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Nobel Prize-winning economist and New York Times columnist Dr. Paul Krugman is at it again.
A favorite of the Keynesian crowd, he claimed earlier this week that fixing the deficit is important but added that "doing it now would be disastrous." He also observed that the 10-year U.S. debt situation isn't really all that bad.
At least he's consistent. I'll give him that.
For five years now Dr. Krugman has argued that increasing U.S. government spending is vital to our nation's recovery. And for five years he's been dead wrong.
Since this crisis began, the United States has spent trillions...more money than any nation in history. In the process, it's gone from being the world's biggest creditor to the biggest debtor of all time.
In fact, our national debt is now so high that people literally can't count the zeros. So most have thrown up their hands in exasperation and given up trying.
Now, to be perfectly clear, I don't believe Dr. Krugman is stupid. Far from it - you don't win Nobel Prizes for being an idiot. However, I do believe that he's trapped in the past--an acolyte of sorts to failed economic policies and doctrine that dates to the 1930s.
Some people, like University of Chicago Finance Professor John H. Cochrane, are more pointed, noting that if Krugman were a scientist, he'd be akin to a "flat-earther," an "AIDS-HIV disbeliever" or somebody who believes the continents don't actually move.
This makes him very dangerous in the scheme of things because Dr. Krugman's solution is that "we" just haven't spent enough money...yet.
I don't know how he can make that argument with a straight face.
Where Krugman Gets It Wrong
Here's the thing. If Dr. Krugman's ideas and his understanding of modern finance were accurate, our economy would be screaming along at 6%-8% a year, and the debt we've accumulated already would have led to some sort of government-spending utopia.
That obviously hasn't happened. Our nation hasn't had a budget for years, and doesn't look set to come up with one any time soon. Unemployment remains chronically high and we haven't created a fraction of the jobs actually lost since this crisis began. Various studies suggest there are 15 million-20 million people who are underemployed.
Manufacturing has cratered and confidence is slipping. Our financial markets are still appallingly overleveraged and the risks associated with them are more concentrated than ever.
It's no wonder, under the circumstances, that the economy recently slipped back a notch and that GDP contracted by 1% for the first time since Q2 2009, according to the government's latest data.
Krugman has got to understand this, so there's something else driving the man. But what?
I think what Krugman's really hammering on is the implied belief that the government should take charge of all capital markets because private business is incapable of effectively investing for society's good.
In other words, he's dismissing the science of empirical economic data and proof for the fallacy of imperfect information and social engineering. At the same time, he's completely ignoring the dangers of easy money.
In as much as he subscribes to Keynesian economics and its 1930s roots, he's either forgetting or deliberately dismissing another view from the pages of history, that of NY Senator Elihu Root, who warned against the dangers of easy money in 1913, the year the Fed was created.
So why can't Krugman make the same jump?
I don't know, but I find it absolutely galling that he cites treasury markets, low interest rates and Japan as evidence that he's correct in his thinking.
Apparently he's willing to overlook the fact that the only reason our treasury markets haven't gone crazy is that Team Bernanke has them on life support with no plans to pull the proverbial plug. If anything, spending more money as Dr. Krugman advocates would accelerate the madness.
Bloomberg reports the latest round of bond buying will top $1.14 trillion by the end of 2014. There's a reason why the global derivatives industry is now valued at as much as $1.5 quadrillion. It's because no amount of spending can compensate for the cumulative failure of decades of bad fiscal policy. The markets know this even if, evidently, policy makers don't.
They also know that stimulus spending never works on anything other than a short-term basis. No nation in recorded history has ever bailed itself out by doing what our leaders are doing today.
Spending even more money now would be like giving an addict more drugs on the assumption that it will help him kick the habit later. The private markets have always been and will always be more effective "investors" than central government planners.
As for low interest rates, bear out the presumption that more spending is okay, that notion too is badly flawed.
Stimulative spending depends on the government's ability to convince people to involuntarily reallocate their capital from one bubble to another.
By keeping rates artificially low, the Fed is forcing money from bonds and cash into stocks which is why the markets have rallied. Don't get me wrong, I like rallies just as much as everybody else does. It's what happens "next" that I have a problem with.
Spending more money perpetuates the illusion of wealth by fueling borrowing. Borrowing, particularly at the government level, in turn strips capital from private markets and further bloats the public sector.
Krugman has noted this isn't bad for the dollar. No, it isn't, but it's not exactly great, either. The reality of the situation isn't so much that Dr. Krugman's policies are working, but rather our leaders don't have the political willpower to make the right decisions.
Being wrong in consensus is easier than being right. That's why it's easier to put off difficult decisions even when doing so means higher consequences in the future.
But, back to the issue at hand. The dollar has survived the most inflationary assault in modern financial history relatively unscathed to date because there is no alternative currency on the planet. The Euro is a great big question mark. The Swiss Franc isn't liquid enough, and the Yen is an unmitigated disaster.
So far the Chinese haven't let the Yuan take on the burden, knowing full well that they don't want to play this game which, I think, is the ultimate irony considering how capitalist the world's biggest communists have become.
As for his insistence that Japan is an example of why policies like his and yet more spending is the answer, I can't imagine that Dr. Krugman truly believes that.
The Nikkei has fallen 71.5% from its peak, its domestic economy is in tatters and China recently brought that nation to its knees in a buyer's strike that crippled already fragile exports without even trying.
Japan's combined public, private and corporate debt is approaching 500% of GDP. How's is that rewarding out of control spending??!! To my way of thinking, Japan's "success" is hardly worth emulating.
Here's How to Really Fix Our Problems
Instead of spending more money on the assumption we'll deal with the problems for having done so later, as Dr. Krugman advocates, what we need to do is cut spending radically.
Our government needs to get out of the way and free up the true capital needed for growth. We need to let dead financial institutions die, including, if necessary, parts of our nanny state itself.
At the same time, we need desperately to return to a strong, fixed-value dollar. From 1790 to 1970 we had one, and the U.S. economy grew at an average annual rate of 3.94% according to Louis Woodhill, who noted as much in Forbes last August.
