Guest Post: Krugman Blowing Bubbles

Tyler Durden's picture

Submitted by James E. Miller of the Ludwig von Mises Institute of Canada,

The perennial question of modern economics is simple: how are market downturns best combated? It’s a good question, if you are trying to deduce truth in matters. It also makes for good fodder to appease career-granting benefactors, i.e. the government. It was not always this way however. Economists, if true to their craft, do not make for barrels of optimism. They are supposed to be a splash of cold water on wishful thinkers.

The unholy alliance between the state and the economic profession would never last if dismal science practitioners were gadflies who swatted down every harebrained scheme that festered in the dreams of central planners. This was one of the problems encountered by classical economists. Being market-friendly, it was tough appealing to monarchs or government leaders who wanted a quick fix to economic doldrums. No head of the public wants to tell his citizens, “Sorry, I cannot help you today. You must help yourself.”

Eventually John Maynard Keynes would come along and give the economic vocation the crony justification it needed to become respectable in the eyes of the state. His The General Theory of Employment, Interest and Money was a how-to guide for pols looking to spend other people’s money. At last they had an excuse: to boost unemployment by paying laid-off workers to dig holes aimlessly.

Our friend Paul Krugman is Keynes’s most vocal disciple, and never tires of reinvoking his intellectual master’s teachings of mo’ money, mo’ debt, and no mo’ problems. In a recent interview with the forever exhausted-looking Joe Weisenthal of Business Insider, Kruggy is perplexed by the Federal Reserve’s inability to inflate out of the ongoing economic slowdown. He snakes out a position between naysayer Larry Summers, who thinks the economy can only grow with artificial bubbles, and someone who is more optimistic about the future. On necessary bubbles, Krugman tells us:

“If we look at the evidence…and it kind of looks like…we need bubbles to grow. We’ve had one bubble after another. Long-term rise in debt, with no inflation…the economy is looking like it’s just barely managing to keep its above water with all those bubbles so…that’s the observation.”

Krugman blames the news status quo on slowing technological innovation and lower population growth. As for the United States, the Nobel Laureate is convinced the trade deficit is largely at fault. Lastly, he concedes that no one really knows why the economy must be goosed by a shot of exuberance.

That’s all true, if you forget the fact that some folks do actually understand why Krugman and his like-minded colleagues are scratching their heads over bubbles.

That the past few decades have witnessed financial bubble after financial bubble is not proof positive of a great need for them. Krugman’s assumption is that had the Fed not interfered in the marketplace to boost particular assets, the whole economy would have imploded. It’s a false assumption, but totally in line with Keynesian theory.

From the stagflation in the late 1970s to the stock market crash of 1987, forward to the failure of Long Term Capital Management in 1998, the popping of the dot-com bubble years later, and finally culminating in the housing crisis of 2007-2008, Krugman and Summers appear to have a point. All of these cases of faux prosperity were caused by the Fed’s meddling with the money supply, pushing interest rates down below their natural level. The headache after each instance was cured with the hair of the dog – meaning more inflation, more stimulus, and more central bank liquidity. The roller coaster ride of money printing has left the economy distorted and unable to find true balance again.

For the life of him, Krugman can’t seem to find any evidence of market stability without the animal spirits being thrown a liquidity bone. And yet, his go-to example of angelic prosperity – the 1950s – has all the markings of a relatively calm period of prosperity absent of central bank interference. As former Office of Management and Budget Director David Stockman points out, the heads of the Federal Reserve following World War II were less-than-enthusiastic about ginning up growth via the printing press. This was when William McChesney Martin was at the helm and President Eisenhower was reluctant to keep up the hog wild spending of his predecessor. In an interview with the American Mises Institute, Stockman comments:

Although central banking does cause moral hazards and lends itself to abuses, there have been periods in which monetary and fiscal discipline have been employed. Fed Chairman William McChesney Martin, for example, really did take the punch bowl away when the party got started because he took monetary discipline seriously. Fiscal discipline under Eisenhower and the gold standard behind Bretton Woods helped put off the day of reckoning for quite a long time.

