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Source link: http://archive.mises.org/10710/paul-krugmans-identity-crisis/

Paul Krugman’s Identity Crisis

September 25, 2009 by

Anyone who reads Paul Krugman, our latest “Nobel Prize-winning economist,” knows that Krugman believes inflation is not a threat to the economy at all. He is a regular defender of large fiscal deficits and expansionary monetary policy, claiming that they are the road to salvation from our so-called deflationary spiral. (We’ll ignore the fact that this “deflationary spiral” involves six straight months of price increases and regular complaints from Mr. Krugman himself about skyrocketing costs in health care.)

In 2009, Krugman stated that “deficits saved the world.” However, in 2003, when Alan Greenspan and the Bush administration were destroying this country’s balance sheet, Krugman was scared to death about inflation. The rest of this article references several paragraphs from Mr. Krugman’s March 11th, 2003, article, “A Fiscal Train Wreck.” FULL ARTICLE by Benjamin Lee


roy September 25, 2009 at 8:05 am

As I’ve said repeatedly… Krugman is not ignorant. He is willingly and profitably lying.

Ellsworth Toohey all the way.

pravin September 25, 2009 at 8:31 am

he is a liar.but he has a prize from the swedish central bank.do you?

Dennis September 25, 2009 at 8:56 am

As Mr. Lee has documented, Mr. Krugman has certainly changed his tune since March 2003. Krugman can always argue that he has had an intellectual epiphany in the intervening years or that things are somehow “different” now, but the truth is he is a politically motivated pseudo-economist.

I dare the “New York Times,” “Washington Post”, or any of the other establishment periodicals to reprint Mr. Lee’s article.

Stephen Grossman September 25, 2009 at 8:59 am

The two Krugmans are consistent in attacking the enemies of liberalism.

Thomas M McGovern September 25, 2009 at 9:28 am

I agree with what is said in this essay and I consider Krugman to be among the most pernicious public intellectuals. That said, what’s the point of the LvMI refuting him on its site? Anyone with any understanding of Austrian economics knows that Krugman’s ideas are ridiculous.

This essay would have great value if it was accepted for publication on the op-ed page of the New York Times (which I believe is highly unlikely), but what good does it do here? Do Austrians need a foil such as Krugman in order to frame and present their ideas? I don’t think so.

AJ September 25, 2009 at 9:28 am

I think Krugman would say that we are in very different economic circumstances now than in 2003. He would argue that the economy has hit the “zero bound” on interest rates and that the only way out of this liquidity trap is for governments to engage in robust deficit spending to stimulate the economy. In recent articles he does acknowledge that these deficits are big, but hey were are in different times.

Remember in theory Keynesians aren’t always for deficit spending. “In good times” (i.e. economy near full employment) they have no problem with governements correcting their balance sheets, paying down debt, etc. It just never seems to work out that way.

Chicago Methods September 25, 2009 at 9:29 am

Krugman has been getting quite a bit of heat lately from quite a few economists. It seems that Krugman is racking up more enemies on his list; quite a few of them are economists. Some simply demeaning him to nothing more than the leftist version of Rush Limbaugh, whenever he posts in the New York Times.

Personally, I simply think he is one of the few fringe economists trying to de-bunk the work of Macroeconomics for the past 30 years. And he tries to do this with very shakey “facts”.

For anyone who wants to know, he got the Nobel because 18 yrs ago he applied a specific level of Game Theory to economics. Yippie.

K Ackermann September 25, 2009 at 9:52 am

These are the kinds of articles that drive me nuts.

Not a single bit of helpful advice, and riddled with holes that I am generously not going to call lies.

To compare statements by an economist from 2003 and 2009 is like comparing comments about a house before it burned down, and after it burned down. Yes, the stairs used to be dangerous, and now they are not.

You complain about the printing presses running around the clock, but you don’t give the other side of the equation. You encourage students to study here, and then give them incomplete information. How is it going to help anything when a bunch of morons are running around saying they were educated in the tradition of Mises?

Is it possible that Krugman had a legitimate gripe in 2003 that the presses were running while credit was massively expanding and asset prices were increasing?

How can you credibly fail to mention the massive deleveraging that is taking place? Foreclosures are accelerating, and credit is contracting, not to mention high unemployment. Tell your students how that is inflationary.

If your main point was to attack Krugman, why not say that he smells bad, or kicks his dog, or is a welfare queen?