That stands in stark contrast to the 2.81% average annual growth rate for the "fiat" period of 1970 to the present, when our dollar has been allowed to float freely against other currencies and the Fed has been able to print money at will.
Krugman, like other classic Keynesians, has argued for a weak dollar on the assumption that it helps exports and thereby strengthens the economy.
Here, too, the data suggests otherwise. Woodhill noted that dating back to 1950 when the Bureau of Economic Analysis began tracking such things, presidential terms that coincide with strong rising dollar periods reflect average real GDP growth of 3.21% a year. Presidential terms when the dollar is stable produced average real GDP growth of 3.58% a year, while presidential terms when the dollar was falling chalked up a much lower 2.23% average real GDP growth.
And finally, Krugman has argued that the rising inequality of wealth and the irrationality of the markets are primary causal factors behind the mess we're in. So, logically, he wants to spend more money as a means of equalizing both.
He should know better. Higher capital risks equal higher capital returns.
If the government seizes capital, which is effectively what it is doing by printing and diverting expenditures, it lowers both the return on investment and, not coincidentally, the incentive to invest in the first place.
This is why businesses are not spending money and the government cannot kick-start lending at the consumer level, no matter how hard it tries. People have been so badly scarred by the financial crisis that they don't want more debt -- even if it's free.
The other flaw in Dr. Krugman's argument is that cheap capital and government spending does not constitute effective investment. In fact, it creates "malinvestment."
This is a term from the Austrian school of economics that refers to pricing distortions caused by unstable money that actually causes businesses to invest in the wrong assets at the wrong time.
The housing bubble is perhaps the best example in modern times of what I am talking about in this instance. Fueled by an orgy of debt, unregulated derivatives and congressional leaders who determined that housing was a right not a privilege, billions in capital was diverted. For lack of a better term, it was "malinvested" and the results should not have been surprising in the least.
Imagine what would have happened if that money had been appropriately invested in real manufacturing, with real products and real jobs?
The truth of the matter is that more spending would be tremendously counterproductive and our deficits are already a problem. The 10-year picture is not okay...it's terrible. We crossed the point of marginal gain a long time ago.
Then again, there's always the little green men.
As Dr. Krugman noted on CNN August 8, 2011, defense against space aliens via ditch digging and bulwark building would create a viable economic build-up that would end "this slump [in] 18 months." If they never arrive, he posited, we'd still be better off economically for having prepared.
I'm not so sure.
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.
Looks like somebody's done a poor job at reading or comprehending Krugman's writings. Better stick to investment topics.
Ludi,
Do you mean people like Paul Ryan, Rand Paul, the British Government, the German Government all of whom disagree with him? Or, are you referring to other economists like Steve Keen from the University of Western Sydney, Greg Mankiw of Harvard, Veronique de Rugy of George Mason University, or Alex Taborrok, also of George Mason University? Perhaps you mean that anybody with an opposite opinion…Milton Friedman, Gary Becker, Friedrich Hayek…they all won Nobel Prizes too. Or, are you hiding behind the Internet’s veil by attacking Mr. Fitz-Gerald without offering your alternatives?
Well, many of those as well. But the arguments in the article by Mr. Keith are quite poor. There're a lot of misconceptions of what Krugman is saying. But go and read it for yourself. I hope you don't rely on what Paul Ryan is telling you for your basic understanding of economics.
Paul Ryan's an idiot and a fraud. Stipulated. No argument there.
Now, I hope YOU aren't relying on Paul Krugman for YOUR basic understanding of economics.
Yeah, that's the problem. We just don't understand and appreciate his genius.
Either that or he's just plain wrong. Hmmm…I'll have to ponder that one a while.
Okay, I'm done. He's 100% wrong. You're a troll and the shifty-eyed Krugman is either a knave or the biggest fool on the planet. Take your pick.
Thank you Keith for another first rate article.
Note how many people defend the guy. That's telling. Nauseating and telling.
I saw Dr. Ron Paul kick Krugman's arrogant a** on TV. Krugman was trying to make fun when Dr. Paul speaking by making smug and/or childish faces. When it was over, Krugman didn't even realize he had lost miserably.
You are too kind, Krugman is very stupid, deluded even, and you can get Nobel prizes and be stupid and deluded…Al Gore has one.
Dear Sir,
My observation is that youalso are totally engrained in the capitalist structure and speak the language of an indoctrinated economist and also do not see the woods because of the trees. What Krugmann actually says is that all those monies spend to support a capitalist structure is ill-spent money. Bailing out a criminal Bankster community by supporting a doomed capital structure, which will ultimately fail, as those monies have not been injected into the country s economy, but used by the Banksters who have turned World Markets into a casino.
Regs
H Steffen
Henri – I totally agree with you. Bailing out the Banksters is wrong and I, for one, am tired of providing the chips for their casino games as are many Money Morning readers.
However, to your other point, I am unaware that Dr. Krugman has precisely voiced the nuance you suggest. If you'd be so kind as to provide some specific examples, that would go a long way to better understanding his work. It's entirely possible that we arrive in the same neighborhood but from different directions.
Best regards, Keith
Where is Keith Fitz-Gerald advocating any bailouts?
Throughout the article he is advocating that the government gets out of the way, stops taxing productive people and reward genuine hard work and success. Yes, that is capitalism and yes many of us are engrained in its structure – which is the only one that works.
Which centrally driven country is a success?
Separately, what I find amusing is how Krugman took a 180 degree turn regarding deficit spending, country debt, inflation prospects, currency stability… between the times of Rep administrations and Dem administration. Many examples are posted on the internet. It’s all out there back on white. What a hypocrite; a political hack masquerading as an economist.
Which Nobel was more of a fraud – Obama’s or Krugman’s? The entire world knows that both were nothing more than political statements by radical academic lefties from some obscure Scandinavian countries. Yes, we know you hated Bush, but did you have to sell out whatever reputation you had left and made such idiots of yourselves?
Brilliant piece. Guys like Krugman who are under the progressive keynesian spells cant admit they were wrong; it would be too damaging to their egos.
Sharing sharing sharing!!!
