who sought to take advantage of his need to finance the Union’s war effort, by offering $4-500 million at 26%-30% interest. Lincoln, instead, ordered the issuance of “Greenbacks” as legal tender backed by the good faith and credit of the Union. He won the war and created an environment for the Federal government to mount public programs without creating deficits. His debt free currency is a mechanism that is not without merit in present day circumstances, where the Fed generates both fiat money and real inflation through book entry fractional reserve banking.

Maybe the Federal government and other State governments need to take a hard look at what the Bank of N. Dakota has accomplished over the past 9 years:

1. “… the state’s GNP has grown 56%, personal income has grown 43%, and wages have grown 34%. This year the state has a budget surplus of $1.2 billion!” (Ellen Brown, March 11th, 2009)

2. All state and local government agencies are required to place their funds in the bank. Other entities may also open accounts at the Bank; however, BND offers fewer retail services than other institutions, and has only one office, limiting its competitiveness in consumer banking. There are fees and a minimal income tax system but essentially the debt free funding to state agencies allows N. Dakota to carry a large surplus every year and fund long and short term public needs.

Krugman would do well to use his forum to inform his readers of real monetary options rather than admonish us for using terms that reflect the state of what’s likely in the near term, given our obviously, superior capability for critical thinking.

Don Mitchel August 30, 2010 at 2:31 pm

I believe Mr. Krugman suggested the Federal Reserve should follow a policy of slight increase in inflation. Would it not be better for national debt, if the Federal Reserve did nothing and this inflation could be created by legislation to protect our waters? The following excerpt is from a Dec 2009 report for Congress about national legislation and ballast water.

“Although estimates of the costs of ballast treatment may be imprecise and vary from vessel to
vessel, there is some general agreement on average costs.14 For example, it may cost an estimated $400,000 per vessel for modification of container/bulk vessels to use onshore ballast water treatment facilities at California ports. More generally, the cost of retrofitting vessels to treat
ballast water has been estimated at between $200,000 and $310,000 per vessel for mechanical
treatment and around $300,000 for chemical treatment.15 Most of this expense will be borne by
foreign shipping companies, as the U.S. flag fleet is a small percentage of the global fleet,16 and
likely passed along to consumers of products imported on these ships.”

Although this type of legislation may hurt our current largest employers, in the long run it may even help produce jobs that will stay in America, if implemented fast enough. The longer we delay, we are allowing the foreign shipping industry to prepare for “change” while Americans are out of work. Currently the only work being done is another delay for a twenty year Coast Guard phase in and some ships are going towards that direction now, because the life of their investment will be assured despite better technology?
If this continues on for another six years there will not be much hope for America ever again to become cost competitive manufactures.

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