There are genuine reasons why Krugman is wrong, but it’s not in the minutiae. What Krugman should be saying is that trade has to be rebalanced, and realistically, the way they are going to do that is… what?

You know how, and I know how, so why not say it? Let’s take our heads out of the arse of history and look at the structural changes that will be taking place in the economy. I think Keen’s recent comments about a debt jubilee have more credibility than people realize. The Fed is doing a colossal head fake right now because they can. They cannot get inflation to take hold until enough deleveraging takes place. Then watch out below for the dollar. It’s the only way they are going to reverse trade, and that has to happen.

It’s a sad, sad state of affairs we are in.

Tim Kern September 25, 2009 at 10:19 am

Partisans are always inconsistent, in the overall scheme of things.

Does anyone remember when President Clinton proposed “privatizing” Social Security? All the Republicans rightfully denounced that idea, for a number of good (and a few bad) reasons. Then, when President GW Bush proposed essentially the same thing a few years later, the Democrats used many of the old Republican objections, as the Republicans jumped on Bush’s “great idea.”

Partisanship is not economically driven; it’s brainless and political. That’s why it makes no sense except through lucky coincidence, and why it’s bad for the country. When the cult of personality takes over from the Constitution, we’re (as the author properly, though perhaps crudely said) screwed.

mpolzkill September 25, 2009 at 10:22 am

Ackerman: “To compare statements by an economist from 2003 and 2009 is like comparing comments about a house before it burned down, and after it burned down. Yes, the stairs used to be dangerous, and now they are not.”

The dumbest analogy I’ve heard in a long time.

Try Schiff’s: Someone who called for no gasoline to be thrown on a smoldering house, then calls FOR gasoline when the fire is taking over.

Mr. Genius, please give us your exact definition of inflation. Better yet, point us to your papers where in scholarly fashion you fully lay out your brilliant plans that we should all follow.

Mushindo September 25, 2009 at 10:43 am

That it took a biochemist to highlight this level of inconsistency in one ( Nobel-winning) man’s published thinking, is a devastating indictment of the entire (mainstream) economics profession – do any of them have a memory going past yesterday lunchtime?

Even Greenspan’s shift from passionate free-market advocate to Statist control freak took decades to manifest itself. But a measly 5 years to flop from one end of the spectrum to the other is breathtaking.

Knowing how long it takes for academic achievement to translate into a Nobel nomination , its a fair bet that Krugman’s Nobel was informed by the halfway-reasonable old work implied by the article deconstructed here. And if that’s the case, his post-prize utterances should by rights be cause to consider revoking the award.

I mean, imagine if Einstein had recanted his photoelectric work just after having gotten a prize for it?

Dennis September 25, 2009 at 10:45 am

If I recall, the economy was not in good shape in early 2003 either. At that time, the Fed was engaged in a massive credit expansion that is the root cause of the current monetary problems. In addition, government spending was also increasing significantly. In fact, government spending has been robust and increasing throughout the entire 21st century. Both these monetary and fiscal responses are standard Keynesianism, which ignores Austrian business cycle theory, the fundamental importance of price flexibility in clearing markets, and the importance of combining the myriad of specific capital goods into an efficient and stable capital structure.

Keynesian economics has indisputably dominated economics and public policy since at least the early 1930s, and these erroneous doctrines and policies have resulted in yet another, and a severe, economic downturn.

K Ackermann September 25, 2009 at 11:07 am

mpolzkill, my exact definition of inflation is an increase in the money supply. Since I have not seen that I should do otherwise, and since it is much larger than M0, I include credit, and credit is contracting. There is also the little matter of velocity. If the Fed printed one septillion dollars, and then buried them in a giant hole, is that automatically inflationary? Is M0 the money supply? Conveniently, there is no M3 anymore, but if there were, would it be the money supply?

Any technical definition is useless without taking into consideration the practical effects. The popular use of the term inflation is applied to the value of money.

I’m not asking anyone to follow my “plans”. I’m just expressing my opinion on what I see as obvious. Some things are very obvious, and rarely get mentioned by the scholars. The Great Depression has been sliced and diced, but how many papers explicitly mention the fact that deleveraging was a constant that policy could not touch?