Great article, thank you very much. I think your proposal to "let dead financial institutions die, including, if necessary, parts of our nanny state itself" won't be acceptable until the devaluation of USD.
D.C.
The projection of what the govt spending should have caused and what it did cause is incorrect. The fact is that the increased spending was implemented to keep the Bush/GOP recession from turning into depression, and it succeeded. As for the implication there is out-of-control spending, the facts don't bear this out. The record deficit is still Bush's for FY09. Despite the cratered economy Obama was handed, he has managed to cut the deficit slightly. One year, he even managed to cut govt spending year over year, for the first time since 1965.
Have you noticed that whenever Dr.Paul Krugman says anything, his eyes look sideways and around as if he's anticipating someone hitting him over the head for something ridiculous he's just uttered.
Keith – I'll say what it is you don't say but seem to understand. People get awarded the Nobel Prize for "towing the company line." I lost all respect for Nobel Prizes after they gave one to Al Gore; that's when I realized they were a farce. In the case of Krugman, he is being paid well by the central bankers to perpetuate the myth that Keynesian economics really works. As you and I both know, it's nothing more than a front for money supply expansion and contraction that robs the real wealth of people who actually work for a living. We've had 100 years now of central bank manipulation under the 3rd bank of the US (i.e. the federal reserve). We need another Andrew Jackson to shut down this incarnation, just as the real Andrew Jackson did the 2nd bank of the US.
You have to spend money to make money. You have to generate income to pay bills and then debt. By paying debt before bills, your electricity and water is shut off and then comes the divorce and the familly breaks up. Most people understand this process, why can't you?
I agree that you have to generate income before you can pay your bills – but if I don't pay my mortgage (debt) before I pay my utility bills, my house will be foreclosed on and paying my utility bills will be a moot point because I won't have a house anymore.
Countries and companies are exactly the same. If a country or a company misses a debt payment it is considered in-default.
A country can always withhold payments to retirees, government contractors, government employees, etc. That would feel bad for the people, companies or employees that are getting the temporary shaft – but the alternative would be to pay them and miss a debt payment, which would crush the countries credit-worthiness and send borrowing costs soaring. That would make borrowing any new money to pay retirees, government contractors, government employees that much more expensive – and a viscous cycle starts. Think Greece.
If a company goes into bankruptcy it is the senior bondholders (debt-holders) that get paid before anyone else. The vendors, utility companies, and even employees only get paid after the debt-holders.
Just a thought :-)
I think Krugman is right and your solution would be terrible for the economy. Cutting spending during this fragile economy would absolutely crush the poor and middle class. With so many unemployed and so much work to be done, there are many projects where we can give a boost to the economy. How is austerity working in Europe? We are monetarily sovereign and need not fear becoming Greece. Massive cuts to spending has the same impact of raising taxes on the poor and middle class who are the spenders in our economy. The banks got their bailout but didn't make loans to fuel the economy. A direct injection of capital from the government to the private sector is what needs to happen. Do you agree or disagree that government deficits equal non-government surpluses to the penny? Spending his how our monetarily sovereign, currency issuing government "issues" the currency to the private sector. They do it with debt and deficit spending but they really don't have to. Households and state governments balance budgets because they have a solvency constraint. The U.S. Government balances the economy and has inflation as its constraint. Inflation isn't a problem right now. If you were unemployed and had little to no money, would you really complain about paying a little higher prices for goods and services if someone offered you a good paying job?
Hi Bruce.
Thanks for the thoughtful comments. I don't disagree with you one bit – failure is never pleasant and it would be terrible.
But again, if government spending actually created wealth there wouldn't be any poverty whatsoever, we'd never have recessions and banking would not resemble the world's biggest casinos.
The lower and middle classes you reference wouldn't exist because the economy would be growing at 5% a year with full employment.
Unfortunately, every dime the government spends it gets from the private sector. By implication, the bigger the government, the smaller our wallets.
The only question is do we want to pay for that now or, as Dr. Krugman advocates, later under the assumption that doing so will be feasible. And on that point, we disagree.
Best regards and respectfully so,
Keith
Government spending does create wealth. Why do you think the Defence Industries are flush with cash? How do you think the banks were rescued and are getting bigger and bigger and bank CEOs don't know what to do with their money? Try cutting Government spending for infrastructure like roads, FAA, etc. and see what happens next.
Change the topic from Religion to Capitalism, and Tommy P has it right……
"Reason obeys itself; and ignorance submits to whatever is dictated to it."-Thomas Paine
Based on most of the posted comments, the readers here want much more of the same. In part, this is why continued money printing and massive deficits will continue, and increase, for the foreseeable future. Hence, we will be able to experience the outcome. The majority of the commenters here will then say the process failed not because we did too much (of the wrong thing) but we did to little. Austerity takes a long time to reverse decades of bad policy so Europe, Japan, the USA will have a long difficult climb out of this hole we are digging. When inflation does take hold the middle class will be the hardest hit and the FED is confident it can manage it. Any bets?
No I don't want more of the same. I'd like someone to tell me why the US still has bases in Germany and Japan 68 years after WWII. Why the US has bases in countries the world over even though they are no threat to us. Why the US has to stick its nose into everyone's business while we the tax payers foot the bill to bail out banks, Israel, and every tin horn dictator. And finally when bank regulations are put on the table to prevent another tax payer bail out certain people yell and scream socialism.
It's not matter of spending or not spending, but rather how the funds get allocated, or better how good we are at using them. And the answer to that is we're not good at all. Those who give money don't do it for the benefit of the communities they represent but for the benefits of special interests looking only at their own profits. Those who receive money – and most of them are banks – keep it in reserve, pledge those reserves in the repo market to get the cash they need to assume hyper speculative derivative-based positions, knowing very well they'll be rescued for being too big to fail if something bad happens – and that nobody will be prosecuted. This is the real problem. Krugman just toys with theories and should get serious – you can't live in a dream world, even an academic needs to face reality. Our system needs to be repaired, principals need to have skin in the game – even journalists do – and spending money has nothing magical into it.