After wartime price controls were relaxed in the late 1940s, capitalists and private investors were freed of government burden and began investing in the country yet again. Washington’s budget was cut significantly, including hundreds of billions removed from the Pentagon’s death machine expenditures. Stockman brings attention to the data: “Between 1954 and 1963, real GDP growth averaged 3.4 percent while annual CPI inflation remained subdued at 1.4 percent.”

So yes, this was the non-bubble prosperity Krugman is looking for. As Justin Raimondo writes, “[E]ight years of relative fiscal sanity under the Eisenhower presidency ushered in the greatest economic expansion in modern times.” What’s funny is that Krugman is one of the biggest cheerleaders of post-war prosperity and continually advocates going back to the Ike-era. But he wrongly attributes the golden times to pro-union labor policies and high rates of taxation.

Regardless, the takeaway from the decade of General Motors, Elvis, decent manners, and the Red threat is bubbles are not necessary for economic growth. By trying to stimulate demand, the Fed only mucks up economic calculation and capital accumulation.

Krugman’s solutions for the bubble-addicted economy are no better than his own understanding of economic theory. Widespread unemployment can be cured, in his opinion, by weaker purchasing power, a stronger welfare state, and continual government spending. In other words, by top-down central planning that attempts to tweak society “just so.” All these efforts are nothing but a shell game that take money from some and give it to another. Basically, Krugman is King Solomon with a sword, cutting everyone into parts he sees most fit.

Saying we need continuous financial bubbles to keep full employment is such a flawed conception of economics, it belongs on an island of misfit philosophies. Krugman’s incessant promotion of statism is doing more harm to the economy than good. As an opinion-molder, he is perpetuating the economic malaise of the last few years. More bubbles won’t help the recovery, just harm it more. In the middle of a grease fire, Krugman calls for more pig fat. And the rest of us are the ones left burnt.

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TeamDepends's picture

How 'bout we start breaking windows with Krugmans face.  Would that help?

Chris Jusset's picture

This is awesome:

All of these cases of faux prosperity were caused by the Fed’s meddling with the money supply, pushing interest rates down below their natural level. The headache after each instance was cured with the hair of the dog – meaning more inflation, more stimulus, and more central bank liquidity. The roller coaster ride of money printing has left the economy distorted and unable to find true balance again.

IOW, the Fed causes the initial bubbles, and the Fed's response to the collapsed bubbles via ZIRP and QE causes even more bubbles ... and when those collapse, the Fed responds by blowing even more bubbles.  When the current massive bubbles pop, the Fed will respond by lowering interest rates and by rampantly printing cheap, easy money ... which will reflate the previous bubbles and blow new bubbles.  And when those bubbles collapse, the Fed will repeat the same process, only with more force and more vengeance.

Anusocracy's picture

The host must continue to grow so the parasitic worms can continue to grow.

jbvtme's picture

isn't "bubbles" the name of the princeton football team mascot?

krispkritter's picture

I thought it was Jacko's monkey? (shudders)

knukles's picture

The offspring of which was....

are you ready?


Ta dah!


Paul Krugman and his Welcome to the Third World Plan B-0-nomics


PS... Didn't Neal Young sing a song about that "Stravin' in the Free World"?

michael_engineer's picture

Speaking of bubbles, the bubble in resource consumption will by definition have to deflate to follow the trend in resource extraction/production.  It really is a zero sum game.  However, the public perception of bubbles doesn't seem to follow a similar definition and zero sum equation.

krispkritter's picture

NOW I gotta change my avatar dammit...

knukles's picture


Yours is one of the olde Originals, One of the Best.
Please, no changes!

whatthecurtains's picture

What do you have against chimps?

kchrisc's picture

I wonder what Krugman, the banksters' snake oil salesman, will think of the coming 'bubble' in guillotines?!

DOGGONE's picture

USA status quo is
The Public Be Suckered

I thought STOP IT.
Krugman says KEEP IT UP.
Hell of a world.