Trade reversal seems obvious to me. Am I wrong? Is there some other way that we can manufacture wealth that does not pull demand forward? Credit might enable this to happen for a long time as long as employment remains full, but that does not seem to be the reality that we find ourselves in. We either make stuff, or we go deeper in debt. No matter how special we are, there are limits. The longer we hide from this fact, the worse it will be when we have to settle the account.

I’m just an engineer, but I trust my practical analytical skills. They have done well for me so far. I am all ears to other workable solutions. How do you think we are going to get out of this? Do you see full employment as fundamentally important the way I do? Can structural deficits be run up forever?

Zap September 25, 2009 at 11:10 am

Krugman is a liberal Democratic political mouthpiece, if a Republican were in office right now and had made the exact same moves that this administration has made his columns would be nothing but hand wringing about solvency issues and bailing out the Wall Streeters and Keynesian theories would not get a mention.

Republican mouthpieces are no better

If economics has taught me one thing, its that all politicians are screw ups, Krugman missed that class.

Eric September 25, 2009 at 11:42 am

Krugman is what Rothbard would call a “court intellectual”. If he changed his story, it’s because he had to adjust it to survive in the land of liars.

From what I can tell, he made a good decision – nobel prizes are kinda a handy hedge against roaring inflation.

mpolzkill September 25, 2009 at 11:52 am


Besides your religion of Democracy giving you the false impression that either of us has the slightest effect on what our masters are to do (only stupid mobs have a slight effect): you have a fundamental conceptual problem that sends you off on dead end alleys I don’t have the inclination to follow. Your being an engineer is probably the problem. You can’t build a clockwork orange can you? You realize there is the world of the mechanical and the world of the organic. The world of human action is the world of the organic. All the problems you mention stem from crime, myriad crimes in trying to control an organic system. Your calls are calls for further crimes.

How do I propose we get out of this? We can’t, because people will not be educated. It’s all crazy because being an individual is not that complicated. Never bother anyone unless they have committed assault, theft or fraud (that means don’t have “representatives” that commit those things for you; “regulation” is mass assault). Produce things people want, most of these people will do the same for you: division of labor, it really works. If you run out of whatever you need to make what you make, you’ll find something new to make it out of, or quit making it and try something else. No individual has any solid answers for what anyone else should do, but stop committing and/or brooking crime.

That’s all anyone needs to know, but if you need more, read Human Action. Being an engineer though, I don’t think you’ll ever be satisfied with what he tells you. Just like the wanna-be physicist, Krugman. He will never be satisfied in a world where men aren’t like pieces on a chessboard for him to try to manipulate through the State.

CJ Maloney September 25, 2009 at 12:03 pm

Mr. Krugman, like any well trained dog, wags his tail and barks on command. Depending on whatever way the wind blows, that’s the side of his mouth he’ll speak out of.

K Ackermann September 25, 2009 at 12:37 pm

I just typed a long response to mpolzkill, and got a submission error. Life is too short, so, mpolzkill, I concede this round. I’ll be damned if I type it in again. (Frustrating!)

A. Viirlaid September 25, 2009 at 1:02 pm

To K Ackermann — I recommend you type your posts into your word processing program or email or something else first before posting. Then you can save to your own computer as well.

Less pain, less work, less heartache.

I prefer email in plain text format — that way, there is never any conflict with some sites that don’t ‘like’ the newer encoding standards.

BTW I enjoyed the exchange between you and mpolzkill.


Niko September 25, 2009 at 1:24 pm

@K Ackermann:
Well,economy is not like in engineering. There is no simple solution that you can read from a manual and apply it. Not in the Austrian type anyway. If you want manual solutions, than monetarism and Krugman is for you. They actually think as engineers.

What Mises and Hayek said is that each situation is different, so for each moment you can expect a different outcome. The only constant is that, if the market is free, the end result would be a lot better than an engineered one.

A. Viirlaid September 25, 2009 at 1:41 pm

It doesn’t really matter what Krugman writes or says since it is not his advice the current Administration is taking.

They were already on their current path before Krugman flip-flopped.

Krugman is just agreeing with Dem-Policies, perhaps because he is a liberal, perhaps because he sincerely believes that the current policies are correct, perhaps because he is ingratiating himself with the King, perhaps for all 3 reasons, or perhaps for some other reason(s).

Contributors here need no convincing that he is misguided.

The ship is listing — he is just another person running around on deck.

