To go along with Frank’s excellent piece today, we have (Who else?) Paul Krugman — excuse me, Nobel Laureat Paul Krugman — declaring that we are in a “liquidity trap” and that the only way out is for the government to spend money that it does not have.
The Newly-Anointed One (not to be confused with the “Anointed One” who will be elected president on Tuesday) declares:
… consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.
Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.
In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.
The cure? It is (drum roll) Government Spending!!
For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.
The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.
The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.
No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.
The one fear that Krugman has, not surprisingly, is that the “free market” Bush administration will block this action:
Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way.
There is one fallacy after another in this column, and I wish I had the time to debunk all of them, but Henry Hazlitt beat me to it nearly 50 years ago, with his classic The Failure of the New Economics. It is time to give this great volume another look.
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there were a few good paragraphs in Richard Duncan’s “The Dollar Crisis” in which he says something to the effect of:
“When Japan entered it’s deflationary spiral, Paul Krugman’s recommendation was “print lots of money” Krugman is a Keynesian. The Japanese central bank did exactly that but to no avail. Keynesianism has been tested and left wanting”
Arguing with a Keynesian is weirdly frustrating. Like arguing about distance with someone who insists on looking through the wrong end of a telescope.
Krugman’s op-ed also appeared in the WSJ today (unless it was yesterday, I forget at times). Needless to say, I couldn’t bring myself to read it, especially when there was a well thought out ‘opinion’ article (wsj, your format ever declines) blaming Hoover for hysterically intervening, and FDR for making it worse – even to pointing out that GDP didn’t get back to prerecession levels until 1945 (if that is right, I forget), and drawing the obvious parallels to todays situation.
Of course, it goes without saying that even the good editorial didn’t mention the Austrians.
At any rate – there are far more Krugmans at the WSJ so I will be glad when my subscription runs out.
As exemplified by Mr. Krugman’s comments, one of the roots of the Keynesian and mainstream nonsense is the fallacy that additional quantities of money, i.e. the generally accepted medium of exchange, can lead to the sustainable production of additional consumer and capital goods. This cannot be accomplished by the medium of exchange. As Mises emphasized many years ago, money is not a consumption or a capital good, rather it holds a distinct place among economic goods as the medium of exchange. An increase in the quantity of money, even of a commodity money, will result in prices higher than they would have been without the increase. The laws of supply and demand, despite the Keynesian machinations, apply to all goods and services, including money.
Unfortunately, the implications of the fundamental difference between the generally accepted medium of exchange, and consumption and capital goods is, for whatever reasons, lost to the vast majority of economists.
In addition to Hazlitt’s comprehensive treatment, Chapter 11: Money and Its Purchasing Power of Rothbard’s “Man, Economy, and State” also contains excellent discussions of some of the Keynesian fallacies.
I saw this beauty on Bloomberg yesterday.
Today’s Commerce Department report also showed that the Federal Reserve’s preferred measure of inflation cooled last month. Receding price pressures mean the Fed has “more room to maneuver” with interest rates, Behravesh said. San Francisco Fed President Janet Yellen said yesterday policy makers may cut the key rate close to zero percent should the economy remain weak.
Didn’t Japan try this already? Why would anyone think this would work? I think Peter Schiff is correct – the main problem is that the American consumer is tapped out.
Krugman is just a scrawny old tired socialist. What more can be said? His writings are worthless.
Politics aside- American needs only the truth- un-abridged, unadultered-
Let the rest of the world watch this video
Buzz it up
http://buzz.yahoo.com/article/1:32c609e497ff10c8fd2691b61bbae8dc:60c103662d1c2895e47dbd1b31d187f9?usc=1
I didn’t go to college, and although I plan to buy some of the books from this site I haven’t yet–I’m being careful with my spending, which I suppose means that I’m a scofflaw in Krugman’s eyes. Anyway, maybe it’s just my ignorance but his premise seems way off:
“Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.
In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.”
Maybe this would happen if everybody cashes their paycheck and stuffs the cash under the mattress. But don’t most people have their savings in a bank? The money I’m not spending is in my bank account, which means my bank can lend it; in turn, people who borrow money usually do so for the purpose of spending it on something, right?
I know I don’t have a Nobel and all, but somehow Krugman’s “if you cared you’d be buying stuff” just doesn’t seem right to me.
EES, I think you’re right. In an undistorted free market (no central bank), savings would be the supply of money that is loaned out to borrowers, who naturally, would spend the borrowed money. With a central bank like the Fed, though, it’s hard to see this, since newly-created inflationary money is loaned out, too.
