05.31.2009 0

Krugman’s Folly

  • On: 06/01/2009 12:02:52
  • In: Economy
  • By Robert Romano

    Writing for the New York Times—“The Big Inflation Scare”—op-ed columnist Paul Krugman states that “when it comes to inflation, the only thing we have to fear is inflation fear itself.” His claim, highly controversial—and dubious—comes in the face of America’s largest in world history budget ($3.6 trillion), deficit ($1.8 trillion), debt (nearly $11.4 trillion) and monetary expansion (the Fed’s balance sheet expanding from $800 billion to over $2 trillion since September).

    It also comes as an ever-growing number of lawmakers, 179 and counting, on Capitol Hill are supporting a truly revolutionary bill (H.R. 1207), calling for an outright audit of the Federal Reserve Board of Governors and regional bank operations. As ALG News has previously reported, more than $2 trillion of loans remain unaccounted for and federal law bars the Government Accounting Office from auditing most of the Fed’s operations: transactions with foreign central banks and the IMF, discount window operations, reserves of member banks, securities credit, interest on deposits, open market operations, Open Market Committee operations, and all of the meetings of the Board of Governors and any of the Reserve’s committees.

    Ironically, the current financial crisis was in large part precipitated through monetary expansion by the Fed in the first place. At the very least, it led to asset inflation in the housing market. This expansion was accommodated by easy money and loose credit policies. Through generally lower than inflation interest rates money flowed into the financial system on a gargantuan scale. In short, the spigots were on.

    Excess houses were built throughout the country with this money. Schools and university systems increased payroll and expanded pensions. Consumer credit, student loans, and mortgages were given out at very low rates. State and local government experienced fiat revenue booms. And markets experienced a giant bubble, first in the 1990’s (popping at the end of the decade) and again in the 2000’s (popping in 2007), and then once again in 2008 with the commodities bubble (remember $1000 for an ounce of gold and $150 for a barrel oil?), which popped the same year—right before the markets crashed.

    All with easy money. Boom, bust, boom, bust, boom, bust.

    Now, economists like Paul Krugman are telling the American people a that in order to cope with the current crisis, the money must continue to flow into this broken system. Much like a wheel that must continue to turn—even when rolling in the wrong direction. A nation is told it has no choice but to follow the same course that landed them into their current predicament. And to be sure, Krugman has been an ardent supporter of fiscal and monetary “stimulus,” his chief criticism being that efforts have not gone far enough. In addition, he wants the banking system nationalized to better “manage” the markets.

    Considering the cycle, following the bust period, there will be another boom period. Stocks will rise in value, other assets will increase in value, and revenues may even once again recover to the state, local, and federal governments.

    But that, of course, will take time—the only commodity Barack Obama and his advisors don’t seem to be willing to spend willy-nilly. And so, the American economy is saddled with their massive, deficit-spending, borrowing, and debt monetization “rescue” efforts. Not to treat the causes of the plague, but its symptoms. By inflating. By dropping money from helicopters.

    Krugman—a Nobel Prize-winning economist—implies that the historical inflationary cycle will not necessarily continue because “these are not ordinary times.” So, don’t believe your lying eyes. Don’t peer behind the curtain. This time, inflationary fiscal and monetary policies will not result in inflation at all, says Krugman.

    Towards the bottom of his piece, in passing, he writes that “we have a long-run budget problem…” He makes no connection at all between debt expansion and inflation.

    “It’s important to realize,” he remarkably writes, “that there’s no hint of inflationary pressures in the economy right now.” Oil is already pushing $70 a barrel again. Gold is nearing $1000 an ounce again. And gasoline prices have already surged from $1.90 a gallon to $2.50. But no, (repeat after Krugman), “inflation isn’t a real risk.”

    And investors are scared witless over the prospects of a U.S. debt downgrade. Writes Michael Pento, “If the reasoning behind S&P’s decision to call into question Britain’s ability to repay debt is due to their budget deficit being 175 billion pounds ($273 billion), or 12.4% of gross domestic product for this year alone, then America’s budget deficit ($1.84 trillion and approaching 12% of GDP) should yield the same result. Investors agreed with that reasoning and sent the yield on the 10 year not soaring to 3.45% as of Friday’s trading session, up almost 100 bps [basis points] from the Fed’s March 18th announcement to purchase $300 billion in treasuries in order to keep rates low.”

    The foundation for the boom is already here. Although this boom will not be prosperous; instead, it will result in catastrophe. The inflation is already taking root.

    Krugman apparently believes that this coming particular boom period will be controlled not through inflation at all, but… well, he doesn’t say what. “[M]odern examples [of such inflation] are lacking,” he writes, casting his usual blind eye to history. He even ignores—or forgets—the historical deprecation of the dollar since the Fed’s inception—where it has shrank astronomically. InflationData.com puts it all together: “By looking at the change in the Consumer Price Index we can see that what cost an average of 9.9 cents in 1913 would cost us about $1.82 in 2003 and $2.02 in 2007.”

    So, the facts, contrary to the Krugman fiction—speak for themselves. 2000 percent inflation. 96 percent depreciation. All since the Fed’s creation.

    Some are beginning to see the Creature from Jekyll Island’s true nature. In a recent letter to his colleagues encouraging them to co-sponsor H.R. 1207, Congressman Alan Grayson (D-FL) writes that “An audit of the Federal Reserve may not be sufficient to control this sprawling system or bring it back into balance, but it is a start. The public has a right to know to whom the U.S. government is lending trillions of dollars. Dancing around this issue with technocratic terms like ‘increasing liquidity’ and ‘private financial intermediation’ is preventing a full and long overdue public debate on the role of the Federal Reserve and the influence of private banking interests in the governing of our economy.”

    Krugman is in the clouds. While Rome burns, he is fiddling about for “modern examples” of inflation, hoping against hope (and history) that the Obama Administration’s critics are wrong. With not the foresight to lead and prepare for a predictable catastrophe, he urges Leader Obama “not to let himself be bullied” by “fear-mongering” economists and pundits.

    In the meantime, as the nation’s representatives come to a new-found, heightened awareness of the public treasury being emptied out the back door, and as the American people prepare for the coming “recovery” built on a yet more depreciation and devaluation of the dollar and their purchasing power and the exorbitant expansion of taxpayer debt, now is the time to see the forest for the trees.

    The thing to fear is inflation, itself. And when the “recovery” begins, even Paul Krugman may have to acknowledge the error of his ways—and the wisdom of the Bard’s age-old admonition: “The past is prologue.”

    Robert Romano is the Senior Editor of ALG News Bureau.

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