It may even be too late for Misean solutions at this time. The ship may have taken on just too much water.

Once you have a serious opium addiction there is a good chance you will never climb out of your self-created, drug-induced, depression. You’ve lost your bearings, you’ve lost your capabilities, and you’ve lost your mind. You’re no longer a logical human, capable of arriving at proper solutions to your problems. For one thing you have no idea of what your real problems are.

So it is with using OPM (Other People’s Money).

It’s bad enough when any single individual can no longer properly service the debts they have assumed.

When it happens to a whole society, or a significant portion of that society, watch out. The time to any meaningful recovery is extremely long. The Great Depression taught at least all of us (on this site) that much.

As was pointed out earlier, when our learned Economic Establishment (the mainstream one, that is) considers GDP going up as a “good thing” — as via consumers spending more and more (beyond their means) by taking on more and more OPM — and when that Establishment urges The FED to do everything to accomplish this end, where are we?

We are all in an OPM den.

And as someone pointed out, we here, on this site, are only convincing ourselves — nothing will change to get society out of that den.

We borrow as a society from offshore. We spend on goods that are made offshore. Our GDP goes higher and higher as we spend more. A good thing? Hardly!

Sure, our “income statement” looks good, as turnover rises. But it makes no sense to make spending go up if this spending is mostly discretionary consumption financed by foreign borrowings.

Our “Balance Sheet” is getting killed. Our societal net worth is going down, down, down.

And the current solutions offered by the likes of Krugman and the current administration are only making matters worse. These policies will never help us to crawl out of the OPM den and go cold sober.

What I fear we are witnesses to is the Decline (and maybe fall) of the American Dream and Empire.

That would be a tragedy.

Whatever criticisms America gets from offshore, she gets her biggest criticisms from her own citizens — that is one thing that makes her so great.

America also offers hope to people around the world. For all her faults she is still a beacon shining hope into all dark corners of the world.

It would be a monumental disaster for humankind for that beacon to be even partly dimmed.

Ned Netterville September 25, 2009 at 2:09 pm

Mr. K. ACKERMANN, I sympathize deeply with your experience of losing a post attended with considerable effort down a computer’s memory hole. I’ve done the same too many times, and usually react as you do: hardly anything I write is worth twice the effort. AVIIRLAID offers sound advice to overcome the problem, but I seldom put it into practice since I kid myself into thinking I can outwit my computer.

K. ACKERMANN said, “[W]hy not say that he (Krugman) smells bad, or kicks his dog, or is a welfare queen?”

I’ll say it: “All of the above.” Worse yet, Krugman believes World War II was a “fiscal stimulus” and “public works” project that “saved the economy” and brought an end to the Great Depression. (http://www.nytimes.com/2008/11/10/opinion/10krugman.html) If Obama’s stimulii don’t work, watch for Krugman to champion a war with, say, China or Russia or both. That’ll end unemployment. With “economists” like Krugman around, who needs Keynes or Marx? Even a caveman does better economics that Krugman. (http://www.jesus-on-taxes.com/ON_PAUL_KRUGMAN.html)

Adam I. September 25, 2009 at 2:49 pm

“I agree with what is said in this essay and I consider Krugman to be among the most pernicious public intellectuals.”

Now that Irving Kristol has gone to wherever Statist intellectuals go, I would now agree with that… Krugman takes the taco now.

Robert Brager September 25, 2009 at 2:52 pm

OPM den?

That is priceless. Sad, yes. Priceless too.

Houseward September 25, 2009 at 2:55 pm

I worry that we are putting too many eggs in the “inflation/hyperinflation” basket. Not that it won’t happen, but by the time it does happen, the public will have lost interest.

By and large, I agree with Mish on the inflation / deflation debate.

The general economy is still suffering from the deflationary correction. The money we have printed has not caused prices to rise in general because it hasn’t offset the loss of credit. Our printing has, however, delayed recovery and inflated the stock market rally bubble.

When the bubble bursts, we’ll probably see another deflationary correction and a surge in the dollar. This isn’t going to look very much like inflation, at least not how the public uses the term.

In the short term, we may or may not suffer stagflation:

Our printing and deficit-spending will definitely delay recovery. Whether it more than offsets the credit contractions and therefore constitutes an inflation of the money supply is a question of how you read the data. If it’s not inflation, the economy will continue to stagnate while particular assets experience bubbles. If it is inflation, then the whole economy will experience price increases while particular assets experience bubbles.