The Nobel Prize Dude missed one little tidbit on Japan that would throw his whole government spend all the money concept into the toxic pit of Mortgage Backed Securities:
That is while Japan had zero interest rate they had the largest public works project in history going on at the same time. In fact the tiny packed island nation consumed more concrete in one of those years than the entire United States. The of course turned this country from the worlds biggest saver into one of the worlds largest debtors.
As an aside:
Until the bailouts and other actions by the USG, I did think the US is headed for a 20year long recession like Japan as the labor market in the US is substantially more flexible as are the financial markets. Now I am not so sure.
The current economic crises manisfests a preference for U.S. treasury bills as a safe place for savings. In addition, low interest rates cannot even induce people to borrow.Agregate demand is declining and unemployment increasing along with it as the economy spirels downword. If the nation can intervene on behalf of the banks, why can’t it have some control over the money supply, Zero percent interest loans, money backed up by something of intrinsic value such as public infrastructure , things that have a functional utility would generate job creation and wealth along with it. The greatest problem with deficits are the interest payments charged by the banks and when compounded over several years they increase the debt foisted on the people.
I am constantly taken aback by how terrible Krugman’s ideas are in both theory and practice. His ignorance of history is beyond my ken.
He is just another planner, wanting to impose upon other people his vision of society. I think it’s ingrained in his psyche.
There was an interview he did where he discussed something that inspired him as a child. It was Isaac Assimov’s Foundation Series, a series of books that featured a fictional branch of mathematical science called “psycho-history” that was, through extensive mathematical equations and analysis, able to predict the future development of humanity and therefore guide humanity to save it from itself.
Maybe I read too much in the interview. Or maybe Krugman read too much into a work of fiction.
I have been reading up on some economic fundamentals, trying to get a handle on what policies make sense going forward. This site has been a great resource in reminding me that economies are built on “real things”, and money supply and government spending change the pricing of things and redirect spending.
But there is one assertion that I hear repeatedly: that government spending does not create wealth. I see why that would be the case in a booming economy. But it is not clear to me why that is not true when reduced demand all around has shrunk GDP and reduced the utilization of the economy’s productive capacity. If “real stuff” is the important measure, and the production of “real stuff” is shrinking, wouldn’t it be good to stimulate demand if it could increase capacity utilization and increase the creation of “real stuff”?
Patrick: “…wouldn’t it be good to stimulate demand if it could increase capacity utilization and increase the creation of “real stuff”?â€
When an economy is in a depression, there are unused resources and stimulation can cause these to be absorbed quickly. The problem comes when the stimulation has used up the idle resources and the economy faces shortages. You would think that the Feds could end the stimulation and keep the economy going, but they can’t for several reasons: 1) They don’t have the right economic theory of business cycles. 2) Because of lags in data they are always too late to recognize a problem. They usually wait until consumer prices are rising and by then it’s too late. 3) The lag between Fed policy changes and the effect on the economy is fairly long, 12-18 months in some studies.
The economy doesn’t need stimuli because entrepreneurs are always ready on the sidelines to jump start it. As soon as prices settle down, bankruptcies slow and confidence returns, entrepreneurs will use savings to invest in new ventures and employ new workers. Also, the Ricardo Effect kicks in. at the end of a bust wages tend to be high relative to the prices of output so business people will start buying labor-saving equipment again and increase employment in producer industries. Relying on these natural effects can produce sustainable growth.
Patrick: “that government spending does not create wealth. I see why that would be the case in a booming economy. But it is not clear to me why that is not true when reduced demand all around has shrunk GDP and reduced the utilization of the economy’s productive capacity. If “real stuff” is the important measure, and the production of “real stuff” is shrinking, wouldn’t it be good to stimulate demand if it could increase capacity utilization and increase the creation of “real stuff”?”
Check this site for the following terms: socialist calculation debate, business cycle theory. I think both explain the current situation pretty well.
There’s books, as well as hours of videos and mp3′s that lay out everything pretty well.
Just came back from visiting my son at college and “audited” his intro to Economics class. They are using Krugman’s The Return of Depression Economics. Well, it was depressing to see how all the kids are being brainwashed…
J Cortez,
I have read the Foundation series of books, but this occurred after I had been reading Austrian Economics for several years. I took away the exact opposite that Krugman did. I saw the futility in tweaking society and expecting particular results to occur. In the books, Asimov contends that mass sentiments and movements can be predicted and altered, there is some similarity that I saw with respect to business cycles, but my understanding of human action and the limitations of knowledge allowed me to take the books as fiction and not as a blue print for planning. In all, it is an interesting concept, just not applicable to acting human beings. I do think that the books are worth reading for their science fiction and entertainment value.
