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Paul Krugman is Dead Wrong: Debt Matters

Paul Krugman, the Princeton University economics professor, Nobel Prize winner, and regular New York Times op-ed contributor says, "Debt matters, but not that much."

Not only is he off the reservation on this one, but he's completely fallen off his high horse.

In the real world, debt actually matters a lot.

In a Houston Chronicle opinion piece last week, Krugman, riding his horse – whose name might as well be Liberal Conscience – trampled conservatives under the guise of an economics lesson that derided "deficit-worriers" for wrongly seeing "America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments."

According to Krugman, that's a bad analogy and "the way our politicians think about debt is all wrong, and exaggerates the problem's size."

Decide for yourself. Either debt matters a lot, or not that much…

The World According to Paul Krugman

Professor Krugman calls all the conversation in Washington about debt and deficits a "misplaced focus" and says all of the economic experts "on whom much of Congress relies have been repeatedly wrong about the short-run effects of budget deficits."

He derides the fears that deficits will cause interest rates to soar by pointing out that they haven't moved.

What he doesn't say is that they haven't moved because they're not free to move.

The fact is that the U.S. Federal Reserve has corralled the free market in interest rates by knocking short-term rates to almost zero through successive open market operations and extraordinary quantitative easing measures.

Mr. Krugman mocks those waiting for rates to rise and notes that while they wait "rates have dropped to historical lows."

Maybe what he doesn't realize is that the Fed's actions themselves have been nothing short of historical.

The crux of Mr. Krugman's supposition that debt doesn't matter much is based on his bashing of the popular analogy comparing America's debt problems to those of a mortgaged homeowner.

All of which Krugman claims is "a really bad analogy in at least two ways."

He says, "First, families have to pay back their debt. Governments don't – all they need to do is ensure that debt grows more slowly than their tax base."

"Second," he says, "an over-borrowed family owes the money to someone else; U.S. debt is, to a large extent, money we owe ourselves."

He goes on to say that the debt from World War II was never repaid and didn't make postwar America poorer.

In fact, the Professor points out, "the debt didn't prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation's history."

Krugman is Flat Out Wrong

First off, the homeowner analogy is excellent–not irrelevant.

Mr. Krugman is wrong when he says that homeowners have to pay back their debt. The truth is they don't have to.

Just like the government, as long as their creditworthiness is intact and money is available, at whatever cost, homeowners can refinance their mortgages over and over. That's no different than how the government rolls over its own debts.

We saw this phenomenon play out in stark reality during the housing bubble.

Not only were homeowners refinancing their homes to take out money for consumption purposes, they leveraged themselves to buy more homes to multiply the wealth effect they were already experiencing.

In the case of the housing crash, borrowers were counting on rising property values to finance their expanding debts. That's the same as what Krugman says governments should do: make sure debt expansion doesn't outpace revenue growth, in this case taxes.

In the end, though, didn't the bursting of the housing bubble prove that debt eventually matters?

To me, the housing bubble was a pretty darn good analogy as to what happens when mounting debts aren't repaid. When it happens on a systemic basis, the entire economy suffers.

Doesn't our nation's expanding debt and deficit in the face of falling tax revenues and worse, a lower base, portend similar problems on an even larger scale?

Of course, Krugman has it all figured out.

We just have to grow our debt at a slower pace than our tax base grows. Who knew the answer was so simple…

We'll just meet our expanding debt obligations by raising taxes faster. Perfect!

Second, to claim that U.S. debt doesn't matter because we owe it to ourselves, and that homeowners' debts do matter because they owe them to someone else, is absurd.

It is as if we are all going to say to the government, "It's okay you took all of those taxes from us and spent them on stuff we'll mostly never see, wipe the slate clean, we're good. And all the stuff you promised us that you didn't budget for, or worse, those set aside budgets you stole from, it's okay, we're good, we relieve you of what you owe us." It's just stupid.

Also, if you are a homeowner you are paying yourself too, in a sense.

While you are paying the mortgage to your bank you are also paying into a capital asset known as your home. You end up with something of fairly equal value, or more when home prices appreciate.

The Truth about Debt

But we screwed that all up because debts do matter.

Too much debt leads to depreciation and deleveraging, which leads to lower demand, lower production, fewer jobs and a lower tax base.

The last piece of Krugman's argument that our World War II debts were never repaid and that the huge deficits to pay for the war effort led to an extraordinary peacetime expansion is also frighteningly off the mark.

Of course, the savings bonds issued to fund the War have matured and been paid off. And the portion of our national debt brought on by the War was paid off a long time ago.

Just because the U.S. continues to add to its deficit and has to continually rollover debts doesn't mean that we're rolling over debts from 70 years ago.

Mr. Krugman's own argument even addresses that. Rising incomes and our rapidly expanding economy in the postwar period generated a vastly rising tax base and led to prosperity.

But, that had nothing to do with deficits not mattering.

That had everything to do with soldiers returning home and being educated under the G.I. bill, being able to find work in revved-up manufacturing facilities, and the ensuing baby boom that would lead to a substantial increase in the population and tax base.

A Political Axe to Grind

There are a lot of problems with Professor Krugman's argument that deficits don't matter.

But, the biggest problem I have is that instead of addressing deficits in an organic, holistic and objective way, Mr. Krugman addresses these important issues from his political perspective rather than a purely economic perspective.

Bashing conservatives who say deficits matter and spending cuts along with a smaller government are the best way to solve our long-term fiscal problems, and arguing that "responsible governments — that is governments that are willing to impose modestly higher taxes when the situation warrants it" are the answer to deficits that don't matter much, is polarizing at best and dangerous at worst.

What economists should be advocating is an apolitical approach to both our short-term and long-term problems.

We need smaller deficits over time and a smaller, more responsive government in the long-term.

In the short-term, we need real infrastructure spending, not quantitative easing for banks to increase their bonus pools. We need a massive investment in education and we need an industrial policy that promotes manufacturing and job growth – not the exportation of our capital to less developed countries where labor cost advantages fatten up public corporations that don't pay enough U.S. taxes and hide the money from Uncle Sam in the loopholes Congress digs for them.