Long-term, we are definitely on an inflationary course:

Our deficit spending will exasperate our already staggering debt, while our printing will destroy the dollar and make it that much more difficult to sell T-bills. If we don’t change course, we will have to decide between national bankruptcy and hyperinflation.

Between now and national bankruptcy, I’m concerned that the Austrians are becoming the economists who cried “inflation!”.

Maybe the stock market rally is a harbinger of inflation. Maybe it’s a bubble that will be popped. Maybe the government stepped in too soon, and the economy still has another round or two of major delayed contractions. Any of the above could be explained by ABCT. It’s all a question of how you read the data.

A. Viirlaid September 25, 2009 at 3:48 pm

Our deficit spending will exasperate our already staggering debt, while our printing will destroy the dollar and make it that much more difficult to sell T-bills.

We’d be like Argentina.

The American Treasury will still be able to sell bonds.

These bonds just might no longer be denominated in U.S. currency — that is, they might not be sovereign bonds.


They might however be denominated in Argentinian pesos, Mexican pesos, or Russian rubles.

Just so long as we are willing to pay the interest demanded by the marketplace.

Bob V September 25, 2009 at 7:40 pm

Mr. Lee says that Krugman was “wise” to refinance in March of 2003. Why? Wouldn’t he have been wiser to wait until March of ’09 to refi? Krugman was wrong about being “terrified” of where interest rates were going. Can we learn anything from his error?

Yancey Ward September 26, 2009 at 11:36 am

If McCain and the Republicans had won last November and then pursued the exact same economic strategies (and who really doubts they would have), Krugman would be singing a different tune altogether.

Krugman writes as a political advocate. He abandoned independent thought a long, long time ago.

A. Viirlaid September 26, 2009 at 4:05 pm

I wrote a post at The Globe and Mail today which was an effort to bring at least a flavor of Austrian thought to that paper — you all might be interested in reading the article that generated the response below from me. The original article “Why saving too much is scary bad” (reflecting Krugman and Establishment-type thinking) can be found at


My response is below:

I have to apologize for earlier using the word SHILL — it does seem too shRill for normal use.

Actually Rob Carrick writes a piece that is perfectly understandable from a normal Everyday Perspective.

His statement that “Way, way too much money is sitting around in savings and chequing accounts as well as money market funds” even seems initially logical to most of the aggravated responders below — one of which is me.

But we should ask ourselves why some of us and so many others fall into this frame of reference automatically with no questions asked.

I would suggest that the answer has to do with the prevailing ‘wisdom’ in the financial community most especially amongst those economists who run the Central Banks of the Western World.

Of course that prevailing Think Set, that Paradigm, is not only actively taught (and ‘propagandized’ if you prefer) it also is ENFORCED and reinforced in the broader community.


Once the Money Authorities have it in their own Mindsets that it is ‘good’ for the Economic System to occasionally be ‘goosed’ with Easy Money (low interest rates) they tend to fall back on that ‘solution’ in Troubled Times more and more frequently.


Because it does work — at least for many decades, and for many, many Regular Business Cycles.

The problem is this — it takes lower and LOWER artificially-set interest rates to achieve the same stimulative effect EACH TIME. The regular marketplace is bypassed and lenders and borrowers are essentially told at what fixed price Money is to be ‘exchanged’ at.

That purpose is this type of periodic stimulation of the Economy is to encourage more spending at both the Consumer level and at the Investment level, by retail and other investors, and also for Business Capital Expansion — raising equity and investing in business activity.

The main problem is that this activity of Stimulation causes generally the taking on of more and more Debt — lower interest rates always favour the borrowing party, most assuredly not the Lending party.

The other problems it causes (from an Austrian School of Economics perspective) are related to the resulting business and personal economic activities that occur which only APPEAR to be economically SOUND. In actuality these activities cannot pay back the funds they require for financing them. But this realization comes only once interest rates return to their ‘normal’ levels.

Ask yourselves to remember back to when you were younger and you first started thinking of Money. One of the things you may have correctly realized was how Money loses its worth over time. That saving is silly. That ‘investing’ is smart, even if only for buying a house.

Savers are Dummies. There is no book needed named Saving for Dummies, well, because they are Dummies. As per Rob Carrick, these dummies need a book called Investing for Saving Dummies.

