Bubbles Everywhere: Krugman Wrong Again; Austrians And The BIS Are Correct

Tyler Durden's picture

Submitted by John Cochran via Mises Economic blog,

Paul Krugman is at it again – distorting or misinterpreting work by other economists to attack critics of  today’s central bank driven low interest rate environment and to defend policy status quo or to push for even more stimulus. This time the economist is Knut Wicksell whose work in both monetary theory and capital theory was part of foundation for Mises’s development of Austrian business cycle theory (ABCT). Krugman’s rant is in response to Neil Irwin’s  commentary on booms and bubbles in asset prices driven by central bank policy and his target is Austrian influenced economists and Wall Street analysts and pundits with a pointed jab at recent work from the Bank for International Settlements (BIS).  From Krugman:

The proximate cause is obvious: policy interest rates are very low, and expected to remain low, so money is pouring into alternative assets, driving their yields down too. The question is what you think about this situation.


Quite a few people — including a lot of people on Wall Street, at the BIS, and so on — look at this and say that it’s terrible: the Fed is keeping interest rates “artificially low” and thereby distorting asset prices across the board, and it will all end in grief.

But for Krugman there is no reason to panic, rates are not too low and there are no asset price bubbles:

Mainly, though, there simply isn’t any macroeconomic case for claiming that interest rates are wildly depressed relative to fundamentals, and not much reason to believe that assets in general are overvalued.

Robert Murphy at Mises Canada exposes the fallacy of Krugman’s argument:

Krugman is supposed to be a technical wizard who throws up an impressive array of mathematical models to justify his policy conclusions. Well, in this case he tries to get his readers to accept first derivatives in place of levels. Nope: However you slice it, central banks have pushed interest rates artificially low. That’s why their balance sheets have exploded. It is astonishing that Krugman is trying to justify this outcome as “natural.”

What I find interesting here is Krugman’s explicit attempt to discredit the recent BIS warning, based on the work of Mises and Hayek, of Central bank excesses. As reported by the Wall Street Journal, (“Stop Us before We Kill Again”):

The Bank for International Settlements issued a report warning that global monetary policies are reaching their useful limit and may be contributing to financial excesses that could turn out badly if central bankers aren’t careful.


“Financial markets are euphoric, in the grip of an aggressive search for yield,” Claudio Borio, head of the monetary and economic department at the BIS in Basel, Switzerland, said as the club issued its annual report. “And yet investment in the real economy remains weak while the macroeconomic and geopolitical outlook is still highly uncertain.”

Austrian influenced work by current BIS economist Claudio Borio and former Head of Monetary and Economic Department of the BIS, William R. White is highlighted here. As a side note, I would like to think work by Fred Glahe and I perhaps planted a seed for some of this work as White often cites our Keynes-Hayek Debate when he introduces Hayek.  A more detailed list and discussion of recent mainstream work on ABCT is developed Nicolas Cachanosky can be accessed from links provided here.

Andreas Hoffmann, co-winner of the 2014 Lawrence W. Fertig Prize in Austrian Economics for Monetary Nationalism and International Economic Instability, has had his paper “Zero-Interest Rate Policy and Unintended Consequences in Emerging Markets” has been accepted for publication in The World Economy (pdf upon request). The abstract:

 Since 2009, central banks in the major advanced economies have held interest rates at very low levels to stabilize financial markets and support the recovery of their economies. This paper outlines the unintended consequences of the prolonged period of very low world funding interest rates in emerging markets. The paper is informed by a Mises-Hayek-BIS view on credit booms and Mises’ law of unintended consequences. Consistent with the presented credit boom view, the paper shows that the period of low world funding interest rates is associated with a rise in volatile capital flows and asset market bubbles in fast-growing emerging markets. As suggested by Mises’ law, the unintended consequences give rise to a new wave of interventionism as policymakers in emerging markets increasingly reintroduce financially repressive measures to isolate the economies from foreign capital inflows.

Interesting addition illustrating the renewed influence of Hayek and Mises is the reference to this increasingly influential emphasis on credit booms as Mises-Hayek-BIS view.

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Cattender's picture

It's a HUGE Recovery Thank You President Obumba!!!!!!

BTFDemocracy's picture

Krugman writes the econ textbooks, that are published by McGraw Hill, which is pretty much owned by Goldman Sachs.

Future looks bleak.

ThirteenthFloor's picture

Krugman is owned by the oligarchs, sucking their lollipop.  Just as Warren Buffet(an oligarch) owns the politiques and gets exactly what he wants like knowing in advance Goldman Sachs will be made whole at the demise of Lehman Bros, so he can park some $$'s in GS.

JFK, a democrat, completely proves Krugman's economics wrong in 1962.  Time tested proof this loser Krugman should be hung out to dry.


SoberOne's picture

So, Europe is fixed, USA is exceptional and Russia's stock market gained from US sanctions.  I am so confused!

ThirteenthFloor's picture

When USA sanctioned RU, RU dumped US treasuries with the assistance of one large FR bank, and the Belgian holding of treasuries bulged.  RU dumping US treasuries was a positive move for RU.  That explains one.

USA is exceptional at starting colored revolutions through out the world and at destruction in general.  That type of exceptional.

EU well, it ain't over until the fat lady (Merkel) sings.

Everybodys All American's picture

None here seem to understand American exceptionalism. The point not that we are any better as we are all equal but the fact that the idea of free market capitalism and liberty of free men and women had never been tried like this anywhere in the world prior to America. Obama, Bush, the Fed, and too many to name have changed that course by not following free market principals which btw includes bankrupting failures no matter the pain inflicted.

nailgunnin4you's picture

The point not that we are any better as we are all equal but the fact that the idea of free market capitalism and liberty of free men and women had never been tried like this anywhere in the world prior to America.


You have a woefully warped view of American history, how do I know so much more about American history than 90% of yall? Free market capitalism?




You're welcome.

Scarlett's picture

When will people EVER fucking listen?


Paul "the FED should make a housing bubble" Krugman == Irvin (1929) "stocks have reached a permanently high plateau" Fisher


Here's the current propaganda, boys:  


Irving Fisher (February 27, 1867 – April 29, 1947) was an American economiststatistician, inventor, and Progressive social campaigner. He was one of the earliest American neoclassical economists, though his later work on debt deflation has been embraced by the Post-Keynesian school.[1] Joseph Schumpeterdescribed him as "the greatest economist the United States has ever produced",[2] an assessment later repeated by James Tobin[3] and Milton Friedman.[4]

Fisher made important contributions to utility theory and general equilibrium.[5][6] He was also a pioneer in the rigorous study of intertemporal choice in markets, which led him to develop a theory of capital and interest rates.[3] His research on the quantity theory of money inaugurated the school of macroeconomic thought known as "monetarism."[7] Fisher was also a pioneer of econometrics, including the development of index numbers. Some concepts named after him include theFisher equation, the Fisher hypothesis, the international Fisher effect, and the Fisher separation theorem.

Fisher was perhaps the first celebrity economist, but his reputation during his lifetime was irreparably harmed by his public statements, just prior to the Wall Street Crash of 1929, claiming that the stock market had reached "a permanently high plateau". His subsequent theory of debt deflation as an explanation of the Great Depression, as well as his advocacy of full-reserve banking and alternative currencies, were largely ignored in favor of the work of John Maynard Keynes.[3]Fisher's reputation has since recovered in neoclassical economics, particularly after his work was rediscovered in the late 1950s,[3][8][9] and more widely due to an increased interest in debt deflation after the late-2000s recession.[10]  



Ok... as each month passes, his wikipedia page miraculously turns better, praising the loser as if he were a man of worth.  


Keynes wasn't even a man, so I guess he doesn't count, does he?

Mark Urbo's picture

I hope when it crashes that they drag Krugman (and his cats) out into the street and set them on fire...

ThirteenthFloor's picture

Cattender > Save some thanks to Bernanke and Greenspan, they engineered it.  Maybe they mislabeled the package as "Recovery", it actually contained "Destruction", and they now claim ignorance.

RaceToTheBottom's picture

Presidents have very little to do with anything going on now.  