The problem is not the deficit, its debt-money and the idea that we have to borrow our own money into creation and pay interest upon interest to a private cartel of banksters – this is the scam of the ages and the sooner we dissolve the "Fed" and create a public central bank the better off we will be.
Kent Welton,
PublicCentralBank.com
Kent, you are absolutely correct. It would be illuminating to read a discussion on this topic by serious thinkers who are willing to see that mistakes made in the past can be corrected. The existing condition of the U.S. government paying a private entity to create money and then lend it back to us with interest is an absurd set up opposed by a number of our founders and a couple of subsequent presidents. It's time to seriously examine how to unravel this mess and start again.
Dianne – for such a discussion, please look up any of the following: Randall Wray, Bill Mitchell, Warren Mosler, or the UMKC – for the topic Modern Monetary Theory (MMT).
Please define what you mean by "public central bank". from where I stand, it sounds like you want to tear down the privately owned FED to replace it with a…publicly owned FED? Either way you have more of the same, regardless of who the shareholders are.
The truth is that Keynesian economics is like religion to Krugman. He truly believes the validity of his arguments and there is no way that he can ever change them. Religious beliefs (or lack thereof) are part of what make up our core value systems as human beings. At his very core, Krugman is a Keynesian. To admit he is wrong, he would have to give up his core belief system and a huge part of who he is.
It sounds like you don't believe that MV=PQ…what alternative formula do you propose? So far this equation has proven effective for explaining economic phenomena the world over…although more in hindsight than as a predictor.
It is difficult to predict the results of a given monetary action when multiple facets of the economy are changing simultaneously. There are other forces at play…globalization, electronic transfers, high-speed trading, political pandering, and even the WEATHER can dramatically impact economic behavior.
The real question is WHY the FED is expanding the money supply when they know that it is not being directed to create jobs? Do they not realize that the money is being used for mergers and foreign investments instead? Why do they think MORE money is going to help?
Keith,
Son, me thinks you been inhaling way to motorcycle exhaust fumes in them thar Oregon mountains! Idiots do win them NoBalls Piece Prizes! Think Arafat, Krugman,
Carter, Obama – I could go on forever, but I have to get on the tractor and cut some grass (yes, grass does grow in Florida in Jan/Feb – an inch and a half every two weeks to be exact).
Ron
He's talking about the specialized Nobel Prizes for fields such as Chemistry, Physics, Economics and such. You'd have to make a significant contribution to the respective fields to be able to receive it, and only the very best do. Like for example, the "groundbreaking experiments with Graphene" by the Physics Nobel Prize Winners of 2010 that has the potential to revolutionize the materials and electronics industries as we know it. Billions have been invested into Graphene research and it has the potential to generate trillions in revenue.
On the other hand, the Nobel "Peace" Prize has always been a farce. It's not even worth acknowledging the recipients of that said prize.
I tend not to trust people who misrepresent the views of others to make their arguments. I've read a lot of what Krugman has written and I'm afraid Mr. Fitz-Gerald that you are guilty of that fundamental sin of misrepresentation here. In addition, I find it particularly amusing that you say " he's dismissing the science of empirical economic data and proof for the fallacy of imperfect information and social engineering". One reason I will listen to Mr. Krugman's arguments is that he has made predictions and subsequent empirical evidence has proven him correct. For instance, early on in the wake of the financial crisis he said (and excuse me for paraphrasing based on my own memory) that the ongoing concern (bordering on hysteria) that massive inflation was right around the corner because of excessive govt spending was misguided, because as long as aggregate demand was down substantially inflation would not be a problem. Check on that one.
He also early on was quite adamant that austerity budgets were not the way to go during a time of private sector slowdowns and made the point that gains in fighting the deficit from austerity budgets would largely be negated by the damage of shrinking GDP. I think the subsequent events in Europe have shown that Krugman had a good grip on that issue at an early date. Until I see some empirical evidence that your position has been borne out by real world events (and I find it curious your article doesn't provide any of that evidence) I will continue to keep an open ear when Mr. Krugman talks and cast a skeptical eye when you pontificate.
To improve your reputation for broad economic forecasting in my eyes I would also be very willing to read any historical articles that you wrote back in the go-go years of the early 2000s warning us about the evils of deficit spending (when we could actually afford to pay our bills but didn't want to be bothered), or the dangers of excess liquidity in the financial sector, or the problematic nature of credit default swaps, CDOs etc.
Dear Carl,
Thank you for reading and for writing. Readers like you are a great addition to Money Morning. But your comments do raise an important point which is why I have chosen to respond to them.
In your response to Mr. Fitz-Gerald, you note that you “tend not to trust people who misrepresent the views of others to make their arguments.” I think that’s a little ironic given Dr. Krugman’s widespread and exceptionally well documented history of personal attacks on others using misrepresented information from their work. Examples include attacks on financial officials from England, Germany, Greg Mankiw of Harvard, Veronique de Rugy of George Mason University and others.
My point is not to suggest you are incorrect in your thinking, but to point out that dialogue is not always process of agreement. It is a constant and ongoing conversation. By automatically calling into question the trust of one party or the other because they disagree with you in fact weakens your own argument.
With regard to Mr. Fitz-Gerald’s work, please feel free to browse the Money Morning archives which are filled with years of his highly accurate predictive economic analysis. Or, feel free to jump on board with our paid products and browse the subscribers only websites we maintain for each service. He has helped tens of thousands of investors successfully navigate today’s challenging markets.
Thanks again for being part of the Money Morning subscriber family.
Sincerely,
Steve Christ
Editor, Money Morning
Nice smackdown.
I'm puzzled as to how the poor spend money. They don't have any, and if they do they need to pay for food which keeps them alive. Moochers aka the Goverment, produce absolutely nothing .Krugeman has produced absolutely nothing in his lifetime, except mooching off a system that rewards non productivity, and pschycobabble.
i wonder how many "poor people" Mr. Krugman has recently helped. Princess Diane was hailed as a great "philanthropist". That was easy, since she was giving away money that was not hers.
And speaking of Nobel Prizes, how did a scumbag like Obama get one, and for what? That instantly makes these guys "EXPERTS"? Hello! Krugeman and his ilk are the reason Americans are viewed as the dumbest people on earth. Well next to the Federal Reserve. Nothing Federal and dubious reserves.
