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Guest Post: Krugman’s Adventures In Fairyland
Submitted by William L Anderson of The Ludwig von Mises Institute,
After studying and teaching Keynesian economics for 30 years, I conclude that the “sophisticated” Keynesians really do believe in magic and fairy dust. Lots of fairy dust. It may seem odd that this Austrian economist refers to fairies, but I got the term from Paul Krugman.
According to Krugman, too many people place false hopes in what he calls the “Confidence Fairy,” a creature created as a retort to economist Robert Higgs’s concept of “regime uncertainty.” Higgs coined that expression in a 1997 paper on the Great Depression in which he claimed that uncertainty caused by the policies of Franklin Roosevelt’s New Deal was a major factor in the Great Depression being so very, very long.
Nonsense, writes Krugman. Investors are not waiting for governments to “get their financial houses in order” and protect private property. Instead, he claims, investors are waiting for governments to spend in order to create enough “aggregate demand” in the economy to bring about new investments and, one hopes, full employment.
According to Higgs, the “humor columnist for the New York Times, Paul Krugman, has recently taken to defending his vulgar Keynesianism against its critics by accusing them of making arguments that rely on the existence of a ‘confidence fairy.’ By this mockery,” Higgs says, “Krugman seeks to dismiss the critics as unscientific blockheads, in contrast to his own supreme status as a Nobel Prize-winning economic scientist.”
It seems, however, that Krugman and the Keynesians have manufactured some fairies of their own: the Debt Fairy and the Inflation Fairy. These two creatures may not carry bags of fairy dust, but they might as well, given that their “tools” of using government debt and printing money to “revitalize” the economy have the same scientific credibility.
Let us first examine the Debt Fairy. According to the Keynesians, the U.S. economy (as well as the economies of Europe and Japan) languishes in a “liquidity trap.” This is a condition in which interest rates are near-zero and people hoard money instead of spending it. Lowering interest rates obviously won’t spur more business borrowing, so it is up to the government to take advantage of the low rates and borrow (and borrow).
If governments issue enough debt, argue Debt Fairy True Believers, the economy will gain “traction” as government spending, through the power of pixie dust, fuels a recovery. Governments spend, businesses magically gain confidence, and then they spend and invest. (At this point, we are apparently supposed to just overlook the fact that the Keynesians are saying that we need the Debt Fairy to resurrect the Keynesian version of the Confidence Fairy.)
The Inflation Fairy also plays an important role, according to Keynesians, for if bona fide inflation can take hold in the economy and people watch their money lose value, then they will spend more of their savings. In turn, this destruction of savings will, through the power of Keynesian sorcery, revive the economy. Thus inflation undermines what Keynesians call the “Paradox of Thrift,” a theory that says if a lot of people withhold some present consumption in order to save for future consumption, the economy quickly will implode and ultimately will slip into a Liquidity Trap in which no one will spend anything.
These fairies can work their magic if (and only if) one condition exists: factors of production are homogeneous, which means that government spending will enable all lines of production simultaneously. The actual record of the boom-and-bust cycle, however, tells a different story. It seems that the Debt and Inflation Fairies enable booms along certain lines of production (such as housing during the past decade), but as everyone knows, the fairy dust lost its magical powers and the booms collapsed into recessions.
Austrians such as Mises and Rothbard have well understood what Keynesians do not: the structures of production within an economy are heterogeneous and can be distorted by government intervention through inflation and massive borrowing. Far from being creatures that can “save” an economy, the Debt Fairy and the Inflation Fairy are the architects of economic disaster.
Despite Keynesian protestations that the U.S. and European governments are engaged in “austerity,” the twin fairies are active on both continents. The fairy dust they are sprinkling on the economy, however, is more akin to sprinkling ricin on humans. In the end, the good fairies turn into witches.
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The Chinese are challenging us via the air rights skirmish, but that is a smokescreen.
When they finally reach the point where they have had enough US “intransigence” and can stomach a violent capital flow shift, they will diversify away from USD denominated assets (this has already begun), and they will stop playing nice when US budgetary deadlines arise.
They stand to lose a lot if US Treasuries tank, but they also stand to gain a lot if the yuan becomes the world reserve currency. When that happens, its over.