Both deficits and politics matter.

And if we don't figure out how to bridle both we are all going to end up in the dirt being trampled by stampeding emerging economies everywhere.

[Editor's Note: If you're fed up with the rampant corruption, double-dealing, and protection of Wall Street by Washington (at the expense of the taxpayers on America's Main Street), then you need to read Shah Gilani's Wall Street Insights & Indictments newsletter. As a retired hedge-fund manager, Gilani is a former Wall Street insider who knows where all the bodies are buried. But unlike most insiders, he's not afraid to tell you where they are. He's also got some pretty good ideas how to fix this mess – and how to protect yourself until the cleanup takes place. Please click here to find out more. The newsletter is free.]

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Dale Richardson | January 9, 2012

    Of course Krugman takes the position that debt does not matter. He is a tenured academic that has never come out from the ivy covered building and has never had to work or provided a service. This is the typical attitude of the people that are surrounding the occupant ( I cannot bring myself to utter his name) of the White house.

    • Lance | January 22, 2013

      So… professors don't work and provode no services? It's amazing this country has done anything given that so much of its population has been educated by magic. Good argument Dale!

    • Marvin McConoughey | April 17, 2013

      I don't dismiss academic research, or researchers, because they work in academia. A degree of detachment may actually help promote objective research. My concern about Dr. Krugman is that his ardent political views are difficult to separate from his economic thinking. One reviewer found that his views apparently treated Democratic administrations differently from those that were Republican. Of course, views can legitimately change with or without political changes.

      The broader concern with all apologists/advocates for taking on greater national debt is that all of us are severely limited in our ability to forecast the future. Given than inescapable uncertainty, I would prefer us to enter the future with a smaller rather than a greater burden of debt. This is a personal view, and the future may show that great national debt was followed by easy debt retirement due to high inflation.

  2. Rick | January 9, 2012

    Shah Gilani should ask the papers that published Krugman's piece to publish his as a response. It is very well done. The only thing I would add is that there is a real world set of cases in the Euro Crisis that makes the point with current real world evidence! Do we want the USA to look more like Greece, Spain and Italy?? That is where we are headed with obvious certainty if we do not course correct and reduce debt and the size of government!

    • John O'Connell | January 9, 2012

      The US is monetarily sovereign. Greece, Spain, and Italy are not. That is why they are in trouble with their debt, just as a family would be, and the US is not, just like Japan is not, with twice as much debt as we have.

      If you don't understand monetary sovereignty, then you don't understand economics.

      • Andrew du Boulay | January 9, 2012

        I am from the other side of the world and even I know the US government does not possess monetary sovereignty.

        Both the name of the Federal Reserve Act, (12 US Code, Ch. 3, Sub-Ch. 6, 38 Stat. 251, enacted 23rd December, 1913, otherwise known as the Owen-Glass Act) which created the Fed, and the name of the Bank itself, convey a message of Federal legitimacy and ownership. The fact that the central bank of America has the word ‘Federal’ in its title has misled the great mass of a nation ~ and for that matter the rest of the world ~ into thinking the Federal Reserve is part of the US Federal Government and therefore answerable and subservient to the US Congress and the people of the United States. That is not the case.

        The US government relinquished monetary sovereignty to a consortium of private banks (predominantly owned by the House of Rothschild) in 1913 when President Wilson signed the Federal Reserve Act into existence. Within a year he realised his mistake but by then World War I was underway which forever indebted the US government to the private banks which own the Fed. Hence the corporate descendents of JP Morgan & Co, Morgan Grenfell & Co, Morgan Guaranty Co., Freres of Paris, Lazard & Company, Brown Brothers, Lehman Brothers, Schroder Bank of Hamburg & Berlin, MM Warberg, National City Bank of New York and Ors have been dictating US monetary policy ever since.
        The two principal Rothschild representatives in New York, JP Morgan Co., and Kuhn Loeb & Co. were the firms which set up the Jekyll Island Conference at which the Federal Reserve Bill was drafted. Those banks then directed a campaign to have the plan enacted into law by Congress. Not surprising, in 1914 JP Morgan Co., and Kuhn Loeb & Co. acquired major interests in the Federal Reserve Bank of New York and had their principal officers appointed to the Federal Reserve Board of Governors and the Federal Advisory Council. They also purchased controlling shares in the Federal Reserve regional banks giving them total control of the supply of money and credit within the US.

        How quickly people forget; after 60 years everyone forgot about the Fed being privately owned (even politicians) so much so that in the 1970s Congress’s Committee on Banking, Currency and Housing, had to clarify who actually controlled the supply of money in the US. [Federal Reserve Directors: A Study of Corporate and Banking Influence. Staff Report, Committee on Banking, Currency and Housing, House of Representatives, 94th Congress, 2nd Session, August 1976]. The US government may request money from the Federal Reserve to finance its deficit spending but it has to borrow the money from the Fed and repay it with interest.

        In Lewis v United States [680 F.2d 1239 (1982) Court of Appeal, Ninth Circuit] the United States Court of Appeals, ruled: ‘Federal Reserve Banks are not federal instrumentalities … but are independent, privately owned and locally controlled corporations’, and that ‘there is not sufficient federal government control over detailed physical performance and day to day operation of the Bank for it to be considered a federal agency’. The judgement continues:
        Federal reserve …banks are listed neither as ‘wholly owned’ government corporations nor as ‘mixed ownership’ corporations; federal reserve banks receive no appropriated funds from Congress and the banks are empowered to sue and be sued in their own names. . .

        Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. The stockholding commercial banks elect two thirds of each Bank’s nine member board of directors. The remaining three directors are appointed by the Federal Reserve Board. The Federal Reserve Board regulates the Reserve Banks, but direct supervision and control of each Bank is exercised by its board of directors. 12 U.S.C. Sect. 301. The directors enact by-laws regulating the manner of conducting general Bank business, 12 U.S.C. Sect. 341, and appoint officers to implement and supervise daily Bank activities. These activities include collecting and clearing checks, making advances to private and commercial entities, holding reserves for member banks, discounting the notes of member banks, and buying and selling securities on the open market. See 12 U.S.C. Sub-Sect. 341-361. Each Bank is statutorily empowered to conduct these activities without day to day direction from the federal government.