However if you feel the need to blame presidents, compile a list back to and including Mr Reagan or even Nixon to make your guilt list complete.


snr-moment's picture

Right.  That 17 trillion in debt was unavoidable.  Dropping employment was unavoidable.  A welfare state which encourages laziness was unavoidable.


A chicken in every pot.

BTFDemocracy's picture

Aj aj aj this hurts my brain.

erg's picture

Krugman is a fine surname if you are a neanderthal.

jcpicks's picture

What are these 'fundamentals' of which you speak?



DOGGONE's picture

If the economic "eminences" were intellectually honest, these very instructive histories would be in the people's faces continually -- rather than NEARLY NEVER.

The Public Be Suckered

nmewn's picture

A one percenter not seeing any asset bubbles, how myopic. He'll be completely shocked & surprised (again) when it pops and of course, yell for moar printing to fix it.


Good Lord, I just called stawks & debt "assets"...now they've got me accepting the premise...lol.

ugmug's picture

Here is the last sentence of everything that Krugman writes....

"If all else fails marry a rich ugly woman!"


Pairadimes's picture

In that photo, Krugman is making another one of his famous assertions: B-b-b-b-b-b-b-b-b-b-b-b-b-b.

Squid Viscous's picture

Krugman is a 0.002 percenter of course, never "kvetch" about them they know what's best for everyone else

lasvegaspersona's picture

I'd just like to point out that the Krug and the BIS see things differently. Krug is on the side of the dollar. The BIS is one the side of the Euro. Their interests are no longer one and the same. The dollar is going down and the BIS intends to save the Euro.

That is why the Euro will not do QE like so many think they will. 

The ECB is not the Fed and has a whole different game plan.

The rest of the world has ceased supporting the moribund reserve currency ('cept 'Belgium')and now it is every currency for itself. If the dollar goes the ECB will still have 10,800 tons of gold on its balance sheet. Gold will be the new reserve asset of the world. It will not be a part of the monetary system except as a reserve asset. There will not be a new gold standard.

Colonel Walter E Kurtz's picture

You are right but that is the only thing they are doing correctly (but not by Draghi's choice at this point). Remember those Euro banks are far more indebted that the US banks. When the SHTF this next time, the EUROS will do everything else first, before printing (i.e. bail-ins) but they too probably will eventually print...you know.. for the good of Euro Citizens! We all are screwed!

Goldilocks's picture

Insanity: doing the same thing over and over again and expecting different results. - Albert Einstein

The world is a dangerous place to live; not because of the people who are evil, but because of the people who don't do anything about it. - Albert Einstein

Only two things are infinite, the universe and human stupidity, and I'm not sure about the former. - Albert Einstein

Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. - Albert Einstein

It has become appallingly obvious that our technology has exceeded our humanity. - Albert Einstein

Technological progress is like an axe in the hands of a pathological criminal. - Albert Einstein

Memory is deceptive because it is colored by today's events. - Albert Einstein

Force always attracts men of low morality. - Albert Einstein

The road to perdition has ever been accompanied by lip service to an ideal. - Albert Einstein


P.S. Fallacize much!

Me.Grimlock's picture

It seems implausible that someone could, with such regularity, be even more wrong than Gartman.

orangegeek's picture

when this tanks, Krugman is out of a job and he knows it


a lot of these "sacrificial lambs" are used to pump the herd into a market top


the assumption here is that Krugman has the credibility to do this



malek's picture

 when this tanks, Krugman is out of a job

Uhh, you mean for the 2 weeks it will take him to come up with another theory based on half-facts that defies all and any common sense,
and then find a crowd of followers that need a new rationalization why reality doesn't matter?

tolivian's picture

I suspect he has far more influence on Wall Street than sensible people would believe. However on main street he is already dismissed as a clown. 

True story: A few years ago there was a townhall meeting in a very small Wisconsin (about 5,000 pop) town. I knew the town having grown up there many, many, many years ago. A rather loud audience member stood up to dispute some of the numbers being shown by the speaker (whose identity escapes me). The speaker responded that they were from the "non-partisan" CBO. The dissident declared them wrong. When asked who had disputed them, he responded Paul Krugman. 

