Paul Krugman Gives Me a Rash: A Rant

There are very few things that get me angrier than Paul Krugman’s Nobel Prize-winning economic analyses.  Seeing people post his articles on Facebook and then worshipfully extolling the virtues of Keynesian economics is one of them.  I have to restrain myself from verbally attacking people on a personal level.  That is how much I can’t stand Paul Krugman.  Reason goes completely out the window.  Furthermore, I have noticed a pattern among these posters, and I now assume that they are all career students or professors who have never had a real job because, well, most of them are.  Call me judgmental.  It won’t hurt my feelings.

I can never quite decide if Paul Krugman is secretly a genius who knows that he’s writing pieces that are full of b.s., or if he legitimately believes what he’s saying.  I also can’t decide which option is worse.  Whatever the case, he seems to offer overly simplistic, one-sided solutions delivered with a healthy slathering of unclear language.  Because being obtuse makes you smarter…

I’m not going to cite any particular Krugman articles on here, since I’m filing this under “Rants,” and I’m going to speak purely about my personal opinion.  I feel like every Krugman article I read comes back to one central theme: we aren’t spending enough money.  Every time I read a Krugman statement that amounts to an admonition that we should be printing/spending more money, my left eye twitches and an overpowering urge to punch someone repeatedly in the face takes over.

Putting the fancy economic analysis aside, let’s address this with plain common sense.  How in the world is it possible to spend oneself into prosperity?  I’m sure Krugman has offered some explanation somewhere about spending oneself into prosperity, but I honestly can’t think of an instance in the last century when that has happened.  If any of you readers think of one, please do post it in the comments section.  Some folks will try to use WWII as an example, but the depression didn’t end until the post-war era, so that one falls flat for me.  Lord knows the New Deal didn’t do the job.

I am probably (hopefully) being somewhat extreme in my rantings, but I truly feel as though Krugman is constantly advocating greater and greater debt, saying that it generally doesn’t matter.  Just keep spending.  Keep driving consumption.  Spend, spend, spend.  Consume, consume, consume.  Um, isn’t that what most liberals/progressives/lefties/whatever trendy name they’re using now are generally against?  Consumption?

The on-the-books US debt right now $15.4 trillion.  That doesn’t include Fannie and Freddie, nor does it include the Fed’s off-balance sheet transactions.  I shudder to think what it would look like, were those additional items added to the computation.  As though $1 trillion isn’t a number too big to grasp!

The ever-increasing money supply can only have one final result: hyperinflation.  As I’ve stated previously, there are various reasons why hyperinflation hasn’t hit us yet.  For one thing, US and international banks are still sitting on a lot of that capital that is just floating around out there.  For another thing, it is being used outside the US to settle international transactions.  Again, this is why the US dollar’s status as a reserve currency is so important.  Were we to lose that privileged status, it wouldn’t be long before those dollars started making their way home.  There is only so far down that the Fed can drop interest rates, which seems to be Krugman’s other solution for every ill our economy faces.  If the money supply were suddenly contracted and interest rates were to go up, it would certainly make debt repayment a lot more interesting for the US government!

Whatever the case, I have caused myself a whole evening of stewing and mumbling to myself just for reading two Krugman articles.  I’m convinced that he has never taken the time to read and even passingly consider the Austrian business cycle model.  He laughingly brushes it off, but I have yet to see him mount a convincing argument against it.  I suppose he doesn’t have to.  He already has masses of slavering fans who adore him and think that his ideas about spending a seemingly endless supply of cash, soaking the rich, and redistributing the wealth are incomparable genius.  Maybe I’m the one who needs a reality check, but I don’t think so.

Taxation and wealth redistribution is still legalized plunder.  Creating an endless supply of cash with no backing will eventually lead to a hyper inflated currency.  Go ahead.  Ask the South Americans.  The Romans.  The French.  There are many, many examples throughout history of such a thing happening, so every time I hear a Keynesian say that it can’t happen here, I have to shake my head and remind them that it has, it can, and it could.  That’s usually about the point where someone says, “Oh, aren’t you a libertarian?  Yeah, you’re one of those Ron Paul supporters,” and they think that solves the matter.  I’m wrong, and they’re right.  I suppose if it helps them sleep better at night.  For my part, I think Krugman’s articles make far better bonfire starters than reality-based economic reading material.

I Wish OWS Stood for “Occupy Washington, Stupid!”

Occupy Wall Street still seems to be bringing the turmoil to cities across the country.  I would like to start off by saying that I think it’s great that folks are exercising their freedom of speech – when they aren’t being maced by John Law – and their right to make a peaceful stink in public.  That said, I still think OWS has missed the boat on the fundamental reasons why this whole financial catastrophe has come about in the first place.  I know that I might as well wish for the moon, but I really wish some “End the Fed” protestors would make the rounds at these things and get some more people educated.  That might bring a bit more direction and sense to OWS, which unfortunately seems to lack a clear focus about what it wants.  The movement, as a whole, knows it’s pissed off, but doesn’t really know what to do to go about getting anything done.  There is no clear platform here.  And yes, this is another post about monetary policy.

There is a great illustration that was created by a guy named James Sinclair, and it looks like this:

In a lot of respects, they’re upset about the same things.  The main differences are that OWS protestors tend to be young adults or students with a socialist tendency while Tea Party members tend to be middle-aged and kinda like Sarah Palin.  Well, I don’t like socialism or “Sexy Sarah,” but I do think it would be nice if some of the “End the Fed” elements popped up more often.

The truth is that the current financial crisis was not created by Wall Street, as such; it was created by the Federal Reserve.  Both current Fed chair Ben Bernanke and his predecessor, Alan Greenspan, are both known for targeting inflation.  That is, they take a look at one measure of the economy – the consumer price index (CPI), for example – and then move to keep that index on a target rate of inflation.  They become fixated on that index and that number.  Without Fed intervention, the market would extend credit based on savings, and investors would take risks based on the rate of returns on capital investment.  The central bank’s manipulation of the money supply, however, throws these things off.

The Austrian business cycle essentially states that the whole thing begins when a central bank buys up assets, which directly leads to the banks expanding credit.  The result here is that prices and inflation concurrently go up.  Businesses will tend to borrow more and, when this money comes onto the market, it will artificially lower interest rates.  The problem here is that when interest rates are artificially low, investments that might have otherwise looked like a losing proposition to business owners will suddenly look far more palatable, and these businesses will start buying up capital goods.  To quote Murray Rothbard: “In short, businessmen react as they would have if savings had genuinely increased: they move to invest those supposed savings.”  I bet you can see where all this is going.

Rothbard continues to explain that, because of an excess of work in the capital goods industries, worker wages are bid higher and higher.  The workers will, in turn, begin to spend this money.  Unfortunately, the lower interest rates reflect saving that is not really happening, and saving is necessary for capital investment to occur successfully.  In effect, businesspeople have a false perception of the real amount of capital available to them.  They have been tricked into believing that people are saving more than they really are.

So what happens when consumers start to get back into their old savings/consumption routine?  Bad news bears, that’s what happens.  Businesses realize that they have invested too much in production goods and not enough in consumer goods.  At this point, an economic depression occurs.  It should be noted, however, that depressions are a necessary evil in the business cycle, for that is the time when bad investments are liquidated and the market rights itself.  As unsavory as it may be, liquidation in the market is vital.

The question now might be this: how is it that booms are allowed to go on for years and years without any retribution, so-to-speak?  This is where you might want to start penning a “thank you” note to the Fed.  By continually increasing the money supply over and over again, the system never has a chance to right itself.  Consumer spending habits never find their norm, and the cost of the capital goods industry never catches the rise in prices.  Only when the banks finally start to become unstable must the money supply be contracted.

Still with me?  Hang in there.  We’re almost at Ground Zero of the current financial crisis.

The problem now is that the Fed is keeping interest rates artificially low.  In effect, they are continuing to expand credit at a time when it oughtn’t to be extended at all.  The Fed continues to print money every day by holding interest rates so low.  They accomplish this, in part, by buying up long-term Treasury bonds (quantitative easing).  They used to only purchase short-term bonds – ones that matured within days to months – but because the interest rates on them are so low, the Fed has turned to buying longer-term bonds.  This has the result of ticking off our foreign debt holders (like China), weakening the dollar, and it’s also going to directly lead to undervaluing risk and misplacing scarce capital – things we can hardly afford at this stage of the game.

I know that I’ve said this time and time again, but I’m going to repeat myself.  (Those of you who know me will be used to that!)  I say again that there will come a time to pay the piper.  We cannot continue to monetize an ever-growing debt.  There must be a correction, and we are only prolonging the time until that eventual day arrives.  And when it does arrive, it is going to speak with authority.

At this point, I’ll bring us back to my original comparison of OWS and the Tea drinkers.  They’re mad about a lot of the same things, quite rightly.  There aren’t enough parties, however, in either camp who truly understand why the US is in its current situation.  It is vital that both camps understand what is really driving this crisis, and then maybe we will begin to see some real results, instead of the usual left-right paradigm repeating itself ad nauseum.

Note: I used the following articles and books to help me write this post.  Hop on over to Cato and Mises.  They will give you a thorough and academic run-down on Austrian economics and the business cycle that is far superior to anything I could ever hope to print.  Have a look!

 Malfeasant Central Bankers, Again
Business Cycle Primer
Tea Party, Meet Occupy Wall Street
For a New Liberty – Murray Rothbard