        In United States v Hollingshead [672 F.2d 751 (1982) Court of Appeal, Ninth Circuit] the US Federal Court stated:

        While we would like to think that the federal government and the Fed work co-operatively with each other, and they may on occasion, the Fed is by no means required to do so.

        Ha ha, that ain’t monetary independence or sovereignty.

        • Olaf | January 12, 2012

          I've read much about the Fed, but never have I seen anything so comprehensive, put so succinctly. Well done! I never knew so much of the secrets of the bank were made public through these rulings.

        • Pedro | January 15, 2012

          Hi Andrew,

          I just loved reading this post. Do you have a personal blog, social network you'r in where i can follow you?

          Best Regards,

          Pedro Lima

        • Jeff | January 16, 2012

          You've got to be kidding! The Fed is "owned" by the people of the United States and is under control of the Federal government. That the Congress refuses to control the member banks or act on our behalf does not change that fact. Your entire argument is nothing but an old conspiracy theory, great reading but simply wrong.

        • Servio Redschild | January 19, 2012

          No body has said that sovereignty means “federal soveregnity”. What I understand Krugman wants to say is that EEUU, as an economic entity, has independence to control the quantity of dollars to put out. That quantity could be coordinate with the economic policy of the Federal Government or could be a response of the economic interests of the banks.

      • dbomb12 | January 10, 2012

        So you think because we are a "monetary sovereign nation" that we will be immune to the overwhelming debt problem we have? that is very naive thinking. When the interest rate climbs and they need to continue to "print money" we will be in the same position as the Wiemar republic. But like they say ignorance is bliss.

        • Dewey | January 10, 2012

          Your analysis is typical if one is still thinking as though we are on the gold standard. The reason the Wiemar Republic went bankrupt was they had to purchase a foreign currency in order to pay off their debt. At that time, all currencies, were still on the gold standard. Today they are not and hence the analogy is not pertinent to the current situation. Yes, we can print money and hence solvency is not a problem. Is there consequences of printing too much? Yes, you could run the risk of hyper-inflation – meaning the demand is much higher than supply. So which argument does one make – we are going broke, or we have too much money? Seems incoherent, because it is. Instead of debating the debt, we should be debating how much money the macro-economy needs in order to increase aggregate demand without creating hyper inflation. And that number, or sweet spot, should not be determined by some arbitrary number like what the debt is.

          • Jeff | January 16, 2012

            Actually his analysis is typical for people who fail to understand that the Fed was created by an Act, which is law. Even assuming that he's correct that the Fed is under exclusive control of evil bankers, the fact is that the Act can be repealed by Congress or amended to correct any of the deficiencies he outlines, if they so chose to do so.

            Congress is the problem, not some dark force controlling the Fed, because Congress has the power.

      • Sailor Jo | January 15, 2012

        Completely agree with you.

        On top of that is the inequality of currencies. The US dollar is THE reserve currency, a status that at times only the GBP and the DM shared. That gives the dollar some leeway, but only some.

      • Paul Check | October 8, 2012

        Yes, being "monetarily sovereign" does make a difference, but it also doesn't mean you can never get in trouble with too much debt. It just means that instead of a default in nominal terms you can achieve a default in real terms (courtesy of inflation), the latter of which is only somewhat less damaging to the economy than the former.

        Japan *is* in trouble, as is the US. Deficits and debt do need to be cut. You either do it now with some choices, or absent inflation you do it a wee bit later with fewer options, at the dictat of your lender.

  3. Edouard D'Orange | January 9, 2012

    Mr. Gilani, thanks for calling out Krugman. Industrial policy changes should include lower corporate taxes, in my opinion, to bring capital back to the U.S. But that is anathema to the corporate bashing Obama and his lackeys with their class warfare rhetoric and anti-capitalist mantra. So we end up with the big deficits spent on social spending and the Fed doing what they believe is required, the quantitative easing policy.

  4. Wayne | January 9, 2012

    Yes, Shah, you are dead right that debt matters. And Krugman is just like the greedy bankers who urged the prospective homeowners to barrow more and more money beyond what they could afford now because their earning power would go up in the future. We all know how that worked. The bankers got rich, the banks got bailed out, home values tanked and the homeowners lost jobs. But the bank executivies still got their bonuses. And the politicians who made it all possible are still getting all their perks and salaries and paybacks from the banks and money lenders. So it is time for the American people to wake up and vote them ALL out.

    • Unimpressed | January 9, 2012

      I agree with Vote them all out………. but before you bash Krugman read all his editorials and papers, he arugues the same points as Gilani almost word for word on where we should spend money and how we need to implement tax increases.

      This whole article that calls Krugman out is an argument over their own definition of debt… No reason to bash either side, they both agree we have misapporpraited monies and going forward need to spend differently, so the headline and main point of Gilani's article is lost on me…….

    • pradeep | January 9, 2012

      i like this statement

    • Sailor Jo | January 15, 2012

      Well said

  5. mart | January 9, 2012

    Technically republican governments by far beat democrats in who can get us into more debt. And wasn't it Dick Cheney that said "deficits don't matter".

  6. Bob Oros | January 9, 2012

    Above you state "We need a massive investment in education". Why? We are spending more on a per capita basis for education than we ever have. It seems to me that we need to make our existing educational system more effective. We keep throwing more and more money at education without any significant improvement in the outcome. Throwing more money at a problem without getting the desired result is a typical money wasting liberal method. How can you criticize Krugman's liberal bias then advocate another liberal pursuit? This makes no sense to me. We don't need a "a massive investment in education". We need a massive restructuring of our educational system that will address deficits in education that make our country less competitive.

