Mainstream Economists' Monetary Insanity
Paul Krugman's article in the December 15 issue of The New York Times under the title G.O.P. Monetary Madness takes G.O.P. presidential candidate Dr. Ron Paul to task for his 'ideological' stand on money. For excellent reasons, not all of which had to do with fear of a Zimbabwe-style hyperinflation, the Constitution explicitly prohibited manipulation of the dollar such as Bernanke's threefold increase of the monetary base in three years. Krugman ruefully reports that the 'hard money doctrine and the paranoia about inflation" took over the G.O.P. that has, up until now, meekly followed Keynesian precepts about pump priming and turning the stone into bread through pushing interest rates all the way down to zero.
According to Krugman, in spite of the 'false alarm' sounded by the Austrian economists over the debasement of the dollar, inflation is still only 1.5 percent. "Who could have predicted that so much money printing would cause so little inflation?" he asks rethorically. "Well, I could, and I did," he boasts, "because I understand Keynesian economics that Mr. Paul reviles."
In any event, unknown to Krugman, I also predicted the same thing. Unlike Krugman, I did more than simply predicting that inflation was not the danger. I warned that Keynesianism would lead to deflation and depression. Money-printing has become counterproductive. Krugman doesn't understand that it will boomerang. I stated that, unwittingly, Bernanke is the Quartermaster General of the Great Depression II (see: Front-Running the Fed, www.professorfekete.com, February 9, 2010). He doesn't understand the monstrous mistakes prophet Keynes made concerning the role of speculation in the money-creation magic. The fact is that central bank buying makes speculation risk free in the bond market. In comparison, speculative risks in the commodity market appear forbidding. All the speculator has to do in order to reap risk-free profits is to preempt the Fed. He buys the bonds before the Fed has a chance. Then he turns around and dumps them into the lap of the Fed at a profit. The Fed is helpless: it must buy at the higher price. Keynes completely misrepresented the ability of the central bank to stay in charge, given its compulsive drive to suppress interest rates when confronted with a profit-hungry pack of bond speculators.
Friedman's analysis of the Great Depression couldn't be more wrong. In 1933 deflation was brought about not by the gold standard but, au contraire, by abolishing it. Here is what actually happened. Roosevelt had removed the only competition government bonds have, gold. The most conservative investors saw their gold confiscated and, willy-nilly, they were forced into the next most conservative instrument, Treasury bonds. Speculators became emboldened and bid bond prices sky high for risk-free profits. Had gold been still available, bondholders would have severely punished the speculators for their daredevilry. They would have sold the overpriced bond and stayed invested in gold until bond prices came back to earth from outer space. Then they would have bought their bonds back at a profit.
In the absence of gold, speculators made interest rates go into a tailspin. That caused dominoes in the commodity market to fall. Prices collapsed one after another. Pieces on the chessboard started falling as well, symbolizing serial bankruptcies of productive enterprises. Breadwinners of families lost their jobs in droves as money flowed from the commodity market to the bond market in the wake of speculators selling commodities short while buying bonds hand over fist. All the while Keynes was rubbing his hands together behind the scenes exactly like Mephistopheles had in the famous paper money scene of Göthe's Faust (Part Two).
The same thing is happening all over again. When a central bank increases the monetary base three-fold in three years, this is a clear invitation for bond speculators to move in and make a killing. But what the central bank utterly fails to understand is that, contrary to its hopes, new money is not going to the commodity market. Speculative risks there are far too great. Instead, new money is going to the bond market where the fun is. Bond speculation is risk-free. Speculators know on which side the bread is buttered. Krugman doesn't.
Dr. Paul is the conscience not just of the G.O.P., but of the entire nation. Through inflation or through deflation, the mad orgy of money creation that makes mockery of the Constitution will finish the Keynesian agenda of ruining the nation and the world economy.
Krugman's joy over the supposed defeat of Austrian economics is premature. Bernanke's Fed in blissful ignorance is still putting money in the hands of speculators, which they use to place bets on the further fall of interest rates and commodity prices. The day of reckoning comes when falling interest rates destroy capital and, together with it, destroy budding job opportunities. The lethargy of businessmen will continue. They will not start hiring as long as the interest-rate structure is in falling mode.
Welcome to the world of Keynes-inspired Great Depression.
