04.09.2012 0

Krugman’s ‘private’ sector

Paul KrugmanBy Bill Wilson — The week of April 6, the national average of gasoline prices hit $3.94, according to the Energy Information Agency, with prices continuing to rise nationwide.

But economist and New York Times columnist Paul Krugman apparently thinks you’re not paying enough at the pump just yet. Or everywhere else for that matter. Whether energy, food, or consumer goods, he wants more inflation, and is encouraging the Federal Reserve to fire up the printing presses to help stoke the embers of even higher prices.

Why would he want to do that?

Writes Krugman, “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.”

Therefore, he adds, “Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need.”

But, non-financial business debt (corporate and non-corporate), while slightly dropping after the financial crisis, grew steadily in 2011 to $11.63 trillion — for the first time it’s higher than its peak 2008 level of $11.41 trillion, according to data released from the Federal Reserve.

That indicates that any deleveraging in the non-financial private sector has already worked its way through the system, else the total amount of debt owed by private companies would still be decreasing.

So, which “large parts of the private sector” being hurt by debt overhang was Krugman referring to?

Those in the financial business world: the government-sponsored bank cartel. There, debts have dropped from their 2008 peak of $17.12 trillion to $13.58 trillion now — and are still deleveraging. Particularly, the drop has been centered on the real estate sector.  This confirms Krugman’s observation, in part.

But to call it the private sector may be misleading. Yes, these financial institutions are privately-held, but they operate with a government charter to issue currency by extending credit. How? They are able to lend multiples beyond what they ever held in capital, reserves, or deposits.

Yes, the banks profit off this relationship, and private shareholders are compensated. But it is a government-sanctioned cartel nonetheless — and one that is hurting the economy.

As for this cartel’s debt overhang, Krugman’s solution is to continue weakening the dollar through central bank inflation, presumably to increase real estate prices. This in turn, would appreciate values on banks’ asset side the ledger, thus enabling financial institutions to take on more debt because they’d be issuing more debt to borrowers.

On that front, prices are still collapsing. The Case-Shiller home price index hit its lowest low since the recession began of 135.46 in Jan. 2012 from its high of 206.52 in July 2006.

That, despite trillions of dollars the Federal Reserve pumped into the economy by the Federal Reserve, and trillions more of deficit spending by the federal government — all of which the Keynesians had promised would “stimulate” the economy. All told, since the housing bubble popped in Aug. 2007, the Fed has increased its balance sheet by more than $2 trillion.

Certainly, the economy is still paying the price for the housing mess the government helped spawn by keeping interest rates too low for too long, lowering down payments, and weakening lending and underwriting standards through Fannie Mae and Freddie Mac’s affordable housing goals.

And now, Krugman wants you to pay some more, too, through higher prices, to inflate the bad debts of the banks away. It’s a plan that has not worked so far as home values continue to drop.

So, why should it work now? It won’t. The only thing that all this inflation is accomplishing is we’re all paying more — at the pump, the grocery store, and elsewhere.

Krugman’s just singing a slightly a different version of the same tired Keynesian song. Nothing new here.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

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