    • Albert Wight | January 9, 2012

      "We need a massive restructuring of our educational system."

      And just exactly how do you propose it be restructured? Bill Gates has poured $5 billion into it, with no apparent result. Bush's No Child Left Behind created chaos and a widespread backlash. How can you restructure without a massive investment?

      • Mannstein | January 9, 2012

        How about copying the educational model used by other countries like Finland which by the way stands at the top for student achievement among the Western industrialized countries.

        • Olaf | January 12, 2012

          It sounds good in theory, but Finland has a population of about 5 million and does not have the diverse problems of the US. Even Hong Kong has a larger population. The US is more like Brazil and the UK than Scandinavia. I realize now that the US has become too large and diverse to govern by central authority.

  7. Rick Parton | January 9, 2012

    Shah: Me thinks that you misrepresent Prof. Krugman. While he can speak more eloquently than can I, an operative phrase that has been omitted is "in the short term". Krugman argues as a true Keynsean – governments should act counter-cyclically; borrow in poor economic times to stimulate the economy, and pay down the debt in better times (unfortunately this repayment has not occurred). The impact of the Chicago school of economics is there for all to see in the experience that is being realized in Ireland and the EU Countries with the exception of Germany and possibly France. There is a significant social cost that results from the Chicago School theory, as well as an economic cost.
    A more germane question centres around whether or not the fundamentals of the economic changes as a result of technological change in the US and elsewhere are permanent or are temporary. I suspect that they are permanent, and governments, including my own Canadian Federal and Provincial Governments must take this substantive change into account in formulating their policies. But to argue that governments should not act in a stimulative manner in recessionary times surely is nonsense. After all, our histories show that this is a way of building/renewing our infrastructures while preserving a better level of employment and maintaining societal cohesion when it does not make economic sense for the private sector to continue to invest/reinvest.
    Rick from Toronto

  8. Steve Fleck | January 9, 2012

    Shah Gilani's comments are as usual thoroughly intelligent. His criticisms of Krugman may well be good – but they do sound strangely liberal also! Which is a good thing, because the almost-deafening conventional 'wisdom' that has dominated public (that is, political, again, rather than 'purely economic') discussion is that deficits are killing us and have to be slashed by all means. The problem being that the targets being slashed are not the giveaways to Wall Street (especially those immense and deeply hidden ones that have just come to light), not so much the bloated military machine & its economic dependents, but instead precisely infrastructure (education, for instance), and social safety net (what hasn't already been shredded) and similar politically weak targets, in line with hyperconservative dogma.
    I fully agree that deficits matter, especially in our economically weakened state – but Mr. Gilani might have pointed out that Republicans have hypocritically produced the majority of those deficits by _lowering_ taxes when the nation went to first one, then two wars: an unheard-of policy in the past and unthinkable to any honest conservative or liberal. Our last president famously (I'd say infamously) said then: 'I hit the trifecta' (war president, tax reducer, and I forget the third leg of irresponsibility).
    Yes, both politics and economics (and their history) matter – on all sides of the debate.
    I look forward to reading more of Mr. Gilani's comments.

  9. J Russell Tyldesley | January 9, 2012

    I think Mr. Gilani has mis represented Paul Krugman's view on debt. Krugman is merely saying that deficit spending may be necessary in a severe recession or depression. It would be used to build infrastructure as the stimulous did, and to give the lowest paid in society more money to spend to increase jobs. It is, perhaps, unfortunate that we have such a large sovereign debt, but it does not negate the principle of spending your way out of a depression. The large debt was brought about by two unfunded wars and the financial scams of the Wall Street derivative fiends. The reason the family budget is not a good analogy is because families can't print their own money and they can go bankrupt. Their credit can beruined almost permantly by a record of bankruptcy. They also can lose their income through layoffs and unemployment insurance may not be enough to meet their debt payments. The U.S. will also inflate their way out of their debt – Bernanke is pushing for a little more inflation which, for one thing, could make residential and commercial real estate more attarctive to potential borrowers. With people waiting for residential real estate to drop in price even further, it is a self-fulfilling prophecy. I know – I am a residential builder still stick with lots and houses to sell. My lots were discounted from an average of $100,000 per and I have then listed for $60,000 and not even a sniff by a potential buyer. This is a depression psychology. We need to borrow and spend as fiscasl policy until we can change the psychology. The bond vigilantes may have to be patient.

  10. Steve | January 9, 2012

    If debt doesn't matter, then why are we paying taxes? Why not just borrow all the money needed to run government? It worked for Zimbabwe, it can work for us too.

    • Dewey | January 10, 2012

      The government is not revenue constrained since it can print money. Taxes function as a way to make the dollar legitimate. It is the only form of payment that the US government will accept for you to pay your taxes.

  11. KENNETH PETERSON | January 9, 2012

    Thank God there is some like you to rebutt Krugman!!! I read his op, and thought "could he be right?…he received the Nobel Prize??..what does he know that I do not understand?" It did not seem right !
    You should receive some type of prize , just for responding to him! Shah, you are to be commended! You should put an ad in the Times with your response. Great advertising for you and great info for people like me, who are interested in the truth!
    THANK YOU!!!!!

    • Lars Bagman | January 9, 2012

      Paul Krugman got an award funded by a Swedish Bank, the Sveriges Riksbank. The true name for what he got is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The source of funding for this prize is markedly different than the "true" Nobel Prizes, but the Euro value is approximately the same as the "regular" Nobel, so this Swedish Banker's prize is often referred to a "The Nobel Prize in Economics."

      I could see US based Citibank funding an award and giving it to the US Fed chairman, Ben Bernanke and saying they did so in memory of Alfred Nobel. Would you be impressed by such a thing? How about I give you one Euro in memory of Alfred Nobel and say it is for your insight into BS economic theories, then you too could claim to be a Nobel Prize in Economics prize winner?