Krugman was on CNN a few days ago.Just for a minute.He said that the one good thing to come out of the current crisis is that it proves once and for all that
free market ideology is unworkable.His face glowed with pleasure.
Apparently he feels central banks’ manipulation of
credit and interest rates are part and parcel of a free market.
A bit later Ben Stein was giving his ideas on the current crisis.I am not sure why his words carry any weight.Anyway, he was commenting on retired people having to go back to work, and people having to put off their retirement.He pointed out that
retirement is a relatively new phenomenon, thru most of history people had to continue working through old age.
It is not the statement itself that you would notice.
It was the look of smug pleasure on his face.
This man is pleased at the declining standard of living in America.
The process of capital accumulation has reversed.
The standard of living will continue to fall in
America for many years.
“The government is responsible for the material well-being
of people.We will all have more out of life than we have earned if we invent money out of paper.”
This mindset is now too deeply ingrained in the minds of people for there to be any way out of the present impasse.
APPEAL FOR JUSTICE TO SAVE FROM OPPRESSIVE LAWS
Dear Sir
From 1972 after independent ,Bangladeshi Nationals started to Established Industries investing family resources ,adopting innovative technology as SELF EARNER & to create job for million of unemployed & to achieve economic freedom when everything were damaged and leftover .
Government also started helping these fast growing PRIVATE SECTOR INDUSTRIES with fund received from International Grant / Loan giving Agencies and stated to distributed through different Bank. From 1980 period..
But unfortunately Owner of Industries becomes victims of deep rooted conspiracy & Anti Propaganda .. The Bank Official refrain themselves from ascertaining production capacity of imported machineries and to provide required working capital loan in time extending total non-cooperation, negligence or even were reluctant to receive back their loan money if any Industrial Owner decided to pay back the loan for non-banking activities These have been done willingly to Jeopardize the Government Decision of Privatizations as well to occupy the mortgaged properties of the Owner of The .
Hundreds & Thousand of Industries in Bangladesh have been destroyed by Bank Officials & Policy Maker who are not aware of First Changing Technology of the World even .
Over and above Capitalizing the Illiteracy, Ignorance and Extreme Poverty of vast majority of commoner, Every things have been forced out over the Owner of Industries under private sector .
Due to Such Conspiracy , Negligence’s , Fraudulent Activities including Non – Banking Activities of Bank Official & Policy Maker, Most of these Industries have became in-operative & have lost their Cash Capital, Expatriate Capabilities. And became helpless victims of oppressive laws
In 1992 &1996 the Sick Industries Rehabilitation Cell were formed by GOVERNMENT OF BANGLADESH & have Identified and Registered these Industries as SICK INDUSTRIES declaring not as defaulter but victims of Violation of Contract, Negligence, Fraudulent Activities, Malpractices of Bank Officials including Policy Maker. And lack of Accountability at most of the organization of Bangladesh are no more hidden matter .
THE OWNER OF THE INDUSTRIES OF BANGLADESH ARE LOOKING VERY DESPERATELY FOR JUSTICE BUT THE DOOR OF JUSTICE ARE CLOSED FOR UNKNOWN REASONS.
The owner of Industries of Bangladesh are deprived of Legal Right due to enactment ARTHA RIN ACT ACT ( Money Landing Act ) on 1989 which were amended several time till 2007 and Bankruptcy Act on 1997 treating the OWNERS OF INDUSTRIES SECTOR as like as SLAVE of Primitive Age.
But these laws are not applicable in Nationalized Sector where Billions of Dollars are invested, an unaccounted till today .
Total outstanding Defaulted Bank Loan are about 60 to 70 % lying with Government Sector / Nationalized Concern
And less then 10 % Bank loan are lying with Small & Medium Size Industries of Private Sector & Bank Official can explain well about the balance of the remaining out standing Loan.
LAW OF TORTS and LAW OF CONTRACT ARE MOST COMMON LAW IN ALL COUNTRY and even in our NEIGHBOURING COUNTRIE, BUT NOT APPLICABLE IN BANGLESH YET DUE TO WHICH BANGLADESH HAS BECOME A HEAVEN FOR REPRESSION / EXPLOITATION forcing the Process of increasing – Poverty line in Geometric Ration .
OWNER OF INDUSTRIES OF PRIVATE SECTOR CAN NOT CLAIM ANY COMPENSATION OR SET OFF on the Suit filed by the Bank Official or Loan Giving Agencies FOR VIOLATION OF CONTRACT, NEGLEGIENCES, MALPRACTICES, including fraudulent activities of Bank officials instead of huge loss and damages although Bangladesh is known as DEMOCRATIC COUNTRY and never was a COMMUNIST COUNTRY.
