"Dear Paul Krugman..."

Authored by Frank Shostak via The Mises Institute,

In his New York Times article of March 27, 2018 — "Immaculate inflation strikes again" — Paul Krugman argues that those economists who are of the opinion that the key factor that causes inflation is increases in money supply are very wrong.

According to Krugman, the key factor that sets in motion inflation is unemployment. While a decline in the unemployment rate is associated with a strengthening in the rate of inflation, an increase in the unemployment rate is associated with a decline in the rate of inflation.

Note that for Krugman inflation is about general increases in the prices of goods and services, which is a flawed definition. To ascertain what inflation is all about we have to establish how this phenomenon emerged. We have to trace it back to its historical origin.

The Essence of Inflation

The subject matter of inflation is "an act of embezzlement." Historically inflation originated when a country’s ruler such as king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process, the king would falsify the content of the gold coins by mixing it with some other metal and return diluted gold coins to the citizens.

On this Rothbard wrote,

More characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks”, but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses.1

On account of the dilution of the gold coins, the ruler could now mint a greater amount of coins and pocket for his own use the extra coins minted. What was now passing as a pure gold coin was in fact a diluted gold coin.

The increase in the number of coins is what inflation is all about. As a result of the increase in the quantity of coins (inflation of coins) that masquerade as pure gold coins, prices in terms of coins now goes up (more coins are being exchanged for a given amount of goods), all other things being equal.

Note that what we have here is an inflation of coins, i.e., an expansion of coins. Because of inflation, the ruler can engage in an exchange of nothing for something (he can engage in an act of diverting resources from citizens to himself). Also, note that the increase in prices in terms of coins is because of the coin inflation.

Under the gold standard, the technique of abusing the medium of the exchange became much more advanced through the issuance of paper money un-backed by gold. Inflation therefore means an increase in the amount of receipts for gold on account of receipts that are not backed by gold, yet masquerade as the true representatives of money proper, gold.

The holder of un-backed receipts can now engage in an exchange of nothing for something. Because of the increase in the amount of receipts (inflation of receipts) we now also have a general increase in prices.

Observe that the increase in prices develops here on account of the increase in paper receipts that are not backed up by gold. Also, what we have is a situation where the issuers of the un-backed paper receipts divert real goods to themselves without making any contribution to the production of goods.

In the modern world, money proper is no longer gold but rather paper money; hence, inflation in this case is an increase in the stock of paper money.

Observe that we do not say as monetarists are saying that the increase in the money supply causes inflation. What we are saying that inflation is the increase in the money supply.

So it seems that our Nobel Laureate, instead of discussing inflation is actually referring to its possible symptoms, which are price increases.

Once the proper definition of inflation is obliterated and inflation is viewed as general increases in prices then all sort of explanations of what causes these increases are possible.

By means of statistical correlation, Krugman asserts that a fall in the unemployment rate is an important driving factor of inflation. Hence, on this logic policy makers must carefully watch the unemployment rate and decide whether it has reached the point where it could trigger an explosion in the rate of inflation.

Why Low Unemployment Is Not the Cause of Inflation

But, using statistical correlations as the basis of a theory means that "anything goes."

For example, let us assume that high correlation has been established between the income of Mr. Jones and the rate of growth in the consumer price index. The higher the rate of increase of Mr. Jones’ income, the higher the rate of increase in the consumer price index. Therefore, we could easily conclude that in order to exercise control over the rate of inflation the central bank must carefully watch and control the rate of increases in Mr. Jones’ income. This example is no more absurd than correlating the unemployment rate with the rate of increases in prices as Krugman does.

Contrary to Krugman, a low unemployment rate does not cause a general rise in the prices of goods and services and an economic overheating labeled as inflation. Regardless of the rate of unemployment, so long as every increase in expenditure is supported by production, no "overheating" can actually occur. The overheating emerges once expenditure rises without being backed up by production, a situation that emerges when the money stock is increasing.

In his article, Krugman argues that the Fed’s inflation target of 2% is too low. According to Krugman, the Fed should aim at a higher inflation target, which amounts to an increase in the monetary pumping. Furthermore, Krugman is of the view that the Fed should not tighten its interest rate stance since this could push the US economy into a liquidity trap.