I think you are over thinking all this. Krugman is simply an Obama sicophant who cannot go against anything this administration does.
You obviously don't read his blog.
Kudos to Carl S on his response.
Carl S. and Bruce, along with A. Saenz, you all are right on. In his ideological obtuseness, FitzGerald has relentlessly clamored for austerity in Europe while Krugman has consistently pointed out that this antigrowth policy was killing the continent's economies. Lately, some relief from this insistence on austerity has been forthcoming, and the situation is improving. A more insightful — and humane — investment adviser, Dr. Stephen Leeb, has taken the position that the people of Greece, particularly, have suffered needlessly from this austerity because it has only made matters worse. Leeb also called for a massive stimulus program at the beginning of Obama's first term, along the order of spending in World War II, to right the economy. But Leeb is different from almost all of the investment advisers out there. FitzGerald is just one of the pack. They're all Libertarians who believe they should be able to keep every penny they receive and have no responsibility to their fellow man. They have no understanding of the nature of human social psychology. They don't fathom the interdependence of all humans. To them, it's every man for himself. Except, of course, when they get in trouble and need help.
I read many financial letters and Keith is nearly always the first one I open up. Mr. Krugman may be correct much of the time because he is interpreting the basic economic machine based upon division of labor and assignment of values. The banks are first in line to receive or create the next dollar that gets created, so they benefit from the creation of each one. So the sovereign and its bank, however many-tentacled that beast may be, try to keep the game going by creating debt that the private sector does not create. All the gloom and doom in these comments seem to be just bemoaning that fact. But I may be completely wrong.
As to Mr. Fitz-Gerald's analytical skills, one may wish to consult his investing record. He has recorded at least 3 positions that have doubled during the last 3 years or less: ABB, CNH, and MO. I have profited from Keith's recommendations of TOT, SBRA, TGP, and MAKOX. Also, a small cap organic grocer which will remain nameless.
Love your work, Keith
Dear Rick,
I stand humbled and honored. Thank you for your kind words and for the trust you place in me and in our team. You made my day.
With best regards,
Keith :-)
Referring to "try to keep the game going by creating debt that the private sector does not create."
In reality, there is no need for any of this "debt" as bond issuance is voluntary in a fiat-currency economy. Of course, the banking industry profits greatly by the swap of reserves for (admittedly low) interest bearing treasury bills, so it's in their interest to keep the charade going.
Depends what you're spending money on. If you're spending it on Cheez-Whiz, imperial aggression, corporate welfare – especially to fossil fuel companies – and trillions to zombie banks, it does harm. If you're spending it on real necessary food, essential infrastructure improvements, and otherwise restoring the commons, you're doing good – and the best time to do that is when lots of people are available to put to work on it and interest rates are low. That gets essential things done and reduces the deficit by having more people paying taxes on their wages and fewer collecting unemployment and welfare.
We're not going to see 5% growth in any sustained way, no matter what anyone does. The short answer is that exponential growth on a finite planet is not possible indefinitely. The longer answer is that the cheap petroleum and other energy inputs are gone, and the tougher stuff is more expensive, or the energy companies would have gone after it before. Real energy return on energy invested is falling and will continue to do so over time, with contrary wiggles now and then, and so the real economy will continue to contract with those contrary occasional up wiggles – just as it expanded from 1700 on up, with occasional down wiggles.
It is possible to do it the hard way – lots of profligacy and the continuation of the warfare-welfare state. Or we can do it the easier way – preparing now for a lower energy future by abandoning suburban sprawl and working now for more rail and water transport and livable cities with efficient local agriculture.
"We're not going to see 5% growth in any sustained way…exponential growth on a finite planet is not possible". The earth may be finite, but it is far more vast than people give it credit for. Even the rarest things can be considered abundant.
Mass: 6,613.86 Quadrillion tons (6 Million Quadrillion kg)
Crust (2.18%): 144.18 Quadrillion tons (130,800 Million Quadrillion kg)
Fresh Water (.8%): 2.37 Million Cubic Miles (2.608 billion billion gallons)
Or… 260 Million gallons (5.2 Million Barrels) per person
Titanium: .95 Million Quadrillion Tons
GOLD .0031 ppm: 4.3 Million Tons (13.84 billion ounces)
roadtoabundance.wordpress.com
Keith,
i've read lots of stuff on the dismal situation in US for many years, but this is the best critique of the establishment (Krugman is proxy for estab.) i've ever read — for its succinctness and conciseness. the single worst legislative act in US history was in 1913 – the Federal Reserve Act. once that fiat money system was in place (and other countries following the US pied piper;ok, i know my monetary history enough to know that the real pioneer was England) the debasement of the currency was inevitable.
printing more of this phoney stuff will just hasten the end game, which will be ugly.
thanks, a very sound piece.
Krugman has been a hack for as long as I can remember, and I am 67 years old. The Nobel prize does not impress me in the least, heck, Obama received one before he did ANYTHING to deserve it (and he still hasn't gotten to that point). I DO suggest that people read the very good book "The Creature from Jekyll Island" and then comment on the machinations of Krugman, Bernanke and the Fed.
I challenge you to read it, its 580 pages!!
I've heard Krugman speak several times on TV, most recently on the Bill Moyer's PBS show. Whenever someone points out that the debt is horrendous, Krugman repeats that now is the time to spend more money to get us out of the economic trouble we are in. Then he will say something like, "No one denies that the debt must be dealt with, but not now. Once the economy rebounds we can deal with it then." I am paraphrasing here. The problem is, except under Eisenhower ( I think), Congress has never controlled the debt. It keeps rising – it's an addiction. Name one person in Congress who would seriously think about paying the debt down with some kind of PLAN.There may be a few, but the vast majority will simply spend it. I think that is what the TEA Party believes and why they are so rigid in their view. So, how can Krugman's solution wind up being anything but a fiasco? Any surplus will be spent – that's our history. How does Mr. Krugman suggest we fix that? It's a fair question. I can hear it now, "Oh, that's a political problem!" Political problems are economic problems!