CONDITION OF SICK / DISTRESSED INDUSTRIES are deplorable due to lack of Accountability of Bank Official / Policy Maker & total Indemnity offered to Bank Official / Loan Giving Agencies These have been done to hide out existing high profile Malpractices, Corruption and Fraudulent Activities & Negligence as per opinion of Expert Personals depriving the Owner of Industries from Justice .
Also Common PEOPLE WHO ARE FACING ANOTHER TYPE OF REPRESSIVE LAW UNDER CERTIFICATE CASE for realization of Taxes , Agricultural Loan , including Weaver’s Loan etc.
OWNER OF INDUSTRIES can only file a separate suit for compensation in separate CIVIL COURT CREATING MORE complicacy for life long litigation WITH OF NO RESULT due to restriction to obstruct or resist any order / decree of ARTHA RIN ACT / COURT by any other DECREE OR ORDER OF OTHER COURT or even of by HIGHER COURT. THE RIGHT OF EQUITY OF LAW HAVE COMPLETELY BEEN DENIED TO THE INDUSTRIAL ENTREPRENEUR OF PRIVATE SECTOR IN BANGLADESH
Sections 12, 12 ( khan ) 18 ( 2 ) & (3 ) 19, 20, 21, 34,40, 41, 42, 44, 47 and 50 of ARTHA RIN ACT are contradictory to ARTICLE NO : 8, 15, 26 and 27 of BANGLADESH CONSTITUTION and self contradictory to the policy of Government Industrial Policy adopted time to time..
Now there are no other alternative way but to draw the kind attention of Concerned Authority Including International Community / Organizations seeking help for JUSTICE and Support to save & protect the OWNER OF SICK OR DISTRESSED INDUSTRIES OF Bangladesh under Private Sector, including their properties from such deep rooted conspiracy and oppressive laws as well to protect the interest of large number of workers, staffs of the Private Sector and also for CHANGE of such oppressive laws to restore Accountability of Bank Official / Loan Giving Agencies including Policy Maker to ensure for National Interest
( A ) – Humble appeal before the Government of Bangladesh to kindly allow Industrial Entrepreneur to claim Set Off or Compensation on suit filed by the Bank or loan Giving Agencies. or allow to Run Compensation Suit Simultaneously with suits file by Bank Officials under ARTHA RIN ACT with equal opportunity and equal right so as to restore total accountability .
(B)- Considering the Heavy loss and Damages of Government Registered and Identified SICK INDUSTRIES of 1992 & 1996 of Private Sector since last 25 years due to Non-Banking Activities of Bank Officials and Policy Maker may kindly be allowed 100 % weaver of all type of Bank loan liabilities to minimize their heavy loss and damages to certain extent
( C )- The system of keeping mortgage of Land & Properties from the Owner of Industries by Bank or any Loan Giving Agencies as Securities are mostly responsible for Malpractices and ever growing Corruption, & Fraudulent Activities in Banking Sector, which are now proven matter and may kindly be completely abolished as a part of reform programs at earliest possible time to ESTABLISH ACCOUNTABILITY and Check Malpractices, Fraudulent Activities which are now growing by large in Banking Sector or in other Loan Giving Agencies upto root Levels
( D ) – All suits of Artha Rin Court may kindly be transferred to Civil Commercial Court providing Equal right for the end of Justice or preferably be stopped unconditionally
AND
The above mentioned Sections 12, 12 ( khan ) 18 ( 2 ) & (3 ) 19, 20, 21, 34,40, 41, 42, 44, 47 and 50 of ARTHA RIN ACT may kindly be abolished immediately to unearth y & check existing Negligence , Malpractices & Fraudulent Activities of Banking Sector.
( E ) – And Section 28 ( Ka ) of BANKING COMPANY of 2001 which explain WRITTEN OFF does not mean Weaver were included just to or misguide the International Community & Bangladesh National so as to serve the interest of the Vested Group & to hide out the above also
( F ) And also take immediate steps to reform or abolished the system of CERTIFICATE CASE Which are nothing but abuse of Law for realizing Government Taxes , Agricultural Loan etc and is one of the worst system of CLONIAL RULE
( G ) – It would be an extreme favors if your good self kindly collect the PRINTED COPIES OF THE ABOVE MENTION LAWS for confirmation of mentioned facts .& to help the Suffering Groups by circulating this appeal among Honorable Member of your Organization and Partner’s Organizations & to Publish in WEBSITES or News Bulletin or News Media, Electronic Media of your territory to bring to the knowledge of Concern Authority including International COMMUNITY OR ORGANIZATIONS working for HUMAN RIGHT & FUNDAMENTAL / Democratic Right of People to prevent legal abuse for immediate help and support to protect the Owner of the Sick Industries / Distressed Industries of Bangladesh and their properties from such OPPRESSIVE LAWS for which they all would be ever grateful as well for change of all types of oppressive laws restoring accountability at all organization of Bangladesh.