If Krugman were to define correctly what inflation is all about, he would quickly realize that a tighter stance would be required to eliminate various bubble activities that undermine the process of wealth generation. Contrary to Krugman, a liquidity trap, which is another way of saying that Fed policies cannot generate any longer an illusion that these policies can grow an economy, is the outcome of very loose monetary policy of the US central bank. The loose monetary stance, which weakens the process of wealth generation, results in either stagnant or a shrinking pool of real wealth. Without an expanding pool of real wealth, the illusion that the central bank can grow an economy is shattered.


EmmittFitzhume Pinto Currency Mon, 04/16/2018 - 18:39 Permalink

All these deep state people's mission is the status quo.  Globalism path that was already in motion.  They are desperately trying to keep the status quo.  Smashing all things that go against it.  Shorting stocks, gold and silver real valuations, real housing valuations, real currency valuations.  All these things are to be smashed at all costs. This is how an economy gets destroyed.  Human arrogance and fear.

In reply to by Pinto Currency

SethPoor ???ö? Mon, 04/16/2018 - 18:43 Permalink

A winner of the Nobel Prize in Economics, Paul Krugman wrote in 1998, “The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”

In reply to by ???ö?

FireBrander ???ö? Mon, 04/16/2018 - 18:49 Permalink

The "Smart Adults" argue over the cause/meaning/definition/formula of "inflation" while millions are living out of their cars because the price of stuff has risen beyond what their income can afford.

Let us know when you get it worked out Krugman and friends; we'll be in vans down by the river awaiting your answer.

In reply to by ???ö?

philipat beepbop Mon, 04/16/2018 - 19:56 Permalink

"Inflation is, at all times, a monetary phenomenon". Period.

And beepbop, a/k/a:

beepbop, pier, lloll, bobcatz, loebster, ergatz, armada, Mtnrunnr, Anonymous, luky luke, Cjgipper, winged, moimeme, macki mack, tchubby, sincerely_yours, HillaryOdor, winged, lexxus, kavlar, lhomme, letsit, tazs, techies-r-us, stizazz, lock-stock, beauticelli, Mano-A-Mano, mofio, santafe, Aristotle of Greece, Gargoyle, bleu, oops, lance-a-lot, Loftie, toro, Yippee Kiyay, lonnng, Nekoti, SumTing Wong, King Tut, Adullam, evoila, rp2016, One of these is not like the others.

If your "Biblicism Institute is so compelling in content, why do you need to create falso links to trick people into viewing? Is that the only way you can get people to visit? If so, it doesn't speak highly of either you or your site. Just sayin..

In reply to by beepbop

JuliaS Brazen Heist Mon, 04/16/2018 - 20:32 Permalink

Fed supposedly charges interest for the convenience they offer, renting us their money. At the same time, IRS expects fiat compensation for all transactions that don't even involve dollars, barter included. So, you pay rent, regardless of whether actually rent anything or not.

Is this 21st century US, or 14th century Mongolia?

In reply to by Brazen Heist

small axe Mon, 04/16/2018 - 18:21 Permalink

I feel sorry for Krugman's head, it's way too big for such a mean-spirited and small-thinking man

Paul "the Tool" Krugman should stay well lubricated, his day of reckoning is coming

MoreFreedom Mon, 04/16/2018 - 18:29 Permalink

Krugman is either lucky, or he actually has the smarts to realize socialist politicians are happy to fund economists who say what the politician wants to hear (which is to give their seal of approval to the politicians' economic control desires).  Even if they do so thru a newspaper engaging in liberal propaganda for the benefit of liberal/socialist politicians.  Heck, that's what the owner is doing: promoting socialist politicians' propaganda, so the owner can essentially buy government favors from those politicians that make them richer.  Just like Krugman. 

Whether lucky or smart about what socialist politicians sell, Krugman sells out citizens for his own personal benefit.   I've not read a single one of his articles in years, and I suggest you do the same.  No reason to feed the beasts.

Frilton Miedman Mon, 04/16/2018 - 18:36 Permalink

Since the advent of the CFMA in 1999, this entire debate is stupid when TBTF's control prices of all commodities,metals and foods via undisclosed futures.

Want to collect shorts on a cereal mfg like General mills?...Manipulate wheat futures.

Long utilities, corner NG futures.

Restrict consumer income to induce a market crash in fraudulently rated mortgage derivatives....corner oil prices as in 2008.


If you control price, you control input costs & earnings, you control demand.


In 2008 oil surged to $145 a barrel, yet supply was high, demand was diminished, later revealed by Bernie Sanders that it was the TBTF's that had pressed oil so high.