"The problem is, except under Eisenhower ( I think), Congress has
never controlled the debt." We were running surpluses under
Clinton. Bush Junior decided to he wanted to cut taxes and
spend, hence the disaster that Obama inherited. The idea that
it's politically impossible for the government to ease up when
times are good is simply wrong, because it's been done, and done
recently.
Keith et. al – Hate to burst your bubbles, but Krugman has been spot on the last 4+ years. All you need to do is run a simple Google search on causes of the deficit, spend some quality time reading and digesting it, and you will clearly see that over $2T of it came from loss of tax revenue (not to mention ~$500B ongoing annual losses from tax cheating/sheltering by the rich). I'll take real economic analysis over the armchair variety served up casually here and elsewhere.
When you refer to armchair variety economists do you mean analysts like Hayek, Mises, Fergusen and others? Maybe 2000 years of history isn't good enough for you. Krugman’s four years only hold water because the politicians haven’t failed yet. If the system blows up, Krugman will say we didn’t do enough. If it doesn’t recover, Krugman will say we haven’t done enough. Very convenient way of passing the buck. Kinda like the dog ate my homework. The only way to find out is when he craps.
A person who constantly needs to have a shock sent to their heart to defibrillate it and get it beating properly again is clearly in very poor health. And eventually their heart will stop for good and no defibrillator will be able to revive it. That is the state this economy is in. The government has to keep defibrillating it through artificial stimuli to keep it beating. In the not too distant future, that "heart" is going to stop for good and the defibrillator will no longer work.
Peter,
i find your comments interesting; can't say i disagree. sounds like you've read 'Crash Course' by Martenson. i did – liked it. very enlightening and persuasive. did you read it?
Fitz-Gerald (why the hyphon, btw?) gets a lot right here, but he flubs one issue. Rather than "return to a strong, fixed-value dollar", why not free the the medium of exchange to market forces and get currency manipulation out of the sticky hands of central planners? Indeed, it is a peculiarity of free-market advocates who recoil from the fixing of prices of goods and services but so readily abdicate that viewpoint for the other half of every economic transaction.
You cannot really blame Krugman, and you must. Having arrived where we are, simply put, it is impossible to speak rationally, even remotely and reaonably, or responsibly, about a system that only lies about itself anymore. Even the most credentialed and popularized commentators look like complete idiots and total whack jobs when all numbers (oh, for the days when number were only tainted by political expediancy), have been compounded beyond the whitest form of the white lie, and beyond the blackest form of the most cynical, the most open and the most wanton disregard for anything but propaganda by a country that has not told itself either the monetary or the fiscal truth in over 40-years. The only way to save ourselves is to start over, with a new economy that threads nothing but the human comedy of greed and avarice through every premise, every theory.
Let me try to respond to some of the ideas presented by the auther, Mr Fitzgerald:
1 – Federal deficits must be understood from a larger sectoral-balance approach. If the government sector has a deficit, the non-government sector is in surplus (we also must consider the external sector – “balance of trade” as well, but this is in deficit too). It is in surplus because too little private sector spending is occurring, even 4 full years after the GFC (shorthand for the “great financial crisis” of 2008).
2 – The University of Chicago and Austrian schoolers are the epitome of the neo-liberal approach. This approach pretends the US (like other national economies) is still on a gold-standard or quasi-gold-standard such as the Bretton Woods era. Instead we have a fiat currency world now, where government spending no longer needs to be “financed.” The role of taxation in this setup is to act as a drain for excess liquidity during good times – this is part of what are called the “automatic stabilizers.” When aggregate demand drops and the non-government sector starts to deleverage, spending then drops and unemployment rises. Hence tax collections fall and “welfare” payments go up, thus producing government sector deficits. The Austrians may believe that deficits are inflationary but there is almost no evidence here. At this point in the discussion, someone usually trots out the Weimar Republic (or even the dread Zimbabwe), but neither situation is remotely comparable to today. As long as a government can collect taxes, inflation does occur beyond that driven by globally demanded commodities such as food and energy (which is why we take those out and look at “core” inflation, to answer a noted “Austrian,” Rick Santelli of CNBC).
3 – The tremendous imbalances caused by the GFC have made the problem of unemployment more severe this time around. Obviously, the Obama/Pelosi stimulus has not been adequate, but mostly because it did not into rebuilding the infrastructure. Now it’s too late to get this type of bill passed by the Congress as the GOP-led House won’t even discuss it. So little progress is made, but the earlier stimulus at least helped to put in a bottom, from which we have seen anemic growth. But it’s better than no growth.
4 – The author here may not realize that no “borrowing” is actually taking place, and that government bond issuance is strictly voluntary, now that we longer have a gold standard or Bretton Woods. Of course, the interest can always be paid because there is no “financing” necessary when you are the issuer of the currency. Why do we issue bonds? There are many theories, but the best one seems to be because the banks desire that we do. Even at the low rates these bonds pay, it’s still better than the rates the Fed pays on reserve balances. So banks simply swap reserves for interest-bearing bonds.
5 – Paul Krugman may be closer to an understanding of modern money than most, be he still doesn’t quite get it. The response from Bruce yesterday attempts to bring in MMT (Modern Monetary Theory) concepts and gets many of the ideas of across, such as the notion that “government is like a household” which is based on a fallacy of composition. The author uses the standard neoliberal tactic of referring to “wealth” not being created by government. Obviously, an economy must have real goods and services for sale or government could not purchase them, but otherwise how does an economy grow over time, considering the population also grows? When government spending is greater than taxation, net financial assets are injected into the economy. Without these injections, the same dollars (or whichever currency) or endlessly recycled, and usually withdrawn into savings by the more successful players in the economy, which dampens aggregate demand and leads to unemployment. Government deficits level the playing field by putting more currency out there for the people to spend and create income for others. Never forget that spending equals income.