      Krugman got his 2008 prize for updating the original work on "comparative advantage" by David Ricardo published in 1817. Krugman noted this "rule of thumb" for international trade could be refined to explain why all of one item is not manufactured by the single lowest cost manufacturer on the planet. Krugman's explanation was that people have developed more sophisticated tastes and therefore desire variety/diversity, thus Italian shoes can still be manufactured and sold even though they are not as cheap as shoes made in Bangladesh. He also worked in the aspect of economies of scale to explain geographic concentrations of wealth. A good piece of work, but this hardly qualifies him to speak as an expert on all things economic, much the same as a "brain surgeon" may be brilliant, but I wouldn't drive my family auto over a bridge designed by one.

      Krugman calls himself a "Liberal" but to me, he and many others who purport to wear that label are anything but liberal in their views. He obviously believes in authoritarian rule by the elite, ensconced within big government. This model has been tried numerous times across history and failed miserably each and every time. With his particular set of blinders, he is like a "hammer" to which every problem looks like a "nail."

      Krugman has never seen a "stimulus" that he reported to be excessive. His explanation for the US government's failure so far (actually just those nasty conservative elements) is that the stimulus of US$841 billion was too small by US$400 billion. That's all it would have taken to fix the US economy. This is ludicrous because in the world's financial system money now flows across borders in the blink of an eye. So any stimulus must be summed across all the world's major participants and when one compares an additional increment of US$400 billion to the global total it is only a modest increase, far too little to have a significant impact.

      Krugman appears to have one fix to all economic downturns. While what he suggests might work during a typical inventory overbuild caused recession, this current economic crisis has its origin in excessive debt, which is much harder and time consuming to work our way out of. The solution to too much debt is not just a larger dose of the same.

      • Steve | January 10, 2012

        Thanks Lars for your brief history of Paul Krugman. Such enlightened comment contributes value to to this blog. That being said, I have difficulty with, <> I have observed that any rule by an elite central authority carries many labels of which "liberal" or "conservative" are only two. Liberal or progressive elitism are just as insidious as conservative elitism when given the power to determine the course of others' lives. We actually need a balance of both perspectives to steer humanity along a civilized pilgrimage. Constant helmsmanship is required to adjust this course as crises arise in their infinite variations while the arrow of time pushes our reality.

        • Steve | January 10, 2012

          Please insert, "Krugman calls himself a "Liberal" but to me, he and many others who purport to wear that label are anything but liberal in their views. He obviously believes in authoritarian rule by the elite, ensconced within big government." between the . I am learning that limitations of formatting are not allowing WYSIWYG in this forum. Hopefully, this addendum comes through as I input it.

    • Steve | January 9, 2012

      Krugman a Nobel Laureate? I read somewhere Myron Scholes and Robert C. Merton, both Nobel Laureates and economists are still trying to get published following their careers at LTCM.

  12. John Anderson | January 9, 2012


    NO! It is Prof. Krugman who is dead on the mark, and you and your right-wing Tea Nuts, the new RePugNaCons and 21st century regression back to the original "No Nothings," who are totally full of "IT."

    By the way, while I doubt you can remember what you had for breakfast, back in 1986
    Reagan's top advisor on economics, David Stockman, and the inventor of the TRICKLE DOWN LIE, admitted that: "debt doesn't matter and Trickle Down will not work." GET IT!

    I doubt it!

    I suggest you go get a real job you can handle and stop attempting to match wits with a Professor of Economics, as you are clearly under educated for the task, Oh, and on that note I hear that the Koch Brothers are hiring moron's like you for shovel work out at their pipeline, and to mow their grass, actually weeds, down in Dallas!

    Dr. John Anderson
    Ph.D M.D.

    • Tony D | January 9, 2012

      Wow, what substantive rebuttal JA!
      Full of invective and little else. All you have been able to achieve through your comment is a cheapening of the letters after your name.(Are the real ? If so, I'm glad a person like you isn't my doctor.)

      • Steve | January 10, 2012

        Tony, my thoughts exactly. Moreover, John Anderson, Ph.D M.D. has revealed that despite his title and whatever efforts he made to achieve it, he is an extremely unhappy person and is apparently not in control of his life. Myself, right of middle, am amused by the frequently encountered espousals of Mr Anderson and his ilk.

  13. david | January 9, 2012

    ???Debt doesn't matter ??? What kind of an A…..E would make such a preposturous statement ?Try to convince two hardworking people just getting by on low wages and were coerced by the bank to take out a mortgage they were ill equipped to handle!!!He obviously has HIS "go to hell " money !We were told to be thrifty all our lives until the GREEDY GREEDY banks said that is a stupid idea,and like sheep ,we bought it.As far as I'm concerned ,the banks duped the majority of us !And they should be held criminally responsible !!!!!!If I cheated someone,I would have to pay;so why not the banks for their duplicitous behaviour ???????

    • Sean | January 10, 2012

      eh……. maybe you should read his article

    • Dewey | January 10, 2012

      Debt does not matter in the way that you think it does. Instead of calling it debt, we should look at it as the private sectors savings. The US Debt, to the penny, is equal to private sector savings. No one is forcing anyone to buy our Treasury Bills. People/institutions purchase our bonds because they want to and feel it is a better investment than whatever else is out there. The US government can print money so solvency is not an issue. Comparing a families debt to the government debt is not an accurate way to look at things. The family can not print money. The US government can and does. That is not to say printing too much money does not have consequences. I am not advocating just turning the printing press on. What I am advocating is that most people's understanding of how our monetary system works is still based in old school gold standard theory – which is not applicable to today's floating fiat currencies.

  14. Jake Loepp | January 9, 2012

    Krugman is partly right, debt does not matter when it is a reasonable size compared to the income a person or country has. Now However the USA debt has reisen to suuch an extent it is doudtfull if its income will ever be larle enough to repay the debt, a large part of which is owed to other nations. It would not be as bad if we owed the debt to ourselves, that is if the government had been able to borrow the money from the savings of ots citizens.
    Things are looking Grim in the eyes of most people, time will tell if we are all wrong and Krugman is right

  15. Robin Van Velzen | January 9, 2012

    In order for us to really establish the truth about who is right or wrong there is need for a debate with Krugman and Gilani where there can clarify positions. There is the tendency to celebrate when we hear or read the positions we prefer. We should instead seek the truth. If policy is not based on truth we are destined to be failures notwithstanding the feeling of justification.

