Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Two Questions for Krugman

Economics / Economic Theory Sep 05, 2014 - 06:12 PM GMT

By: Brady_Willett


Paul Krugman is at it again. That is, Mr. Krugman continues to myopically attack anyone who has warned that money printing could lead to 'inflation'.

" I have written many many times, this inflation paranoia has proved remarkably resilient, enduring despite five-plus years of utter empirical failure." Three Roads to Hard Money

Before going further, this idea that an 'inflation paranoia' has been running wild for 5-years is partly being imagined by Mr. Krugman. To be sure, along with the 'money printing causes inflation' theme, those railing against the reckless actions from the Fed since 2008 have also argued that the Fed is punishing savers, the Fed is promoting dangerous asset bubbles, the Fed is monetizing U.S. debt, QE does not create jobs, and the Fed could, longer term, endanger USD hegemony. As efforts to 'normalize monetary policy' in the U.S. have yet to really begin, the verdict is out on whether the Fed's ongoing schemes will prove a longer-term positive.

But rather than objectively analyze the precarious state of U.S. monetary policy, Mr. Krugman continues to pat himself on the back and attack the 'inflation' theme:

"Think about CNBC economics (aka Santellinomics, aka the finance macro canon). This stuff, with its prediction of soaring inflation and interest rates, has been utterly wrong for more than five years. Yet it remains very popular among wealthy investors." Sept 2

"Inflation hawks rarely lay out any specific model of how inflation is supposed to take off in a depressed economy; nor do they talk about testable implications of their view, or for that matter offer any explanation of why they've been so wrong for so long...Inflation hawks know what they want, and don't feel any need to explain clearly why or how they might be wrong." Aug 25

"The real story here is the remarkable resilience of inflation panic: people who worry about inflation never seem daunted in the least by the repeated failure of their predictions. It's an interesting question why." Aug 21

Suffice to say, while Mr. Krugman is absolutely correct that the traditional inflation statistics have failed to suggest monetary wrongdoing by the Fed, at this point who really cares? Think about it: leading into each of the last two asset meltdowns (and recessions), the Fed's favorite inflation indicator, the PCE price index, didn't foretell of impending doom, and the widely followed Consumer Price Index hasn't clocked a 4% handle on an annualized basis in more than 20-years. Thus, if the inflation statistics were never worthy of serious attention during the last two booms and busts (the latter of which was the most devastating since the Great Depression) why, Mr. Krugman, are they worth looking at today?

Which brings us to the point: Krugman' fixates on 'inflation' because it is an easily winnable battle (i.e. Paul Ryan has indeed been wrong about 'inflation'), but he downplays or fails to mention many of the other objections that have be laid against the Fed over the last 5+ years. For example, when Krugman, on September 1, compared the recent performance of the U.S. stock market to that of Italy and Germany to explain why austerity has failed, what he didn't do is explain that stock market booms are not always a positive development. Put another way, while contrarians fret that the $2.4 trillion average increase in household assets over the last 6-quarters is cause for serious alarm, Krugman and others cut from the same Keynesian' cloth pretend to be blissfully unaware of any brewing asset bubble (apparently, since Krugman is unaware of monetary limitations, he doesn't dare delve in the art of speculating about asset price limitations).

The problem with only focusing on the positives of rising asset prices is that negatives can and do arrive quickly and without much warning. For example, during the last economic boom it took 26-quarters for $32 trillion to be added to household assets, but only 6-quarters for more than 40% (or $13.3 trillion) of these paper gains to disappear. Should a similar trend be replicated going forward, can the Fed (unlikely to have reversed measures used to save the day yesterday) really be expected to save the day again?

Households and Nonprofit Organizations (source: FED)
Boom Period Increase in Assets (B$) Total Quarters Av. Per Quarter (B$)
3Q90 - 1Q00 26,859 40 671
4Q01 - 3Q07 32,363 26 1,245
1Q09 - 1Q14 25,865 20 1,293
* Estimated pace of quarterly asset creation since QE3 = $2.4 trillion (2Q14 estimated)

Which leads us to two very basic questions for someone like Krugman:

1) Is the current pace of asset inflation in the U.S. sustainable?

2) Is it possible for monetary policy to be effectively calibrated so that today's historic asset boom returns to a more sustainable pace without igniting any major bust?

If so compelled, Krugman would likely answer the first question by pointing at low interest rates (i.e. low interest rates mean equities are great, low interest rates mean there is no bond bubble, no threat of inflation, inflation doesn't exist, and anyone who doesn't see these facts is crazy). In other words, Krugman would avoid directly answering what is essentially a yes or no question because to contend that the pace of asset inflation has limitations would be to suggest the Fed has limitations.

As for question number 2, given the Fed's deplorable/non-existent record of recognizing asset bubbles (much less doing anything to curtail them), the very idea of magical monetary policies engineering a soft asset price landing is absurd.

In summary, whether or not the traditional inflation statistics rise or fall going forward, the current pace of asset price appreciation in the U.S. is entirely unsustainable, and this boom will, in time, lead to a devastating bust. Suddenly, the open letter to the Fed back in late 2010 - the letter that Krugman habitually attacks - is threatening to become a prophetic warning of tomorrow's monetary quandary:

We "worry that another round of asset purchases...will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy." Open Letter to Ben Bernanke

By Brady Willett was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules