While the Fed has clearly had a problem with reflating the broader housing bubble, one which would impact the middle class instead of just those who are already wealthier than ever before thanks to the Russel 200,000, one place which not only never suffered a housing bubble pop in the 2006-2008 years, but never looked back as it continued its diagonal bottom left to top right trajectory is Canada. As the chart below shows, the Canadian housing bubble has put all attempts at listening to Krugman and reflating yet another bubble to shame.
With all that has been written in respect to Thomas Piketty's new book "Capital", you would think someone would remark on the odd coincidence of timing of the rapid rise in inequality that the Professor is so upset about. It’s the issue of the hour. Yet when it comes to the timing at which this phenomenon presented itself, nada. Omerta from the liberal intelligentsia. What could have marked 1971 as the year the picture began to change in respect of inequality in America? It turns out that was the year America defaulted on its obligation under Bretton Woods to redeem in gold dollars held by foreign governments and the era of fiat money began.
The Spirit of Keynes he'll consult...
Krugman: "There's zero evidence that the kind of extreme inequality that we have is good for economic growth. In fact, there's a lot of evidence that it is actually bad for economic growth. Nobody wants us to become Cuba." Ah yes, inequality, the same inequality that the Fed - Krugman's favorite monetary stimulus machine - has been creating at an unprecedented pace since it launched QE. Just recall: "The "Massive Gift" That Keeps On Giving: How QE Boosted Inequality To Levels Surpassing The Great Depression." So while Krugman is right in lamenting the record surge in class divide between the 1% haves and the 99% have nots, you certainly won't find him touching with a ten foot pole the root cause of America's current surge in inequality. And, tangentially, another thing you won't find him touching, is yesterday's revelation by Gawker that the Nobel laureate is the proud recipient of $25,000 per month from CUNY to... study inequality.
Another quarter, and another attempt at predicting the future by the people whose predictions have become the biggest butt of all economics jokes, even more so than Paul Krugman columns. We are talking, of course, about the IMF's World Economic Outlook update.
The fear of deflation serves as the theoretical justification of every inflationary action taken by the Federal Reserve and central banks around the world. It is why the Federal Reserve targets a price inflation rate of 2 percent, and not 0 percent. It is in large part why the Federal Reserve has more than quadrupled the money supply since August 2008. And it is, remarkably, a great myth, for there is nothing inherently dangerous or damaging about deflation. Now unmoored from any gold standard constraints and burdened with massive government debt, in any possible scenario pitting the spectre of deflation against the ravages of inflation, the biases and phobias of central bankers will choose the latter. This choice is as inevitable as it will be devastating.
If you are not Professor Paul Krugman you probably agree that Washington has left no stone unturned on the Keynesian stimulus front since the crisis of September 2008. By the time the “taper” is over later this year (?) the Fed’s balance sheet will exceed $4.7 trillion - $4 trillion in new central bank liabilities in six years. All conjured out of thin air. Professor Krugman proposing to “do something”... In short, Krugman wants to double-down on the lunacy we have already accomplished. Unfortunately, we are presently nigh onto “peak debt”; there is no “escape velocity” because the Fed’s credit channel is broken and done. Going forward, the American people will once again be required to live within their means, spending no more than they produce. By contrast, Professor Krugman’s destructive recipes are entirely the product of a countrafactual economic universe that does not actually exist. He wants us to borrow and print even more because our macro-economic bathtub is not yet full. And that part is true. It doesn’t even exist.
I bet you the Turkish government can explain the intrinsic value of Bitcoin to Krugman and Roubini very soon as they systematically lose the ability to censor information due to Namecoin and affiliated technologies.
At the young age of 22 Henry Hazlitt figured out the future involves too many factors for anyone to predict, not to mention just knowing what the relevant factors are. Jim Grant admitted it took him 40 years in the business to finally realize he couldn’t understand the future, noting, however, unfortunately the folks working at the Eccles Building have not come to this realization. The PhDs believe they can depreciate the currency at the proper rate to cause everyone gainful employment and live happily ever after. Hazlitt also has a fan in Rich Santelli who notes that if government makes loans, that private lenders won’t make, to entities that can’t pay back, economic signals get destroyed, and chaos ensues. Chaos, indeed...
Why Mainstream Economists Like Krugman Are So WRONG and So DANGEROUS
There is a wider significance to this long-held misapprehension. Namely, that Keynes – so enamoured of his circular flow visualisation of the economy and yet also so prone to the confusion of mere snapshot accounting identities with dynamic and causative phenomena – also held that banks were simple, passive intermediaries in the system and could therefore safely be shorn of having any true role to play in the determination of financial variables. Having similarly insisted that saving and investment MUST be equal (accounting v causation, again), he was thus left with nothing by which to determine the rate of interest and so opted for his ludicrous ‘liquidity preference’ idea that the rate of interest is a bribe by means of which to discourage the common man’s economy-sapping fetish for hoarding money. From there, it was but a short step to the vilification of savers as the enemies of public well being and - via the further idiocy of the ‘liquidity trap’ with which this seemed perennially to threaten us - to the evils inherent in the incessantly inflationary ravings of the likes of Paul Krugman and all the other bien pensants of his stripe.
"Higher equity prices will boost consumer wealth and help increase confidence, which can spur spending" - Ben Bernanke, 2010 But history suggests the opposite: it is higher savings rates which lead to economic prosperity. Examine any economic success story such as modern China, nineteenth century America, or post-World War II Japan and South Korea: did their economic rise derive from unbridled consumption, or strict frugality? The answer is self-evident: it is the savings from the curtailment of consumption, combined with minimal government involvement in economic affairs, which generates economic growth.
What is it with this perennial fear the chief money printers have of falling prices? Not that we are likely to see it happen, but if it does, what of it? The problem is of course that when prices decline, the 'wrong' sectors of society actually benefit, while those whose bread is buttered by the inflation tax would no longer benefit at the expense of everybody else. But they never say that, do they? Has any central banker ever explained why he believes deflation to be a danger? No, we are just supposed to know/accept that it is. As Austrian economists have long explained, it is simply untrue that prices must rise for the economy to grow.
It’s nerve-wracking to live in the historical moment of an epic turning point, especially when the great groaning garbage barge of late industrial civilization doesn’t turn quickly where you know it must, and you are left feeling naked and ashamed with your dark worldview, your careful preparations for a difficult future, and your scornful or tittering relatives reminding you each day what a ninny you are to worry about the tendings of events. Persevere. There are worse things in this life than not being right exactly on schedule.
Keynesian stimulus always has been presented as a government action that improved general or overall economic conditions, as opposed to being a political wealth-transfer scheme. In reality, the government-based stimulus is based upon bad economics or, to be more specific, one of bad economic logic. To a Keynesian, an economy is a homogeneous mass into which the government stirs new batches of currency. The more currency thrown into the mix, the better the economy operates. Austrian economists, on the other hand, recognize the relationships within the economy, including relationships of factors of production to one another, and how those factors can be directed to their highest-valued uses, according to consumer choices. The U.S. economy remains mired in the mix of low output and high unemployment not because governments are failing to spend enough money but rather because governments are blocking the free flow of both consumers’ and producers’ goods and preventing the real economic relationships to take place and trying to force artificial relationships, instead.