The dollar will get dumped en masse, and the Fed will lose control over nearly everything, which is why their perpetual printing experiment is so dangerous.
Wow novictim, you really need to work on your trolling skills. I recommend reading as much of MDB's early work as you can find. He was a real pro. You, on the other hand are a rank amateur in comparison. Try harder!! The regular readers here can easily see right through your nonsense. You must be used to trolling on social networking sights where intellect is virtually non-existant. I advise you to change your screen name and practice on a little league site like Minyanville and come back to ZH after you have improved your trolling skills. At this point your spewage is not even mildly entertaining.
Publius, you are the fraud. You are just one of the legion of Krugman bashers here that throw ad hominems left and right but never state a pooint of disagreement.
What I amd discribing is intellectual cowardice and it is rampant on Zero Hedge...let's try to up-our-game, people!
State an argument, then defend it, and let the facts stand or fall. Be BRAVE!
Here is my carefully thought out argument. Krugman is a crudman POS troll whose humanity and thoughts have no value to me. I don't care if what he says might have truth in it because the shit deliberately mixed in there with the truth makes his "cooking" unpalatable, so I'm not going to waste mental energy analyzing anything he says. If it comes from Crudman, throw it in the toilet and flush right away. Hope that helps you analyze his intellectual defacations.
Krugman is a liar and hypocrite for (correctly) attacking Bush’s profligate spending, and then actively supporting Oblunder’s more irresponsible spending, among other things.
There.
Next.
As I suspected. You don't have a clue.
Here is your assignment, Publius. Look up neoKeynesian policy recommendations and then make a distinction between what you read on right wing blogs concerning Krugman and what you, yourself, have learned.
Then read: http://krugman.blogs.nytimes.com/2013/01/22/the-non-surge-in-government-spending/?_r=0
As I suspected: you are a moron.
There is a cottage industry of Krugman criticism – I suggest you go look it up. Here - I'll give you a quick starter
http://www.cyniconomics.com/2013/11/21/have-larry-summers-and-paul-krugman-just-had-their-dimondudley-moment/
http://faculty.chicagobooth.edu/brian.barry/igm/reviewingkrugman.pdf
http://economicsone.com/2013/06/17/paul-krugman-is-wrong-about-fiscal-policy-research/
The evidence against him is damning.
Now, go away and read something outside your vapid leftist echo chamber, little girl.
Fuck you Krugman, you decrepit piece of excrement.
Just how do you know he's a homo? Inquriing minds wanna know. (Actually no one gives a fuck.)
Can't be bothered but economically it goes like this,
Rich and powerful ignoring the poorest decide to create a new style of economy. (Rule 1 They created it, not me)
Rich person "well we could do this" or "do that", but "not that it would make me poor". (Rule 2. Keep the rich scenario)
So they create a new style of economy, inflationary and a really nice life is had by all of them and it's a great economy all those that created it can never go poor.
Now for all the comments on the free issue, sure it's not good it is paid for by others somewhere now go and look at all the free shit those at the top get. Remove the FSA and the economic demand collapses because they changed the economy to a consumer one, skim off that and make fuck all.
Now run the above economy on a 2% growth for decades, with excess to reinvest when you have loads anyway and wonder why those in the highest position end up with ALL THE MONEY. The thing is the economy goes nowhere now unless THOSE WITH ALL THE MONEY SPEND A LOAD. Not going to happen so government keeps adding it to the debt and then it puts this debt on those "if your are lucky / or unlucky" to service it forever!
Cynicall it is pointless those with wealth spending because there is nothing needing to be produced that is not already produced like what don't you have? Awesome really that which sunk the economic mechanism they created is the ever increasing efficiency of they system they also chased.
Even funnier all those goodies that they thought would make them rich you need a FSA to consume it all.
Bit long in the tooth, that is the dynamics of the system and all the corruption, secrecy, everything else is like you used to buy something and these options were extras now you get them bundled in free.
Always good to skim a Krugman piece here on ZH and then comment as before
EAT SHIT AND DIE KRUGMAN YOU FUCKING ASSHOLE !!!!
ahhhhh, all better now.