The borrower buys a house that goes up in value, for which the loan is paid off in steadily devaluing money. During that time, the borrower’s income also steadily goes up, at least in nominal terms. Then that smart borrower can either trade up with a great down payment from the first house, or if he-she stays in that house until retirement, they can sell it off for a great nest egg for their retirement.

But why does the world work this way? And should it work this way? Is this way of doing things helpful, harmful, or neutral?

I think we on this site can mostly agree that something is skewed into a terrible distortion of what Reality should be.

Here’s the Rub in my opinion.

Sure, the periodic stimulation of Economic Activity during the downturns of Regular Business cycles ‘helps’ BUT it does so at great generally-unrecognized cost.

The harm done is best exemplified as by The Current State of Affairs, or as by The Great Depression.

What happened in the 1920-s as a precursor to The Great Depression is pretty much what happened during Alan Greenspan’s tenure at The FED from 1987 to 2006.

In many researchers’ opinions The Great Depression was caused by exactly the same factors as have brought us to The Great Recession today — let’s just hope it only is a ‘Recession’.

And as I have alluded to earlier, the costs are incurred mainly because Debt tends to pile up in society. If that Debt (facilitated by the Western Central Banks keeping interest rates artificially low during ‘downturns’) were to be paid off periodically then little harm would come from such a ‘solution’.

Keynes himself thought that if governments stimulated with additional spending (and did the required borrowing to finance that spending) during downturns, they could help soften the downturns.

But the idea was always that the loans would be paid off during good times. This would keep both the upturns and the downturns from being too extreme — and the governments could thereby ‘smooth’ the regular, normal 6- or 7-year Business Cycles.

But of course Debt does not get paid off after each such normal Downturn. It finally reaches such a massive level that it becomes a TOO unbearable millstone around our Economic System’s Neck. This in turn causes the Economic activity and jobs we all depend on to slow down on a very broad basis. And to an unacceptably LOW level for FAR TOO LONG.

That is where we are today. That is where we were back in 1930.

In other words, given the context of today, Mr. Carrick’s advice simply makes no sense. In all other times it might.

The more important question we all have to face, is DO WE LEAVE OUR ECONOMIC SYSTEM AS IT IS?

If we do, we will repeat these much longer 70- or 80-year- Depression-type cycles which tragically and deeply hurt so many in society — that society is thereby repeatedly scarred for several generations.

I SAY we do NOT !!!!!!

The one thing I did not get into was the issue of “borrowing from the future”.

Generally the lenders referred to in the opinion-piece above are all of us and the collective society. That is why we will ‘pay’ collectively as well.

Through our pension plans and our retail banks and our society in general we are ALL (willingly or not) encouraged to make poor loans and investments (as all Austrians know) via the periodic ‘goosing’ that Central Banks (and most egregiously, The FED) do with their ‘jump-starting’ of the Economy when it falls into a normal small not-to-be-feared recession.

Those periodic loans have now accumulated into such an albatross that we are in essence economically doomed — for the near future.

In other words, as we all here recognize, the system is perversely set up to guarantee good times at the cost of bad times.

That is what we have to change.

A system that gives golden parachutes to one generation at the cost of the next is perverse to any moral ethical person I can think of.

Kevin Beck September 27, 2009 at 10:57 am

After reading your analysis of Paul Krugman’s thoughts, I am not sure whether he is intentionally disingenuous or a full-fledged candidate for Bellvue. Mr. Krugman gives us ample evidence of what a Nobel Prize does: It causes one’s thinking to become totally unrealistic. I could cite a few other examples here (Al Gore, Jimmy Carter). These all share both those traits. And I think all are spouting totally inane comments about anything they decide to open their mouths about.

BeyondTheMargin.net September 27, 2009 at 1:04 pm

I firmly believe that the monetary and fiscal policies that the world is embarking on have created liquidity induced securities speculation (all over again) and have engendered inefficient resource allocation. You can’t erase trillions in bad loans and poor capital investment decisions just by throwing around some “stimulus” funds and lowering interest rates to 0%. Paul Krugman and Keynesian interventionists are leading us down a destructive path.