6 – This is why the author’s suggestion to drastically slash the government budget would lead to another meltdown such as the one that occurred in 1930. The Hoover Administration succeeded in nearly cutting GDP in half over their four years in office. FDR’s first four years brought much of it back, but unemployment of course lagged (and then the tax increases in 1938 wiped out much of those gains). The other suggestion, to return to something like a gold standard would be equally disastrous, for much the same reason. A fixed exchange rate standard would severely constrict the ability of government to respond to harsh economic conditions. Unemployment will rise to intolerable levels and this will lead to rising social instability. A rather serious price to pay considering it is totally unnecessary – just to prove the neo-liberals are wrong? The reason businesses are not spending money is because there aren’t enough customers to buy what they would otherwise produce, just as the reason banks aren’t lending more is because there aren’t enough credit-worthy borrowers. The way to reverse this situation is via fiscal policy and something called a job guarantee, but the economics mainstream is so spooked by these ideas, they would rather see millions suffer instead. Things will improve once these folks realize they are wrong.
7 – I realize most of this is difficult to take in. (I also greatly disagree with the author’s take on Japan, but I don’t feel like writing a book here). It’s always hard to examine the core principles we carry around with us. I’ve posted these ideas elsewhere around the Internet, and often have been subjected to rather harsh juvenile responses, so I’ve developed a thick skin. I expect some backlash here, but I stand ready to handle it.
Thank you very much for your effort to explain our economic dilemmata in such a condensed way. I couldn´t have done it better. Maybe I would have put a stronger emphasis on balance of trade, because of its importance in the €-crisis.
Do you have a website?
Thanks for the detailed and thoughful comments Melia. There's a lot to think about here and my brain is already chewing on a number of the points you raise. Respectifully, I disagree with several of them but that's not to say I don't respect your input. To the contrary…intelligent discussion and disagreement are the cornerstones for actual solutions.
With best regards and thanks for your time,
Keith
The author (Mr. Fitzgerald) brings up several points that I want to address. His general view is what we refer to as the “neoliberal” approach, mostly based on long-discarded theories that were in place 100 years ago when most countries were on the gold standard. It may be necessary to respond over several posts …
1 – Federal deficits must be understood from a larger sectoral-balance approach. If the government sector has a deficit, the non-government sector is in surplus (we also must consider the external sector – “balance of trade” as well, but this is in deficit too). It is in surplus because too little private sector spending is occurring, even 4 full years after the GFC (shorthand for the “great financial crisis” of 2008).
2 – The University of Chicago and Austrian schoolers are the epitome of the neo-liberal approach. This approach pretends the US (like other national economies) is still on a gold-standard or quasi-gold-standard such as the Bretton Woods era. Instead we have a fiat currency world now, where government spending no longer needs to be “financed.” The role of taxation in this setup is to act as a drain for excess liquidity during good times – this is part of what are called the “automatic stabilizers.” When aggregate demand drops and the non-government sector starts to deleverage, spending then drops and unemployment rises. Hence tax collections fall and “welfare” payments go up, thus producing government sector deficits. The Austrians may believe that deficits are inflationary but there is almost no evidence here. At this point in the discussion, someone usually trots out the Weimar Republic (or even the dread Zimbabwe), but neither situation is remotely comparable to today. As long as a government can collect taxes, inflation does occur beyond that driven by globally demanded commodities such as food and energy (which is why we take those out and look at “core” inflation, to answer a noted “Austrian,” Rick Santelli of CNBC).
6 – This is why the author’s suggestion to drastically slash the government budget would lead to another meltdown such as the one that occurred in 1930. The Hoover Administration succeeded in nearly cutting GDP in half over their four years in office. FDR’s first four years brought much of it back, but unemployment of course lagged (and then the tax increases in 1938 wiped out much of those gains). The other suggestion, to return to something like a gold standard would be equally disastrous, for much the same reason. A fixed exchange rate standard would severely constrict the ability of government to respond to harsh economic conditions. Unemployment will rise to intolerable levels and this will lead to rising social instability. A rather serious price to pay considering it is totally unnecessary – just to prove the neo-liberals are wrong? The reason businesses are not spending money is because there aren’t enough customers to buy what they would otherwise produce, just as the reason banks aren’t lending more is because there aren’t enough credit-worthy borrowers. The way to reverse this situation is via fiscal policy and something called a job guarantee, but the economics mainstream is so spooked by these ideas, they would rather see millions suffer instead. Things will improve once these folks realize they are wrong.
7 – I realize most of this is difficult to take in. (I also greatly disagree with the author’s take on Japan, but I don’t feel like writing a book here). It’s always hard to examine the core principles we carry around with us. I’ve posted these ideas elsewhere around the Internet, and often have been subjected to rather harsh juvenile responses, so I’ve developed a thick skin. I expect some backlash here, but I stand ready to handle it.
I wonder why he received the Nobel Prize and you didn't? Maybe he knows something you don't!
We had conservative principles in control for 8 years and look where that got us. Look at Europe and their austerity measures and where that got them. All of the functioning European nations don't let their capitalists run wild!
We had a surplus when Clinton was president. How can you talk about the deficit without pointing the finger at the profligate president who burned up that surplus and solidified it with outrageously favorable taxcuts for the prosperous and rewards for an interested body of corporations who took advantage of his relaxed regulations?
That's what it looks like from outside. I think you, and most of the other economic pundits, are too far inside your own beltway to accurately evaluate the extent and the nature of our times, especially who controls the economy and for what purpose.
Krugman is also to be blamed for Portugal bankrupcy, for our socialist PM followed his advice on spending to boost economy, our debt increased from 60% of the GDP to more than 100% and PIB growth was negligible.
"And for five years he's been dead wrong."
The people who have been wrong have been the ones insisting that
interest rates are going to explode any day now. Instead they
remain stuck near zero, as Krugman has predicted. (I would
think that someone interested in investment strategies would
care about this…).
"Since this crisis began, the United States has spent
trillions…more money than any nation in history. …"
I refer you to Krugman's "The Non-Surge in Government Spending":
http://krugman.blogs.nytimes.com/2013/01/22/the-non-surge-in-government-spending/
"… no amount of spending can compensate for the cumulative
failure of decades of bad fiscal policy. The markets know this
even if, evidently, policy makers don't."
The market is desperate to loan money to the US government,
offering it at negative real interest rates.