  16. Lary | January 9, 2012

    How can a college beaurocrat be expected to understand the real impact on all of us that an on going and ever expanding debt will have. He and the rest of his elk have not had to experience decreases in the income because their wages have not dropped during this economic depression. To be sheltered from the real economics of life, does not qualify Mr. Krugman as an expert on the impact of debt expansion.

  17. jrj90620 | January 9, 2012

    Krugman is surely crazy but many people,especially govt worshippers, believe him and his ideas can effect what govt does.Best to take actions to ensure your own investments hedge against the results of misguided govt policy.If you aren't aware, all govt deficits,including those of WW2,aren't waiting for some future generation to pay them off.They just result in the inflation tax paying them off.Inflation,over the last 12 months,according to Shadowstats,using 1980 calculation methods,has been 11%.So,all this govt debt hasn't been at no cost.

  18. Sam Timpano | January 9, 2012

    Mr. Krugman has no real credibility as an economist any longer. He lost that when he decided to become a politicist and more importantly, a blatant and unabashed Democrat and worse (in my opinion) an "Obama is God and can do no wrong" opinion writer and an unashamedly Bush basher.

    If he followed his own economic advise he would be bankrupt now, which of course he isn´t.

    Reading him is a waste of time if one really is seeking any form of reality and credible analysis.

    • Dewey | January 10, 2012

      The US government can NOT go bankrupt. It is operationally impossible.

    • Sean | January 10, 2012

      do you actually read Krugman? He is a frequent critic of Obama.

      don't let the facts get in the way of your ideology.

      • Trey | February 22, 2012

        Are you kidding? He can't take his lips off Obama's butt long enough to utter words against him. Krugman makes no sense, just like Obama, because he is a government worshipping communist. Facts are facts. You can lie about Krugman's political bias but no one believes you, him, or Obama anymore.

  19. Jonathan | January 9, 2012

    Despite taking issues with some of Krugman's words, your positions on what to do are actually pretty close to what Krugman recommends:

    "We need smaller deficits over time…"

    I think Krugman has made a similar point.

    "In the short-term, we need real infrastructure spending, not quantitative easing for banks to increase their bonus pools. We need a massive investment in education and we need an industrial policy that promotes manufacturing and job growth – not the exportation of our capital to less developed countries where labor cost advantages fatten up public corporations that don't pay enough U.S. taxes and hide the money from Uncle Sam in the loopholes Congress digs for them."

    Krugman has also made a lot of those points. Most of this would fit quite nicely inside a Krugman article.

  20. Jeanne | January 9, 2012

    Well, with respected "big" thinkers like Krugman, I'm not surprised we're in the condition we're in.

    Krugman's thoughts suggest that debt matter to businesses and people because they're real entities with responsibility to others. Gov't, what's gov't? A manufactured entitity who can manipulate matters to avoid responsibility.

    It seems to me he purports for the US the character a whore who can seduce (read manipulate) matters for her own end. Who thinks she's the player when really she's just being played and those she represents get screwed. (Read not so nice word).

    The question remains, does the character of the US matter? If so, debt matters. We have a responsibility to those we owe. Do the people and businesses of the US matter? If so, we have a responsibility to manage their taxes more responsibly.

    To ease the fears of our massive debt by suggesting that we just need to grow our tax base is comparable to perpetually pursuing the next "fix." We need to get ourselves under control. Quit justifing our godless, irresponsible behaviour and man up to our addiction to power, control, and money.

  21. John | January 9, 2012

    Lets not forget the British example. World War ll debt mattered, so much so that the British went Bankrupt repaying America. Pity Krugman wasn't around in 1945!

    • Joseph Sobry | January 9, 2012

      You may also recall Germany paying WWI war reparations until bankrupt so to speak with a loaf of bread costing billions of german marks. The real consequence in that case was WWII and all it's consequences.
      Just to complete the picture.
      Oh, if only we could learn from ALL of history and in a proper manner.

  22. Ed Sommers | January 9, 2012

    It is refreshing to me to see that at least some Money Morning subscribers have
    an open mind toward Krugman's thesis. Not surprisingly, most comments here reflect
    an attitude toward Krugman that is dismissive…presumably because Krugman is
    a well known liberal, and perhaps because he is a Nobel prize winning economist,
    so he must, by definition be wrong. Just like Darwin is wrong on evolution and
    Gore is wrong on global warming.

  23. Kevin Beck | January 9, 2012

    Your headline could just as correctly stated, "The sun came out today."

    The fact that Paul Krugman is wrong is as ubiquitous as some other facts:

    A day is 24 hours long;
    The alphabet-soup networks will fight for Obama to win in November;
    1 dollar = 100 cents.

    Each of these is as true as your headline.

  24. Robert Brink | January 9, 2012

    Rick Parton and J Russell Tyldesley took the words out of my mouth. Though I have great respect and admiration for Shah Gilani for both his formidable expertise and his political neutrality, I think he overstated his disagreement with Krugman. The Nobel Prize winner has always said that debt has to be dealt with at some point — just not during an economic downturn. At such a time, the economy must be stimulated, he insists, and Gilani said the same thing at the end of his discourse. But later, once the economy is zipping along and people have money in their pockets, taxes must be raised to bring down the debt. Sure, you can cut spending, too, but where? Aren't we all better off if everyone pays small increases in taxes and the rich pay closer to the level at which they were taxed decades ago, when the economy boomed, than cut social services that the masses depend on? These small tax increases don't really don't affect our lifestyles but do enable us to care for the least fortunate in our society and be the kind of nation that we have always prided ourselves in being. And almost half the population now qualifies as "the least fortunate," with that people in that category classified as either at poverty level or low income. Krugman has pointed out that the austerity measures enacted in certain countries, among them Ireland and England, to reduce debt only made matters worse as their economies declined even further. Mr. Gilani seems to have forgotten that.