READ – The Resurgence of Keynesian Economics and Interventionism

Benjamin Lee September 27, 2009 at 4:24 pm

K Ackermann,

You are making bad accusations. First off, I’m not educated in the tradition of Mises. I’m not even an economist. I’m a Chemist. The only formal coursework I ever had in economics was Microeconomics and Macroeconomics. That was enough for me to realize that the economics taught in our universities is anything but Science. That being said, I’ve read everyone from Friedman, to Keynes, to Hayek, to Mises. The state of 2003 vs today do not imply different economic conditions. If you read my article, you would have taken home that every inflationary economic force that was in play in 2003 is still present and bigger. As for your argument that things are not inflationary because of deleveraging and foreclosures, it doesn’t hold any water whatsoever. Deflation is a contraction of the money supply which ultimately results in lower prices. Inflation is the opposite. The deleveraging you speak of has allowed the worst stocks to rally 400%. The deleveraging you speak of involves oil jumping form $35 a barrel to above the level it was at at the peak of the housing bubble. Just because people are losing money and loans are going bad does not mean that printing money is not inflationary. What people can’t seem to grasp is that deflationary forces in the marketplace right now are finite and won’t last forever. Inflationary forces, on the other hand, and there’s pretty much only one (Ben Bernanke), are not finite and can be created out of thin air. Inflation always wins under a fiat regime. Our past 100 years easily proved that.

Krugman likes to argue that the rules change once a nation has entered deflation. This whole idea of being able to print money without consequences because loans go bad is complete nonsense.

I fully understand that a weaker dollar would be a necessary condition to rebalance trade given that the Chinese are hellbent on keeping their citizens poor. A weaker would easily happen if we would the central banks of the world (especially Japan) would stop propping up the dollar. A weaker dollar would naturally result if the free market to work. The problem is, even if guys like Krugman want a weaker dollar to rebalance trade, their preferred method of achieving that weaker dollar is by allowing Obama to print money to pay for every social program out there and deliberately destroy the dollar. Ultimately, you’re gonna get both. The foreign central banks aren’t infinitely solvent and once they stop, you’ve done, at minimum, twice as much damage as needed. Furthermore, you now have a Federal Government that is drunk on their newly found license to print money.

You want to call me out on things I didn’t write? I wrote an article and I couldn’t possibly address so many points in there without readers getting lost or bored. I could write a 1000 page book taking apart Paul Krugman if I wanted to. There’s a right way to get across a message and a wrong way. I suggest you write your own article if you think there are additional things that need to be said. I would also suggest that you reread my article because I feel you misinterpreted a lot of things I said.

Benjamin Lee September 27, 2009 at 4:27 pm


what is sad is that there is are years worth of articles Krugman wrote to pick out and destroy Krugman with. This is the 2nd time I’ve made noise using old Krugman articles/interviews. What’s more frustrating is that somehow the mainstream economists simply shrug it off, even the guys at places like The University of Chicago, who despise Krugman.

Sean W. Malone September 27, 2009 at 8:28 pm

Great Job Ben! Thanks again for keeping track of Krugman like this.

A. Viirlaid September 27, 2009 at 11:14 pm

Even writer Paul R. La Monica at CNN Money is getting concerned about potential inflation. That should tell us something — the regular media are waking up.


What I don’t understand is the completely sanguine view of some of the propeller-heads Mr. Monica quotes.

Here is a typical example:

The Fed doesn’t want to have a stutter-start recovery to the economy. I know people are extremely concerned about inflation down the road and see risks, but we’re not seeing wild upticks in demand that would precede dramatic inflation,” Burtnick said.

Why do I agree with Benjamin Lee that such sanguinity is unwarranted?

Because from my perspective “dramatic inflation” does not have “wild upticks in demand” as a necessary precondition.

In fact just regular current ‘demand’ can coexist with “dramatic inflation”.

Does anyone remember the stagflation of the 1970-s?

Do people today who remember that time agree with those who believe that “wild upticks in demand” took place? I, for one, remember no such Wild Upticks.

People, we have forgotten or misplaced our knowledge of Economics.

The Paul Krugmans of the world have LULLED us to sleep.

Mr. Lee is entirely correct in his worries — by the time The FED wakes up, we will once again hear the propeller-heads on TV lamenting that “Yes, The FED has fallen behind the curve. The FED has failed to judge the situation properly.”

People, WHY do we tolerate the EXISTENCE of such a Lousy Institution — let’s End The FED — Dr. Ron Paul is inviting us to wake up and smell the coffee.

It’s about time that we did IMO.