********* N.B. the Summery of above mentioned Section of Arthatha Rin Act at a Galance:
(A)- In section 18 ( 2 ) & ( 3 ) Defendant or Owner of Industries will not be able to claim any set – off or to make counter claim against the Bank or Bank Official nor will be allowed to claim any Compensation by submitting any Suit against Bank ( Plaintiff ) analogously or simultaneously in Artha Rin Court due to violation of contract, fraudulence activities including negligence, malpractices of Bank officials.
(B)- Section 21: Settlement Conference between Borrower and Bank is a misnomer of Law of Arbitration or just to divert the attention of common people in the name arbitration or to make everybody fool .
(C) -As Per Section 19 (6) of Artha Rin Act of 2003 no suits can be declared to be dismissed or discharged for default or above mentioned fault of Bank Official. As per Section 20 regarding any order or proceedings of Artha Rin Act can not be raised to Higher Court or to any Other Superior Authority without paying 50 % of claimed or Decretal Amount if the order is totally misleading or against any law or illegal one even .
(D) – As per Section 34 Defendant or the Owner of Industries in Artha Rin Adalat Case can be put to the Jail for compelling or forcing him to pay the Bank Money without considering the fault or negligence’s of Bank Official without allowing him to proof the matter of violation of contract, fraudulence activities , negligence, malpractices of Bank officials. V- As per section 41 and 42 -The Owner of Industries are not allowed to file any appeal or revision to High Court or Superior Court against any order of Artha Rin Court without paying 50 % of the claimed amount or Decretal amount in advance , But the Bank Official are not require to pay any amount in advance in the Higher Court, allowing A Great Disparity of Law and Justice.
(E) – Under section 47 and 50 , The learned Court under Artha Rin Act of 2003 have been bared to make any exemption of principal loan amount for Violation of Contract , Negligence’s Malpractices, including fraudulent activities or any fault of the bank official uni laterally
(F)- Section 12 ( Kha ) Imposed a bar for filling write petition to Higher Court which are direct violation of human right and constitutional right of the citizen and reflects the negative attitude of Policy Maker and the Law Maker .
Suffering Groups of Industrial Entrepreneurs of Bangladesh
Prepare for the New World Economic Order
Interest Rates [Credit] are the Cause and Consequence of the Explosion of Income/Wealth Disparities and, Hence, of the Inherent Instability of this Economy:
The Ominous Keynes’ Liquidity Trap.
Origin of Economic Chaos.
Everyone Need an Economy, Don’t They?
There Is One Solution That Works:
A Credit Free, Free Market Economy:
The New World Economic Order.
The Only Goal of 1776 – Annuit CÅ“ptis is to Implement It.
They Can Transfer Their Assets & Forget Their Liabilities.
Anyone Can Join But Still Needs to Ask for It.
http://www.17-76.net/
The Purpose Is to Provide Both a New Deal and a New Game.
It is NOT to Fix This Economy Which is Already Beyond Repair.
The Intention Is to Create a New Economy
With the Assets of the Old One Without its Liabilities.
Why Not Insure Against the Worst Case Scenario?
I am somewhat amused at the explanations here — it isn’t that I disagree, it’s just, well, people are being too nice here.
Reasons for failure of either The Administrations economic policies or Krugman’s policies are myriad and have all been mentioned to good effect.
But I really wish that people would cease all mention of ‘Free Markets’, we haven’t had free markets for nearly one hundred years now. How can you have a free market when the FED’s OMC can deal discreet but massive currency swaps on the currency markets to its own and the fiat dollar’s advantage? Or how about the President’s own personal Exchange Stabilization Fund — a fund that has existed since 1933 — directed without oversite or permission from the Senate or Congress — but which has a current holding of $40 billion dollars. And who’s main purpose is to interfere with the commodities markets — particularly oil and gold — to manipulate prices advantageous to the US govt and the Dollar.
Further investigation as to the real economic activities with such as the IMF and World bank would also surprise you — a read of Michael Hudson’s “SuperImperialism: The Economic Strategy of American Empire” is a sizzling read.
Free markets ? Move on, please….
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