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Paul Krugman's Magic Keynesian Mirror Sees Non Exsistant Economic Recovery

Economics / Recession 2008 - 2010 Jun 08, 2010 - 04:11 AM GMT

By: Mike_Shedlock

Economics

Best Financial Markets Analysis ArticlePaul Krugman is quite upset with the deficit hawks at the G-20, so much so that he says Lost Decade, Here We Come


The deficit hawks have taken over the G20.

It’s basically incredible that this is happening with unemployment in the euro area still rising, and only slight labor market progress in the US.

The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.

Utter folly posing as wisdom. Incredible.

G-20 an Amazing Success

In sharp contrast, I called the G-20 an Amazing Success

With all the heated debate and every country doing what they want, inquiring minds just may be asking "How the heck can you call this a success?"

That's a good question so let's highlight the positives.

Defining G-20 Success

  • Merkel and Trichet politely told Geithner to go to hell. Given that Geithner needs to be fired, this is a positive event.
  • Europe is more concerned about sovereign debt issues than stimulating growth. Only fools like Geither and the IMF would argue against that.
  • No one paid any attention to Geithner or the Keynesian clowns at the IMF, most notably, IMF Managing Director Dominique Strauss-Kahn.
  • There was no agreement on a universal bank levy. A universal tax is the wrong approach to risk management and it punishes banks with good lending practices.
  • Geithner made a complete fool out of himself.
  • A dozen cheers for German Chancellor Angela Merkel who said “We can only spend what we receive in income.” Finally someone gets it.

What more could you possibly ask for?

Predictable Reaction

Without mentioning Krugman specifically, I am not surprised by his reaction. Indeed, I predicted it on Saturday in G20 Heated Debates; Europe Politely Tells Geithner Where To Go.

Kiss the Illusion Goodbye

With global stimulus efforts playing second fiddle to default concerns, a double-dip recession is just around the corner. Please see Hungary Tries To Calm Markets; Europe Headed Back in Recession, US Will Not Decouple for further discussion.

The Keynesian clowns will be howling that reduced stimulus killed the recovery. However, the reality is there was no recovery in the first place, only an illusion caused by unsustainable stimulus.

Krugman's Magic Mirror

Clearly one of us is wrong. But whom? Perhaps this image can help.


Throwing money at problems never works in the long run.

Japan tried that and now has debt to GDP of 200%. Because of its aging demographics, Japan is in serious trouble as soon as interest rates rise. Japan will not be able to finance its monstrous debt nor will it be able to grow its way out of the problem. Such is the nature of compound interest and unsustainable levels of debt.

Likewise, the US tried to spend its way out of the 2000-2001 recession.

Greenspan's policies seemed to work, but it was nothing but an illusion. The real economy was taking a nosedive even as financial assets soared. It was a nice party, as all Keynesian parties are, but in the final analysis all Greenspan and Bernanke accomplished was to dig the deepest debt hole mankind has ever seen. The housing and debt implosion of 2007-2008 was the direct result.

Now Paul Krugman thinks it's too early to shut off stimulus.

Hello Paul!

It will always be too early for you. There is no recovery nor will there ever be a recovery until there is genuine demand for goods and services at prices set by the free market not the government.

When the problem is debt, going deeper in debt cannot possibly be the solution.

Yes, Paul, we lost a decade. Yes, Paul, we are going to lose another, not because we failed to follow your recommendations, but precisely because we did!

We had a chance to write off the debt and to let the insolvent banks go under. Instead we wasted over a trillion dollars bailing out banks that still are not lending (and wisely will not lend) because we never purged the debts that needed to be purged nor did we reduce rampant overcapacity.

We could have and should have forced the bondholders of Citigroup and Fannie Mae to take a hit. Instead, taxpayers who cannot possibly afford it, bailed out wealthy bondholders.

In addition, we tried all sorts of Keynesian nonsense like cash-for-clunkers and an$8,000 tax credits for houses. As soon as the tax credit expired housing went in the gutter. It is about to do so for the second time.

Bernanke will not know what hit him even though it is point blank foolish to stimulate housing when there is an ocean of housing oversupply already.

By the way, how many roads can you pave? We paved roads in our area that did not even need to be paved. Now fooking what?

This is exactly the mistake Japan made. Yet you want to repeat it with more absurd makeshift work.

The stimulus money is nearly out and you want more. You will always want more for the simple reason there is no real demand for goods and services, only an illusion of a recovery that comes from passing out "free money".

When you look in a mirror you see the illusion, what you should see is a Keynesian warthog. Substitute the words "Keynesian Economics" for "Real Economy" on that hag, and the picture is perfect.

As Europe found out, the will and the means to pass out "free money" is 100% guaranteed to end before a lasting recovery can take hold.

That dear Paul, whether you like it or not, is the mechanics of peak debt, compound interest, global wage arbitrage, and something you desperately need to learn: Austrian economics.

Recommended Reading List


Paul, you need help. I suggest a few books on my recommended reading list.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2010 Mike Shedlock, All Rights Reserved.


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