Houseward September 28, 2009 at 9:28 am

Benjamin Lee,

“Inflation is the opposite. The deleveraging you speak of has allowed the worst stocks to rally 400%. The deleveraging you speak of involves oil jumping form $35 a barrel to above the level it was at at the peak of the housing bubble.”

Can we have inflation and deflation at the same time?

In a way, I believe we can. I don’t think it’s an uncommonly held belief among Austrians that we might not be done deleveraging. Commercial real estate may crash. There are millions of people behind on their mortgages, and certainly a large portion will go into default. Unemployment continues to rise, and with no savings, these people will put their utilities on their credit card in hopes they may get a job in the near future.

At the same time, the Fed is pumping new money into the financial system.

So, it seems that the entire economy continues to suffer from deleveraging, while certain pockets (equities and commodities) of the economy are temporarily benefiting from wet money (the ink is still drying).

I am convinced that our economy will suffer from rampant inflation, eventually, but I’m unsure of how we will get there, and I think other Austrians would serve themselves well by choosing their words carefully when they attempt to prophecy the future of our economy.

K Ackermann September 28, 2009 at 1:35 pm

Sorry for the late reply.

@A. Viirlaid – thank you for the helpful advice. Just as Ned Netterville warned, I’m thanking you directly in the form :-). (I will copy to clipboard before submitting.)

@Mr Lee, thank you for the reply. I would like to know what your definition of the money supply is. The economy does not move on M0 the way it used to.

As to oil prices, the fact that they doubled while demand has shrunk should be a huge clue that the price of oil is largely decoupled from normal market mechanics. To affect something like that, for such an important commodity, my guess is that there is concentrated control of supply, or concentrated trade in oil futures. It’s funny we never see a sale in gasoline. Most other products have sales every now and again. It’s part of competition. It’s the beneficial part.

Are you crediting the market rally to the threat of inflation, or are you using the rally as a predictor for inflation?

My personal belief is that a major factor in the rally is simply that interest rates are zero, and that is going to drive a lot of money into the market looking for at least some kind of return. The large rally in the weak stocks is a typical frenzy effect of a rally. Look at the “as reported” PE ratio of the S&P500 right now. Do you really think the market is trading on fundamentals?

Who knows with the market. No matter what either one of us says, it will do something else.

It used to be that the most reliable predictor is the bond market. Various bond metrics always seem to hint at the future. What has my head spinning right now is the government has had no problem selling as much debt as it wants. How many times have you seen bonds hold up well in the face of a massive equity rally? Bonds should be tanking (minus TIPS) in anticipation of high inflation. They should be tanking anyways, given the level and frequency of auctions. Why the great appetite for treasuries?

There is some speculation that the market for treasuries is greatly distorted by the interest rate swaps market. The market is huge, and there is an implicit treasury purchase underlying a swap. The market is so big, that nearly any level of actual hedging by purchasing the underlying treasury (even a 10% hedge) would greatly influence the demand for treasuries.

All of it is scary, and gives me the overall feeling that market forces cannot be trusted right now. It feels synthetic.

I’m not saying I’m in favor of a weak dollar. I just think that is the political path of least resistance. It also means that I effectively agree that inflation is in our future, but it will not happen until they set us up in the worst possible shape first. They need to finish blowing bubbles first. In my opinion, it’s the worst possible real solution, but not when using the political calculus.

I repeat: it’s a sad state of affairs we are in. We might do good for the next year, but is there any doubt there is a gathering storm?

You are right. One article is not enough to cover the state of affairs, but I question the goal of this article to begin with. If it is to discredit Krugman, why not go one level higher and show how Krugman, in a very broad sense, is a political creature, instead of focusing on one minute comparison of statements. I still contend there is a big difference between 2003, and 2009 in the context of his statements.

Krugman is not stupid by any measure. That’s why he is dangerous when he filters his commentary using a political calculus.

Ben September 28, 2009 at 3:36 pm

Keith, dozens of people have done exactly what you have said as far as criticizing Krugman. My method of grabbing attention to his intellectual dishonesty is using his own economic analysis against him. It’s short and to the point. On top of that, he can’t argue against it.

K Ackermann September 29, 2009 at 2:17 am

On top of that, he can’t argue against it.

Now that is something I didn’t think about. Thanks for the laugh. I’m looking for them everywhere these days.

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