Literally (and I don't mean Joe Biden "literally", I mean actually literally) the audience broke out in laughter. The speaker responded with a snippy "He's a Nobel prize winner in economics."

At this, in one of the funniest scenes ever (I watched a tape, I haven't been home in 30 years), the audience, almost as one, roared with an especially raucus laughter.

That pretty much ended the evening for the Krumanite. But I thought it informative of the disconnect between major media heroes like Krugman and the average Joe Six Pack. This audience was a working farmer group, not the corporate farmer type. I, who have rarely even been on a farm, am considered a city slicker by this crowd and a bit of a snooty intellectual what with all my college and book larnin' and even book and newsletter writing.

Color me shocked that this particular crowd not only knew who Krugman was but what a clown he truly is. 

So can we conclude that he may have credibility, but with whom? I doubt his BS slinging convinces any of these people to rush into the stock market. Some are substantial commodity traders - I know from personal experience. So on a positive note it is encouraging to see that there really is a disconnect between the elite Wall Street opinion and policy makers and Main Street. 

But will it be enough to save them from the ravages that Wall Street and DC are sending their way?


surf0766's picture

Another communist

SemperFudge's picture

For some reason, I doubt this is going to end well. 

Seize Mars's picture

For whom? That liar scumbag communist? Nah, he'll be just fine.

Every American grandma? Not so much...

RaceToTheBottom's picture

Bastille day.  It is never too late to make things right.

ThirteenthFloor's picture

In Krugman's book of oligarch economics, two wrongs = one right.

Freewheelin Franklin's picture

Does anyone in the financial world actually take this guy seriously? 

Seize Mars's picture

Financial world? Sure, every scumbag on Wall Street trying to buffalo a client.

Economic world? Ha ha ha ha ha!

Nico Bellik's picture

lol - he who can't do works for the NYT

All is chosen's picture

By definition, a guy cannot be a trollop; & trollop is unlikely to win a Noble badge,

but that was BK: Before Krugman

Yancey Ward's picture

John Hussman provided this little nugget this week that really captures the thinking in the present market, and pierces it with nearly flawless logic:

A widespread misunderstanding comes in when people start using the phrase “fair value.” For any given set of expected future cash flows, if you tell me the price, I can tell you the long-term return, period. If you tell me the long-term return, I can tell you the price, period. Nothing changes this. If you want to say that lower interest rates “justify” a low expected return, and therefore justify a higher price, that’s fine. Just understand that the low expected return will still follow that higher price. If you want to say that in a zero interest rate world, stocks should be priced for zero expected returns over the next 8 years, I have no problem with the conclusion that under that assumption, stocks are at “fair value” here. Just understand that under that conception of “fair value” stocks can still be expected to return nothing over the next 8 years. What is emphatically not true, and not mathematically consistent, is to say that low interest rates “justify” a low expected return, and therefore justify a higher price, but then to turn around and say that since stocks are “fairly valued” under that assumption, they can be expected to achieve normal returns in the future. 

Catullus's picture

Who the hell is Paul Krugman?

fukidontknow's picture



Smashed windows and alien invasions bitches!!!

fzrkid's picture

its easy to get people to listen when you tell them what they want to hear

tongue.stan's picture

I heard somewhere that K might have the early stages of dementia. Can anyone confirm this rumor? I don't believe its true because he is as sharp as ever.

tolivian's picture

How do you tell with this guy? He's always seemed demented. How much further along the scale is dementia?

Ghostdog's picture

The beadie-eyed loon is back!


Paul Krugman eats retard sandwiches just like the NSA staffers do.

Who'd a-thunk it?

OCCUPY THE NEW YORK TIMES - OCCUPY EVERYTHING except the cafeteria that the NSA and Krugman eat lunch in.


Yen Cross's picture

    When you get your paycheck from the very source of the corrupt hive/cabal of politicians and banksters that have created this global financial quagmire, it's almost impossible to have an unbiased opinion.

    Krugman knows he's full of shit and will do anything to keep the status quo because there's a graffiti covered overpass on the D.C. beltway with his name on it, when the shitstorm comes.

AmericasCicero's picture

Theres a lot of single down-votes...Krugman, is that you?