Jonas Parker's picture

"Krugman 's blowing Obubbles..."

akak's picture

I miss the days when Keynesian Kaveman Krugman used to post here on ZeroHedge --- good times.

krispkritter's picture

Guess he took the systematic and thorough intellectual beatings too seriously...more's the pity, the carnage was fun to watch. 

akak's picture

You know, I really think it was PK himself posting under his own name here.

krispkritter's picture

Wouldn't doubt it.  Being surrounded by fawning admirers from his columns and TV interviews, etc., armed with his Nobel, he probably thought this place would be a walk in the park for his 'superior' views. Welcome to fight club...

knukles's picture

Me too me too me too
I think it was him
Some time after he disappeared he wrote a column about supposedly being imitated by some body on some disreputable tin foil hat conspiracy so called finance web site late at nights.

The old The lady doth protesteth too much methinks, routine.

And God, I Loved Beating On and Watching Others Beat Upon Him.
It was like kicking a cripple, a quadriplegic when he was down.
You could just batter the crap out of him with no intellectual or common sense response.
It was amazing.

Paul, we wish you'd come back home.
We miss you, Paul.

You'd be welcome anytime.

We love you.
We dearly need your intellectual guidance in our otherwise barren lives.
Please come home.
We promise we'll be nice.
For the first 3 characters before the comma.



petolo's picture

Triple Dog Fuck the Kroegman!

Problem Is's picture

Krugman is the dysfunctional Jack-Off-In-The-Box on the Island of Misfit Toy Brained Economists...

YC2's picture

Theses Mises institute guys sure seem to have a hard on for him.  Hate is not the opposite of love, it is apathy.

Toolshed's picture

The vast majority of economists are a couple of rungs of the ladder below witch doctors. That being said, what most people seem to forget, or ignore, about Keynes theories is that yes, he said gov spending should increase to replace the decrease in demand from the private sector during recessionary periods. However, he also said that during prosperous times the reverse should happen and gov should spend less and pay off debt and rebuild reserves. That last part never happens in our modern governments. During prosperous times they spend even more!! It just won't work out that way in the long run, obviously.

verum quod lies's picture

After all, he is a member of the tribe that controls such things.

El Vaquero's picture


In a recent interview with the forever exhausted-looking Joe Weisenthal of Business Insider, Kruggy is perplexed by the Federal Reserve’s inability to inflate out of the ongoing economic slowdown

I don't know why he's perplexed.  1) Prices have not gone up across the board, but CPI is a shit measure and 2) If you really want to see shit go BOOM, the Fed could quit printing money for bankers, then paying IOER and instead print a trillion in cash and hand the masses $3k/person. 

Emergency Ward's picture

"Behave, damn economy, behave!"

moneybots's picture

"The perennial question of modern economics is simple: how are market downturns best combated?"


The perennial question is stupid.  Might as well ask, how are market upturns combated?

A flat line has no up turn and no down turn.

Booms end in busts.


moneybots's picture

"Krugman’s assumption is that had the Fed not interfered in the marketplace to boost particular assets, the whole economy would have imploded"



The FED's interference by inflating a housing bubble, caused the economy to implode in 2008.

The bigger the boom, the bigger the bust. 

With QE debt expansion, the FED is adding to the problem, not subtracting from it.  A bubble is replaced by a bigger bubble.

The bigger the boom, the bigger the bust.

New American Revolution's picture

Here's another fine example of how an Austrian economists is just as clueless about the nature of economics as a Keynsian.   How do you deal with resolving a market downturn?   If it is outside the natural cycle of growth and contraction, YOU REFORM THE GOVERNMENT THAT ALLOWED THE UN-NATURAL CYCLE TO OCCUR.   It is the political model that determines the economic model and not the other way around.  Economics are wholly and exclusively dependent upon the structure of the daily political operating model of government, which is something that no economists would ever consider because it would negate their value overnight.   Talk about fiat currencies, how about fiat economists? They're a dime a dozen, and lined up butt to belly button they still wouldn't add up to one straight answer.  