Posted by Glen2Gs on 12/23/11 09:50 PM
Would Someone... ANYONE give Krugman a subscription to John Williams Shadow Stats
Click to view link
Using the the pre-1980 official methodology for computing the CPI-U inflation is running around 11%
Posted by Mountainview on 12/22/11 12:32 PM
Interest and inflation will remain low, as long as the big receivers of abundant liquidity (China and OPEC) still accept Dollars as mean of payment. Keynesian economics applied to one single closed economy is simply a wrong approach. Q1 ,2 have created inflation, not in the US but in China, where the Central Bank exchanges $ cash received by exporters immediately in Yuan.
The game seems to arrange the Chinese as long as they can go shopping with this cash capital assets in Africa, Europe, America and Australia. How long?
Posted by Dilence Sogwood on 12/22/11 11:19 AM
Oh, and to counter Krugman's notion of benign monetary inflation: @1.5% your wealth (if held in $) is cut in half in 27 years. That's pretty rough considering peak human productivity is achieved between the ages of 30 and 55, itself a short span.
Posted by Dilence Sogwood on 12/22/11 11:14 AM
You skipped the part about the BOE's inflationary policies of the 20s resulting in the flight of gold to the USA, which set off the whole chain of events, starting with American counter inflation to assist the BOE.
If not for those pesky arbitrage traders, maybe they could have pulled off the ruse.
And we wonder why Angela and the popular press hate the CDS market...
Reply from The Daily Bell
Thanks. Think we've mentioned it before ... Always good to mention it again!
Posted by josejoe on 12/22/11 10:51 AM
if you don't believe in inflation, i have to believe you haven't advanced past your 5th birthday!! or ever looked back!!!!
Posted by rainmaker9 on 12/22/11 12:27 AM
Whats the question, will we have deflation or inflation? We will have both, and lots of both. What we do not need to survive will deflate. What we need to survive will inflate. We might have more of one before the other or versa visa, but we will have both.
Posted by mcfrandy on 12/22/11 12:00 AM
The Keynesian economists nowadays aren't "insane" or "ignorant." They're court intellectuals, to use Murray Rothbard's term. You get grants, you get promoted in the government-accredited universities, by being apologists for the throne (in this case so-called central banking, the system of theft and oppression which dominates world politics).
And, if you're talented enough at communicating with non-economists, you may even get a Nobel Prize in Economics (conveniently awarded by the central bank in Sweden) and a column in The New York Times, a leading beneficiary of the CIA's Operation Mockingbird. (That's why the Times hums along as usual, though it loses a fortune every year. What other businesses besides secretly subsidized media and un-secretly government-accredited universities have that privilege?)
Posted by onebornfree on 12/21/11 08:24 PM
""Anyone who believes in deflation will believe anything - including Elliot Wave analysis." ~ Porter Stansberry "
The point in the linked article was that while both are possible future scenarios,[ there are others out there too], neither inflation or deflation can be reliably predicted, nor can either inflation or deflation be relied on to occur within our own lifetimes, nor can either be entirely ruled out to _not_ occur in our lifetimes. That's just not the way the world works :-)
"Wave riders are constantly moving the goal posts in an attempt to make everything fit their "waves". "
So true! [but don't expect them to stop anytime soon.]
"Prechter has been wrong way more than right."
Although I have not researched that assertion, it makes sense to me that that is probably true. More than likely, Mark Hulbert's Financial Digest: Click to view link , has the long term lowdown on Mr Prechter's claimed predictive powers. Regards, onebornfree
Posted by Bosco Hurn on 12/21/11 06:36 PM
"Anyone who believes in deflation will believe anything - including Elliot Wave analysis." ~ Porter Stansberry
Wave riders are constantly moving the goal posts in an attempt to make everything fit their "waves".
Prechter has been wrong way more than right.
Posted by onebornfree on 12/21/11 05:03 PM
Although I personally lean somewhat towards a deflation, see:" Elliot Wave and Kondratieff Wave Theories and The Great, Ongoing Inflation/Deflation Debate"
:Click to view link
I would still be the first to admit that I could be completely wrong on this - it has happened before :-)
The unvarnished truth is that no one can reliably, consistently predict future economic events, not Dr Fekete, not me, not the reader, not a central banker, an economist , a tea leaf reader or everyone's favorite Aunty Maude.
A deflation might be right around the corner, or inflation, or even something entirely unexpected by most here including myself [e.g. a "real" economic recovery] .
As always, the economic future remains largely shrouded in a thick mist that no one can penetrate with any consistency. Regards, onebornfree.