  25. Lawrence | January 9, 2012

    Why the surprise. We all know krug is a douche living off his prize. Bought off by the media to regurgitate drivel. If you are stupid enough to read his words thenthe joke is on you duh!

  26. Unimpressed | January 9, 2012

    Mr. Gilani misrepresents what Krugman's intentions are. If you read any more than just ONE editorial from Krugman, you can see he suggests the very same "ideas" Galani concludes with!

    "In the short-term, we need real infrastructure spending, not quantitative easing for banks to increase their bonus pools. We need a massive investment in education and we need an industrial policy that promotes manufacturing and job growth – not the exportation of our capital to less developed countries where labor cost advantages fatten up public corporations that don't pay enough U.S. taxes and hide the money from Uncle Sam in the loopholes Congress digs for them."

    That is almost exactly what Krugman would say if you asked him!

    I see no reason why he choose to atack Krugman's statement. He justifies his position with no historical accuracy, and his take on mortgages in his own words is "dead wrong".

    "Also, if you are a homeowner you are paying yourself too, in a sense.

    While you are paying the mortgage to your bank you are also paying into a capital asset known as your home. You end up with something of fairly equal value, or more when home prices appreciate."

    How does that work out with an interest only loan???? And if you don't have to pay it back as he says, ask anyone who walked away from their mortagage or who has been forclosed on how that worked???/

    And yes we will tell the government don't worry about all the money you spent, becuase that is exactly what we are doing……………………………..

    Galani is at the end of the day a Trader…. Doesn't matter to him if we fix the economics or not, he can make money either way…..

    • Owen K. | January 9, 2012

      Really. So why doesn't Krugman state this in his essay instead of stating that debt doesn't matter.

  27. manuel ossa | January 9, 2012

    The eticts that Mr Krugman, mr Berlusconi and others mean is: countrys can borrow as much money they want, and they have no intention to pay back. Countrys can issue as much money they want…. so money means nothing for powerful people or banks, but people, the magorytys, emploies, all of us, have to live with the salary they give us, so to keep them fat

  28. Ray Teasley | January 9, 2012

    Exactly who is being disingenuously political and less than honest here? Dr Krugman was careful to qualify his remarks about debt as applying IN THE SHORT TERM ONLY. You (rather dishonestly) ignored that in your argument. You also managed to avoid addressing the central thesis of his argument: when the economy is contracting (deflation), governments should not reduce spending because doing so may prolong the recession and, perversely, result in even higher debt because of the falling tax revenues.

    Also, exactly which "conservatives" sought to reduce our debt back when they were in power during an economic expansion? Was it GW Bush? Did Alan Greenspan cast any doubts on the wisdom of the large Bush tax cuts or even larger spending increases? I also don't recall any of the current Republican candidates for President proposing to pay for the future wars they seem anxious to have with taxes. Maybe you could refresh my memory a bit.

  29. Stephen Murphy | January 9, 2012

    Our current debt is a combination of illegal wars propagated by previous administrations and the current administrations spending to prop up the economy after the economic collapse in 2007/08. Remove those 2 issues and there is no problem. So, we don’t need a smaller government, we need elected officials that have a conscience, a government that is more efficient, and a government that is honest with the people.

  30. Joseph Sobry | January 9, 2012

    Mr. Gilani claims that Mr. Krugman is dead wrong but practically everything he writes in this article matches roughly what Mr. Krugman claims in his various articles.
    The fact of the matter is that the economy took a downturn after the "unintended consequences" of creative financing by various lending institutions and poorly equipped borrowers came home to roost.
    By the way this was (and still is??) a world wide phenomenon not just an american problem.

    Once the financial economy started sliding the government had no choice but to save the financial system unless it was willing to face "all the consequences" of letting the chips fall where they may. I for one would not have liked to witness that.
    Once the real economy is in a slump government revenues are in a slump. Government stepped in trying to revive the severely sick patient and protect it's tax base as much as possible.
    The so-called stimulus was and still is inadequate to properly revive the patient or to properly protect tha tax base as far as I can tell.
    The actual consequences are and will be a sluggish recovery at best. The government debt will increase because government revenues are falling and will keep falling.
    The proper way out is as Mr. krugman AND Mr. Gilani fully know is to stimulate until a proper recovery has been established and then immediately raise taxes to stop the deficits and pay for the borrowed money.
    All the austerity advocates are dreaming. If they continue to implement austerity before a proper recovery has taken place the dream will in large part be a nightmare.

    Of course austerity and it's associated nightmares are not deadly. Some austeritarians seem to be willing to shoulder the consequences of a long (10 years or more?) drawn out and very weak recovery. However, when you look closely they usually expect other people to carry the actual burden.

  31. Optimist | January 9, 2012

    Check out Steve Keen's Debtwatch – Debt is a shell game to transfer wealth to the banksters. I win you pay, I lose you pay.

  32. Kevin Donnelly | January 9, 2012

    The economy going forward will be based more on results of political gridlock in Washington, which is unlikely to change anytime soon, than on either of the scribes referred to in this article. Resolving the mortgage value crisis, derivatives as an international Casino game, "value added taxation credits" on manufacturing industry, privatising infrastructure development and such are beyond the capabilities of Washington because they are committed to "internicene warfare" rather than national interests.

  33. Owen K. | January 9, 2012

    Dr. Krugman seems to forget, or perhaps he never understood, that the Government does NOT owe the money to themselves. The U.S. is the largest debtor nation in the history of the world and our main creditors are China and Japan.

    • Dewey | January 10, 2012

      So we owe China and Japan. Whats the problem with that? If they decide that they would like to have their money back, we do not send them a check for x amount. They can use the money that is owed them to purchase US goods. So some US business will then get the US dollars in exchange for whatever goods they want to export to China or Japan. How is this bad?

  34. Benton H Marder | January 9, 2012

    Does Paul Krugman even know what a margin call is? What would he say if we got one? Look at his press photo. Look at his eyes. The man is demented or delusional. Think about it.