Oh, what a clever little boy you are! LMFAO
Orange, you're just another ZH poser wrapped in the ever-fashionable Krugman bashing drivvel.
orange, Take several economics courses and then, after you have at least a hint of a clue,, then try to make some statement as to why you disagree with Krugman.
You've been here 12 weeks and are calling people posers here...
I've taught more econ courses that you have taken, and I know I don't need to refute Krugman's opinions as they are meaningless and display his idiocy clearly. So yes I will Ad-Hom the issue away as I have better things to do than to stress myself thinking you are someone that should be appeassed you mini-tyrant.
Great concept.
Accrue massive debts on my behalf to be paid by my children and grandchildren to promote empire which means nothing to me.
I love Keysiens.
Burn baby burn.
people need to understand that the system has to be let go. I can't find anything i've read that can be reliable. everyone has a point of view based on everyone else's POV. how can we ever come to a sane opinion ourselves anymore? the power to shape public opinion is relevant because we let the majority run things. So my opinion is take away the state let it go then we will see.
Its good to be a noble prize winning goon because if you are right you are a genius and if you are wrong its because they didnt print enough.. how lovely it is to be a goon
If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.
– John Maynard Keynes
Does that sound Hubristic?
That the Von Mises Institute reviles Keynesian ideas is normal, he was not on the same page as the Austrians, he was their intellectual rival whom they admired as a man. But he made a contribution that has marked economic history. Whereas the Austrians have only produced one great practicing economist worth talking about in the sphere of corridors of power : Jacques Rueff in Gaullist France.
Why do people like Krugman and Ben and Yellen get associated with the guy who coined that phrase?
I see you are still an idiot...
If one was to look at all PHILOSOPHIES objectively one could find fault with them all. Once one believes in a single PHILOSOPHY, one is doomed. What I think best sums up the world not just economics or power is the rule of nature. Just as in the animal kingdom most are ruled by alphas. Look at most animal structures and you will find many being ruled by the few. There really is no getting around it, be it dogs, or apes or men, we are ruled by the few. When I look at politics objectively I see gangs, when you look at ideas you see people who tow the PARTY line for whatever suits their own and thus their gangs adgenda. When I look at people in power I see psychopaths, this again is the way societies and structures have always existed. Call it what you will but as humans the majority will always be ruled by the few. Everything else is just wishful thinking by people who aren't sociopathic enough. Everything else is either NIHILISM or TRUE COMMUNISM. The destruction of everything or a true comuntiy doing for others not for material rewards but for the betterment of the whole structure. If history is any guide humanity usally reverts back to the norm after periods of upheaval. Let's hope that after the next dark age we can find a somewhat more equitable way of governing ourselves.
Mr. Krugman often uses two tools that both feed his ego, and (he thinks) discredits his critics. He routinely resorts to ridicule and name-calling to try to discredit his critics. That's oh, so dignified for a Nobel laureate (sarcasm)! He does this regularly in his back-and-forth debates with Harvard economic historian Niall Ferguson, who takes the high road and stays above the fray and out of the gutter of Krugmann's immature imbecility.
His second tool is to DEMAND more respect by deploying crass reminders to the world of his Nobel status. As if we weren't already sick of it. Didn't a certain nincompoop president win one those, too? Without doing anything to merit it?
But respect is EARNED, not DEMANDED. Krugman undermines his own integrity and credibility when he engages in ridicule and foot-stomping, fist-shaking, temper-tantrum shrieks for tribute. He comes across as a puerile pinhead instead. He paints himself as a jackass rather than a respectable scholar.
On second thought, perhaps Krugman HAS earned a certain reputation. It's just not the one he thinks he deserves! It's the nefarious one he has gained by his infantile behavior instead.
Both Keynes and Mises were dead wrong on the proper management of a Medium of Exchange (MOE). Keynes ideas were inflationary. Mises ideas were deflationary.
Neither was aware of the obvious; that money is "a promise to complete a trade"; that real money can only be created by traders making actual trading promises and that it is extinguished when the traders deliver on their promises. And in the event the traders fail to deliver (DEFAULT), a like amount of INTEREST must be collected to protect the marketplace. Protecting the marketplace means "guaranteeing" that INFLATION of the MOE will always be exactly zero ... at all times, everywhere.
The governing relation is: INFLATION = DEFAULT - INTEREST