Posted by chad2 on 12/21/11 04:59 PM
If everything man does ultimately fails, what we need is a system that allows failure. But what do we do when that system fails? I know! We can evolve to not fail! I mean when we were monkey's we just became humans, right, isn't that what the intellectuals say? Which political party will speed up our evolution? Maybe that's who we need to vote for! haha!! Maddness, it's all maddness! Read The Bible already!
Posted by Bosco Hurn on 12/21/11 04:45 PM
When anyone tells me there's no (or little) inflation I have to wonder what planet they are from. I have seen so many incredible price increases on all kinds of items over just past year -- not to mention the past 10 or 20 -- that they are enough to make me feel old.
Posted by Optout on 12/21/11 04:20 PM
Dr Feteke, after reading this I feel that it is part 1 of a 2 part series or maybe I am clueless about the workings of interest rates and monetary expansion by the Fed. On the one hand I think you are saying we will continue to see interest rates near zero, no new capital investments (no new jobs), and commodity prices in general trailing down. Which I assume means gold and silver also. But sitting here in the midwest I see my grocery bill higher than last year, my gas for transportation higher than last year and all around my dollar buying less than before. If thats not monetary inflation what is monetary inflation?
How long can the Fed keep interest rates artificially low?
Are you referring to the banks as speculaters?
Who exactly is financing government debt with bond purchases? Sure there are speculaters buying but they are only there for a short time.
This looks like a game of hot potato to me, only in this case it's the last one holding a dollar that's the loser.
On the other hand with your reference to the depression of 1929 it looks like we have to wade through this (and learn how to play the bond market) for a while and then buy commodities when everyone else wants out and the dollar will still be around because the Fed came to their senses.
Posted by Anthony Migchels on 12/21/11 04:07 PM
Basically I agree there is a strong deflation in most sectors of the economy. Because lending is tight, which basically is the usual scenario. The banks are busted and therefore not lending.
The FED bailouts are sitting in their bank accounts as 'capital', shoring up their busted balances. Doing nothing in the economy.
But some of this money is coming into the primary sector. High commodity prices. Speculation. Goldman Sachs and the hedgefunds.
And this is driving up prices further in the production line.
Especially food prices are biting budgets.
So it's more a stagflation.
Purely by the FED's making. Had it doled out the cash to consumers, they'd been paying off a few trillion in house hold debt. Or at least replace it with interest free credit.
That really would have relieved the situation.
And I'm fully aware that also would be a brute's approach, but it just shows how insanely criminal this whole QE business really is.
Posted by tawny on 12/21/11 04:06 PM
But eventually all that funny money is going to get into circulation and will create Weimar Republic-level inflation - right?
The guys who got most of the money are sitting on it as per the plan - right?
Please correct me if I am wrong, which could be... but some day, sooner or later, those FRNs will get into circulation and cause a rise in prices, seems to me. In fact already inflation rates are considerably above 1.5%.
Frankly I find it a 'stretch' to believe that Bernanke (or Keynes) are/were 'mistaken' - the road to our enslavement is being paved with 'Whoops! Golly what a blunder! Well, slap my wrist! Stupid silly me!' (lawmakers, Presidents, Bernanks & Co., etc. etc.)
Cloward-Piven Strategy is being employed, pretty obviously.
Posted by kenn on 12/21/11 02:14 PM
Have to wait for the boil to pop. Somethings gonna happen for sure.
chad2 is correct when he states the 'dough' isn't getting to the people, but at present DC and company are taking up the buying slack.
Because of different times, people and circumstances depressions/recessions will differ. The problems today are insolvency unlike the liquidity problems in Depression 1929. They didn't price gold correctly and the Brits wanted their pound at prewar levels.
Today, its just a bunch of crooks that has managed to get control. Just because they're doing things doesn't mean they know what they're doing.
It's gonna crash,,, just how is anyone's guess...
Posted by chad2 on 12/21/11 01:40 PM
Interesting article, perhaps too smart for me. What I found refreshing was the realization that we are headed to deflation/depression. Many on this site and all the gold bugs don't realize this! I would sum it up much more simply: The average Joe ain't getting the doe that is printed. Nor does he have a job. And he has no more debt pushing power. Given that consumption is most of the economy and people have no doe, it must deflate and depress. Add geopolitical issue atop of that you have a global crisis that puts an enourmous smile on the face of the elite in the entire world as they will use this to own us. Be prepared for the Great Deception!