"Borrowing, particularly at the government level, in turn strips
capital from private markets … "
This "crowding out" theory doesn't have any evidence going for it.
I refer you to a few of Krugman's articles:
"Extraordinary Popular Delusions and the Madness of Crowding Out"
http://krugman.blogs.nytimes.com/2012/03/03/extraordinary-popular-delusions-and-the-madness-of-crowding-out/
"Interest Rate Follies"
http://krugman.blogs.nytimes.com/2011/08/10/interest-rate-follies/
I could go on… for example, Krugman has never held up Japan as
a success case, but rather a place that walked into the same mess
that we did, a few decades beforehand.
And this pretense that Krugman is the last Keynseian in the world
appears to be an attempt at marginalizing a body of opinion
that's actually very well represented in major Economics
departments, just not in the infamous "fresh water" schools.
Keith,
I think there are some half-truths in here about Krugman. In the same interview on CNN where Krugman advocated that the stimulus wasn't big enough, he explained why with some good data. About $1t in gov't stimulus over four years = $250b per year. Compared with about $16t in annual GDP. That means the stimulus really only created about 1.5% 'growth,' not the 6-8% boon you attribute to him. He advocates we should have spent more because the first round was small, and I think that deserves discussion.
Also, as others have pointed out, I think you make the too broad claim that Krugman (and others) advocate these easy money policies all the time. They don't – or at least they say they don't (and I'll acknowledge that many have a hard time turning away from the spending when we should – especially our politicians).
And how about GDP slipping in the last month? It fell .1%, not a full 1% I believe. But further, there has been a lot of analysis connecting that to the "fiscal cliff" talk and limits put onto state and local spending because of the cliff. How can we attribute that to increased spending?
Respectfully – and curiously.
Very good points. And the .1 contraction, being so minuscule might become positive in the revision. The initial numbers are estimates, even the final numbers are estimates, hopefully more accurate ones. Still this significant drop is not good, and the unwillingness of politicians to address the problems in a serious bipartisan way, simply criminal. Even more criminal has been the creation of budget crises with some crazy hope of political gain. The current problems are enormous, but the standard of the current crop of politicians, on both sides, simply appalling. We live in the era of the completely professional politician, where winning is considered so important there is no policy, position or principle they are reluctant to jettison.
Sure, the Keynesian models Krugman uses have a poor record of predicting growth and unemployment rates, but this is true of all macroeconomic models, including monetarist and Austrian.
The history of macroeconomic thought reads more like a normative political battle over what the degree of government involvement in the economy ought to be rather than a positive attempt to model the economy better.
Quite right. Seems facts can never refute even the extreme versions of true believers models, both on the left and the right. Most recently monetarists are totally unwilling to concede the obvious. That is that according to monetarist beliefs Bernanke's QE efforts ought to have provide a massive stimulus and a massive burst of inflation. That that hasn't happened implies that the monetary stimulus has disappeared in a liquidity trap. Monetarists don't believe that such a thing as a liquidity trap can exist so faced with the evidence they simply choice to ignore it. "Free to choose" what facts and reality you believe in I suppose? Bernanke has to be nuts, because the QE has not worked anywhere like the text book says, but rather than accept something different to the text book world is going on he's simply piled on more and more QE. If and when a little bit of this starts to work, the liquidity trap will be over, it will all start to work and the economy will face the mother of all economic stimuluses. But Bernanke thinks if that happens, he will quickly be able to reverse things. That would require a massive hike in interest rates, and even then, might not work. Like catching a falling knife, possible, maybe, but without injury? Unlikely.
Krugman, like many economists, is hardly devoid of talking nonsense at times. That said,there is either a gross misunderstanding here of what he's said or intentional misrepresentation of his position, and misunderstanding of a variety of facts. The Keynesian approach is about fiscal stimulus, not monetary stimulus. To the extent that there has been fiscal stimulus by the federal government, it was offset, greatly by the states and local governments which pursued contractionary fiscal governments which have been attempting to fix their balance sheets,, and fiscal stimulus that there has been has been, for the most part, poorly directed. An example of well designed and effective fiscal stimulus took place in Australia, and Australia continues to do amazingly well. That said, current problems were a long time in the making and a large component of that making has been stimulus, monetary stimulus by Greenspam and now Bernanke. The Greenspan stimulus provided a long and overheated boom economy fueled by debt and asset bubbles. Bernanke's activities have been possitively dangerous since the GFC. The QE series have been a massive monetary stimulus, but so far completely ineffective due to a liquidity trap. That mountain of money, at the moment is sitting on the sidelines but could rapidly come into play, who knows when, but if and when it does all hell will break lose. The mountain of debt is a great danger, a far greater danger than Krugman seems willing to recognize. When interest rates eventually rise on Treasuries that debt will not be able to be ignored. Both sides of politics and both sides of the divide amongst economists, have, and are continuing to let the American people down badly. The pain so far is nothing compared to what looks likely to come with Bernanke's QE activities (that money will not stay on the sidelines forever), and the mountains of government and private debt which will eventually have to experience higher interest rates. Not to mention the threats posed by an eventual inflationary breakout. The problems were twenty years in the making and are being steadily made worse.
Worth noting, is that the economics Nobel prizes are faux, fake, Nobels (have a look at Wikipedia, for example) in that they have nothing to do with Alfred Nobel's will, and only ended up having his name attached to them to raise the status of economics and economists. And the Nobel peace prizes are rarely awarded in line with Alfred Nobel's will. The Obama award of that prize simply the most absurd of a series of quite shocking awarding based on politics not achievement.
Krugman is working his way into the inner circle of the men who screwed up the Western World the most, along with JJ Rousseau, Marx, W Wilson, FDR, Earl Warren, Obama and now Paul. These people all lived in THEORY LAND which has not base in human reality or human nature. People act the way they act because they away with it, legally or illegally. Think about these people and what they believe about people.
"you don't win Nobel Prizes for being an idiot"
Ahem… We all know of at least one case where the individual in question did. Granted, it's a "peace prize", but still.
Highly descriptive article, I loved that bit. Will there be a part 2?