No, the first question in any economic equation is what is the daily operating model of government within which the economy is operating?  And this is a question that is NEVER ASKED, because you'd have to ask a Political Scientist, and these fellows are too hard to find because they don't make a lot of them anymore and they are not valued for anything because they don't tell you what you want to know; they just what you need to know.  

shovelhead's picture

As much as I hate to be agreeable at fight club, I have to admit you're onto something.

I will take issue with getting answers from political scientists. That is an overkill supposition.

Anyone mildly aware of the mechanations of a kleptocracy will be able to pinpoint the problem.

A bought and paid for Govt. apparatus sharing in the spoils of a dysfunctional and manipulated economy that abhors sound money and free market principles.

Cliff Notes version.

americanspirit's picture

I seriously doubt that "Bubbles" Obama objects.

frank H's picture

From Mises, plain talk, 1948, talking about the post Malthus-Say debates of the early 1800?s. “Those authors and politicians who made the alleged scarcity of money responsible for all ills and advocated inflation as the panacea were no longer considered economist but “monetary cranks” the struggle between the champions of sound money and the inflationist went on for many decades. But it was no longer considered a controversy between various schools of economist. It was viewed as a conflict between economist and anti-economist, between reasonable men and ignorant zealots.”

Krugman recently pushed for higher inflation, along with harvard professor, Ken rogoff, both ignorant zealots and monetary cranks!

Papasmurf's picture

Krugman should know that we need the gold standard backing the currency.  With the gold standard, you would pay workers to dig holes in the ground to find the gold. The expansion of the money supply and the growth of the economy is safely contained to the rate you can dig up additional gold while the purchasing power of the gold remains comparatively stable. 

falak pema's picture

Lets start from fact : This bubble exploded in 2008 due to neo con hanky panky.

The Keynesians, like in post 1929, have had to try and patch up the market, now global; so the collective responsibility of PAx Americana is HUGE. It has been done by using the reserve liquidity pump; something that did not exist in 1929. It has also been done by using TARP which was tantamount to compounding the SCAM as they did not NATIONALISE those "belly up" banks and reinstall GL-ST immediately. They couldn't, the Oligarchs from both aisles RAN the show and were part of it past corruption. No accountability and rampant status quo. 

The problem with this solution as concocted by the FED under BEn is that they DID not STOP the CaUSE of crisis; aka the delusional private sector gambling. They, the FED and Treasury,  just pushed it onto the public and let those Oligarchs continue to Quintuple their casino plays over the next five years. Rodeo banking continued.

So the problem is now worse than in 1929 follow on; as the liquidity has poured oil on to the blazing fire of casino plays. Now the whole world is burning.

So what started in 2008 has been compounded by statist delusion and crony corruption beyond imagination.

What Krugman has done as lead Shaman is to compound what the Clinton/GWB/Greenspan neo con economy started under Bush Snr and Reagan's legacy.

This a joint corruption of all aisles of  government and shamans from university circles doing their bidding like mad medicine men. Pax Americana has now gone economically cannibal on its own public. 

We need a third way; a populist way that represents the 99% and applies due process of Law.  

Never forget the chronology of scam and its deep motivation and most important, the Mindset that spawned it. 

All solutions have to address the cause not the symptom to solve it, or if defeated, to be dissolved by it, in case there is no proper resolution. The end of PAx Americana and blowback for all. 

Tipping times for those who have no MEMORY of timeline of whats occurred or WHY; as they are innocent : the millenials. The boomers just have to live their lives out and at least keep the flame of truth alive.  Period.

kenezen's picture

Goodness, what a rant! 

Captain Clownshoes's picture

Wait, WHAT?  Bubbles is my dog.  Leave my dog alone Krugman!  SIck bastard.....

Prairie Dog's picture

So terminally confused, so misplaced, I wouldn't even know where to begin... 

I love the way KTI's detractors repeat what they think the Great One meant, and then respond to that. So they never break out of the echo chamber of their own misunderstanding.


orangegeek's picture

Kwugman is a scwewy wabbit.





Notarocketscientist's picture

This is all you need to know to understand where we are - why - and where we are headed