Paul vs Paul: Round 2

Submitted by Azizonomics

Paul vs Paul: Round 2

Bloomberg viewers estimate that Ron Paul was the winner of the clash of the Pauls. But that is very much beside the point. This wasn’t really a debate. Other than the fascinating moment where Krugman denied defending the economic policies of Diocletian, very little new was said, and the two combatants mainly talked past each other.

The real debate happened early last decade.

To wit:

Readers are free to make up their own minds who won that one.

And so, round two. Krugman wants more inflation; Paul is scared of the prospect. From Paul’s FT editorial yesterday:

Control of the world’s economy has been placed in the hands of a banking cartel, which holds great danger for all of us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency crisis involving the world’s reserve currency would be an unprecedented catastrophe. No amount of monetary expansion can solve our current financial problems, but it can make those problems much worse.

Or, as Professor Krugman sees it:

Would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.

How so? For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recover.

Ron Paul believes that inflationary interventions into the dollar economy will have unpredictable and dangerous ramifications. Paul Krugman believes that a little more inflation (although he forgets that by the old measure of CPI inflation is already running at 9%, far higher than his supposed target) will spur economic activity and decrease residual debt overhang. Krugman seems to give no credence to the prospect of inflation spiralling out of hand, or of such policies triggering other deleterious side-effects, like a currency crisis.

The prospect of a currency crisis is a topic I have covered in depth lately: as more Eurasian nations ditch the dollar as reserve currency, more dollars (there are $5 trillion floating around Asia, in comparison to a domestic monetary base of just $1.8 trillion — the dollar is an absurdly internationalised currency) will be making their way back into the domestic American economy, and that this may have a steep inflationary impact. Additionally, many of the deflationary pressures that existed in 2008 or 2009 (e.g. shadow bank deleveraging) aren’t there anymore.

I don’t really know how much of this is to do with the Fed’s inflationary policies, and how much is to do with the United States’ role as global hegemon coming to an end. I tend to think that the dollar hegemony has always been backed by American military force, and with the American military overstretched and its funding increasingly debt-fuelled, the dollar’s role is naturally threatened. If America can’t play the global policeman for global trade, why would the dollar be the currency on global trade?

However it must be noted that America’s creditors do believe that their assets are threatened by the Fed’s inflationism.

As the Telegraph noted last year:

There has been a hostile reaction by China, Brazil and Germany, among others, to the Federal Reserve’s decision to resume quantitative easing.

Or as a Xinhua editorial put it:

China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.

Probably, the egg of American imperial decline came before the chicken of the recent inflationism, but that inflationism certainly has the capacity to worsen the problems rather than lessen them. After all, if America’s consumption-based economy is dependent on China’s continued exportation, and Krugman is advocating slamming creditors (i.e. China) by inflating away their debt-denominated financial assets, then surely Krugman’s suggestions imperil the already-fragile trans-Pacific consumer-producer relationship?

And this is a crucial matter — there is nothing, I think, more crucial than the free availability of goods and resources through the trade infrastructure, which is something that Krugman’s policies seem to endanger.

As commenter Thomas P. Seager noted yesterday:

[The situation today] is directly analogous to the first Oil Shock in 1973. In the decades prior, the US had been a major oil producer. However, efficiency gains and discoveries overseas resulting in an incrementally increasing dependence of foreign petroleum. Price signals failed to materialize that would caution policy makers and industrialists of the risks.

Then, the disruption of oil supplies from the Middle East caused tremendous economic dislocations.

Manufacturing is undergoing the same process. The supply chain disruption from the Japanese earthquake and Tsunami was merely a warning shot. Imagine if S Korean manufacturing were taken off-line for any length of time (a plausible scenario). The disruption to US industry would be catastrophic.

In the name of increased efficiency, we have introduced brittleness.

Time will tell which Paul is right. But I know where I stand.

Comments

[no cnbc cretin]

Both these guys are fools!

[OrestesPenthilu...]

The "progressives" love Krugman.  They post his shit on Facebook all the time.

[stopthejunk1]

Economic policy should never encourage spending.  It should always encourage saving. 

Of course, the corporations would hate this, because we would only buy what we need and can afford.  Which means their sales would go way, way down.  If the government stopped price-fixing interest rates and you could get 10% on your checking account, would you really rush out and buy yet another plasma TV?  Or would you save your money?

Among the "policies" that should be enacted to encourage saving and investment instead of spending are: full-reserve banking; currency-backed money; the elimination of debt-as-money; and a near-prohibition on government debt.  Government should ONLY spend what it collects in taxes.  Additionally, all taxation should be on consumption, not on saving or investment -- i.e., enact the revenue-neutral (yes, we really buy THAT MUCH SHIT) FairTax, repeal the 16th amendment.

This (with the exception of the consumption tax) is actually how the U.S. started out, and it's how we got our original prosperity -- i.e., saving and hard work.  The bankers have been robbing us blind for over 100 years.  Inflation increases wealth disparity by redistributing wealth to those who create money -- i.e., those who already have it -- and chipping away at the real value of money held by working people, who only have wages and savings, and almost no "income."  People that think 2% inflation "doesn't matter" either can't do math, or.... actually, they just can't do math.  There isn't any other possibility.

[UTICA CLUB XX PURE]

I hate you etc.

[El Yunque]

Two things here: Number one, there really isn't an economic system on the planet that fully or even partially implement what PK has to say about it, thus his imput is exactly that, input with very little impact. Number two, as long as RP is a one man island in a democratic republic, he, as an island, will never have any kind of impact as a president of the United States unless at least three to four hundred folks in the nations capital fully embrace the man's mobius strip of political left-right circular reasoning, by being so far right it meets his left and continues back into the right, never arriving at a fully functional politically digestable leader.

The curent clusterfuck of austerity economics, disaster economics or whatever you want to call this mess serves one purpose well: To enrich a smaller and smaller circle of insiders that have unbreakable links to giant and central banks. This of course bodes well for the gold bugs, as any fool can see, but ultimately it fucks them too. Those same insiders will continue to drive PM prices where ever they wish them to be. It's a bankers cartel world, and the rest of us are just along for the ride.

Be that as it may, as long as retail banking is comingled with investment banking, RP wishing to rid the world of the Fed leaves at least 29,000 institutions that took TARP bailout funds and reads as a who's who of who is blowing whom. I ask myself all the time how fucking well this would be looking right now with 29,000 banks operating with full independance from one another, and perhaps the giant clusterfuck that comes when they fuck themselves and all the rest of us by being generators of wealth, while also being a place to park it and let it disappear.

Either the banking cartel is just too fucking greedy, or they are dumb as shit, but more likely both, but as long as there no longer exists a firewall between retail and investment banking, anyone that aint part of the circle, will never have any better odds of making a living in the investment business as an individual tha a pair of dice will allow.

Thus it cracks me up to see how pissed off people get over PK when the real dumbshits are the same ones that think PK is an idiot; he either is or he aint but he damn sure ain't what's driving this train wreck, period.

The folks running this show don't post or read ZH because they don't need to. Why bother when the ZH nihilists predict the end of fiat while the high end pass it around like ass-wipe.

You may hate wealth redistribution, but when the circle is smaller and you're not a player, I guarantee you this: You'll be the guy holding $2k gold when one of those high end fuckers pulls the plug on the wash tub and you have to sell it to them for a quarter of what you bought it for. For fiat, because that's what they trade in.

We ain't aint pegging the price of gold to a currency, right? Maybe not so right.

As long as the current bankers run all of this shit, PK and RP are nothing more than shiny objects and a complete waste of discussion time.

It's time to take a side. I know where the fuck I stand, I'm a cash only guy these days, and I don't buy anything I don't absolutely have to have. And if I do buy, I buy it used.

I'm through playing the cash and conservative game; I've tracked it for forty years pretty closely, and all I can say is that it has basically broken everyone I know.

And the Fed had little to do with it; the guys that want to kill it did.

Imagine all those banks out there doing whatever the fuck they want and imagine how it would all look right now without the Fed.

And I used to be a member of the one percentile: suffice it to say, with friends like that, in that sector, I would rather live in the fucking bario.