  35. William W. Andrews | January 9, 2012

    America is so divided the only sensible thing would be to divide it into one nation for liberals and one nation for conservatives, but most Americans are too greedy and selfish to do anything sensible! The Europeans are smart enough to know they are better off with separate nations, but what most Americans really want is to force their values on others, so none of us will ever have a good country. Divided we fall!

  36. Luc | January 10, 2012

    Unfortunately, you did not address the fact that the USA is able to print its own money to remain solvent, that most of her debts are in that currency and is doing so along with several other economies. The value of the USD has been slowly dropping for last several decades ( before Ben's free money ) and but is actually rising now. Individual can't print their own money and pay debts with it.
    The fact is that in this system we live in, debt is what has been creating most of the money. Bad debts make that money disappear…. hence the problem causing the credit-crunch. If those debts are not for generating greater production but are used for paying higher prices for the same goods ( e.g. houses, old-tech cars, low-tech services and other consumer goods ) then servicing those debts eventually becomes too great a burden and the system resets… with much social pain, civil protest or even global war.
    At the moment three options are being presented… either austerity, greater debt ( at lower and lower interest rates ) or new money without debt. Each has an economic or social consequence.

  37. Dr Ross Grainger | January 12, 2012

    I generally respect and often agree with what Shah Gilani says concerning markets and the economy but I think he has misrepresented Paul Krugman's arguments. However, what is worse is the language he has used.

    I prefer and respect more civilized debates than this one. Shah Gilani is using in places, an ad hominen argument. That is, he has attacked Krugman as a person and his credibility rather than just his arguments. I think this a mistake as it portrays Gilani as person other than I thought he was.

    The larger problem is that when economists and financial analysts attack one another in this way they discredit the entire profession.

    I am now inclined to the argument put by a South Korean Professor at Cambridge that engineers have done a much better job at managing the economy than economists. For example, the Chinese Communist Party is dominated by engineers and they seem to have done a better job than the US. Also, engineers are prominent decision makers in Korea, Japan and Singapore.

    • Steve | January 15, 2012

      Nice try Krugman. The only reason we are not begging like the Greeks is that the dollar is still the reserve currency. We have the luxury of printing all the dollars we need to pay our enormous debt service to our creditors. The Chinese who are far and away the largest bag holders finally got smart and have signed an agreement with the Japenese to deal directly in their own currencies without converting to U.S. Dollars. When this trend expands to all countries, and it will, we lose our status as the worlds reserve currency and Presto we are Greece. The Emperor is naked chum and the rest of the world is getting it.

  38. Chris F. | January 13, 2012

    I'm disappointed in this article. Shah seems to have forgotten the deference between useful government spending and two unnecessary wars started by an Republican administration. He also seems to willfully ignore the difference between the deference between "not matter much" and "not matter".

    In a growing corporate world of globalization, larger government is necessary. In other articles Shah has said the government should hold Wall street accountable. Just how is a smaller government supposed to do that?

  39. Viswa Ghosh | January 15, 2012

    Dear Shah,
    I always find your excellent comments worth reading for their educational value. This one though seems slightly below your level of excellence.
    Undoubtedly, you are right about debt. Debts matter. No one can be in debt forever, even the largest economy or corporation. The issues that Prof. Krugman is raising are about timing of debt-reduction and the fallacy of using a micro-example to understand debt at the macroeconomic level.
    First, about the timing. When an economy is in recession, focusing on eliminating fiscal debt should be the last thing for the Treasury or the Congress to think of. Kick-starting the economy takes priority over debt-reduction. We can go into the details as to why this is so, but I will abstain at this point. Focus on debt-reduction and balancing the budget when the economy is back on a growth trajectory. (As an aside: I find it extremely sad that none mention how Ronald Reagan got the U.S. into massive debts through his Star Wars program. It appears that in the U.S., opposition to debt comes up – actually becomes a cacophony – only when the unemployed or the poor have to be supported through government safety nets.)
    Second, about the fallacy of extending the logic of debt from a micro-example to the macroeconomic-level. In the case of an individual house-owner high debt-burden ratio is a serious concern for the lender unless there are other factors that reveal that an existing debt-burden ration will reduce considerably given the future prospects of increased earnings. Just the way GM was able to restructure using debt and is now on its way to regain its number one position worldwide. In the case of the Treasury, reduction of debt-burden starts to happen almost automatically (unless foolish wars against Middle East dictators are launched and foolish tax breaks are given to the top 1% income earners in the name of “job creators”) as the economy starts to grow, the tax base starts to widen as well as increase.
    However, your point is valid that debts matter and should be reigned in. But when the economy is on a firm growth path and not floundering, like it is at present.

  40. david tarbuck | January 15, 2012

    Deficit spending has three bad effects; all are interlockling:

    1) the borrowing can and often does crowd out more constructive borrowings for capital investment.

    2) the borrowing masks the need for equitable taxation. I.e. if the lender has money that is surplus, it ought to be taxed; taxes of this type hinder nothing but excess acumulation of unearned wealth by those who do nothing constructive with it.

    3) the deficits are a base for. and an invitation to Banksters, public and private, led by the Fed and the IMF to engage in all the expansion of VALUELESS paper and electronic manupulation. That is how we have more than $700TRILLION in this ficticious capital that the monetary gangs are attempting to unload onto a GROSS WORLD PRODUCT of $70TRILLION. (both figures estimates but the 10/1 ratio is conservative). This 10/1 alone ensures something will give and in Europe the process is well under way; does anyone including Klugman think N. America and Asia will escape the consequence of this self made fraud?

  41. AspenFreePress | January 16, 2012

    We can print enough dollars to erase our debt in less time than it takes a metro daily to run off an early edition. And guess what? Other world currencies against which the dollar is compared have nothing backing them either. So what we've got here is a giant paper chase. It's like having your cake and eating it too. Enjoy.
    Sterling Greenwood/AspenFreePress

  42. richard walshe | February 21, 2012

    please include me on the news letter

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