Imo, currently suppressed commodity/material prices are the TBTF's doing their penance to bolster consumption, until they feel the markets fat enough for their next big short.

VWAndy Mon, 04/16/2018 - 18:47 Permalink

 Is tarring and feathering illegal? We should check out the law books. Just saying it does seem rather fitting. If done in the cold of winter.

Singelguy Mon, 04/16/2018 - 18:59 Permalink

Inflation consists of 2 components. 1. Increase in the money supply beyond the growth of the economy, and 2. The velocity of that increased money supply through the economy. In other words, the Fed could print trillions of dollars but if those dollars never find their way into the mainstream economy, there will be no inflation. 

There is another cause of inflation and that is the level of confidence in the currency. If the government is perceived to be weak, corrupt, or criminal, capital is likey to flow out of that country to a safer country. The outflow of capital means a dumping of that currency which will cause the value of that currency to fall resulting in higher prices for imported goods. 

A situation is possible where all 3 factors are in play. Venezuela is the latest example. It also contradicts Krugman’s thesis. Venezuela has high unemployment but inflation is above 2000%.

Salmo trutta Mon, 04/16/2018 - 19:06 Permalink

Krugman gives economics and economists a bad name.  This is why and how inflation accelerated:

See my June 2017 forecast:
01/1/2017 ,,,,, 0.13 ,,,,, 0.19
02/1/2017 ,,,,, 0.08 ,,,,, 0.16
03/1/2017 ,,,,, 0.06 ,,,,, 0.13
04/1/2017 ,,,,, 0.08 ,,,,, 0.18
05/1/2017 ,,,,, 0.09 ,,,,, 0.23
06/1/2017 ,,,,, 0.07 ,,,,, 0.19
07/1/2017 ,,,,, 0.07 ,,,,, 0.16 commodities & rates bottom
08/1/2017 ,,,,, 0.06 ,,,,, 0.20
09/1/2017 ,,,,, 0.06 ,,,,, 0.21
10/1/2017 ,,,,, 0.01 ,,,,, 0.21
11/1/2017 ,,,,, 0.03 ,,,,, 0.19
12/1/2017 ,,,,, 0.05 ,,,,, 0.11
01/1/2018 ,,,,, 0.01 ,,,,, 0.17
02/1/2018 ,,,,, 0.00 ,,,,, 0.18 (short commodities/buy bonds)
03/1/2018 ,,,,, 0.00 ,,,,, 0.14
04/1/2018 ,,,,, 0.00 ,,,,, 0.11
05/1/2018 ,,,,, 0.00 ,,,,, 0.12
06/1/2018 ,,,,, 0.00 ,,,,, 0.09
07/1/2018 ,,,,, 0.00 ,,,,, 0.09
08/1/2018 ,,,,, 0.00 ,,,,, 0.07
09/1/2018 ,,,,, 0.00 ,,,,, 0.07
10/1/2018 ,,,,, 0.00 ,,,,, 0.06
11/1/2018 ,,,,, 0.00 ,,,,, 0.06
Jun 25, 2017. 02:54 PMLink
This is the most recent trajectory, and it’s one that’s matching:
Money flows, volume X’s velocity, parse dt; R-gdp, inflation
01/1/2018 ,,,,, 0.09 ,,,,, 0.27 peaks
02/1/2018 ,,,,, 0.07 ,,,,, 0.25
03/1/2018 ,,,,, 0.04 ,,,,, 0.21
04/1/2018 ,,,,, 0.02 ,,,,, 0.17 bottom
05/1/2018 ,,,,, 0.03 ,,,,, 0.18
06/1/2018 ,,,,, 0.02 ,,,,, 0.15
07/1/2018 ,,,,, 0.04 ,,,,, 0.15
08/1/2018 ,,,,, 0.01 ,,,,, 0.13
09/1/2018 ,,,,, 0.00 ,,,,, 0.13
10/1/2018 ,,,,, -0.02 ,,,,, 0.12
11/1/2018 ,,,,, -0.01 ,,,,, 0.11
12/1/2018 ,,,,, 0.00 ,,,,, 0.07
The fact is that everyone is late to the game.

So with the 12/14/17 rate hike, the RoC in inflation subsided one month earlier than originally forecast

You see, economics is an exact science.  I am going to change this world.  Just watch me.

--– Michel de Nostradame (the best market seer in all of history)