Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Nightmare Macro Economics, Keynesian and New Keynesian Variety

Economics / Economic Theory Feb 14, 2010 - 02:30 PM GMT

By: Michael_S_Rozeff

Economics

Best Financial Markets Analysis ArticlePaul Krugman is such an economist. Austrian economist Bill Anderson's highly recommended blog, Krugman-in- Wonderland, deconstructs Mr. Krugman on a daily basis. There is a lot there that needs to be deconstructed.


Everywhere we turn in academia and in the world's governing institutions, we find more Krugmans, more of these smart but ignorant nightmare economists. They uniformly fail to recognize vital insights of Austrian economics. One of these is that government fiscal and monetary policies do not produce uniform price inflation of all goods and assets. The government is capable of causing prices to rise drastically in real estate even as the prices of bread and labor remain relatively tame.

Olivier Blanchard, an MIT professor who is on leave and the chief economist at the IMF, has impeccable and outstanding credentials. This did not prevent him on February of 2007 from writing

"Riskless rates are low around the world, and this is what lies behind most of the increase in asset and housing prices. For the most part, what we see around the world are not speculative bubbles, but increases in fundamental values, driven by lower interest rates.

Prof. Blanchard could not see that credit, debt, and real estate prices were all rising much more than were incomes. He was unable, because of his training, to look for, see, and focus on non-uniform price rises even when they were evident. That is because macroeconomists usually think of THE price level in their models, and they live in and believe in their models to the exclusion of important economic phenomena like real estate price bubbles that are passing under their very noses.

Because he believed that asset prices would remain high, that programs like Social Security and Medicare would be there for retirees, and that pension plans would not be imperiled, Prof. Blanchard wrote

"The large majority of Americans appear to have enough to finance their retirement.

For good measure, his flawed models led him to reason that

"The US budget deficit will be reduced.

And he thought any adjustments would be smooth:

"Poor countries lending gigantic sums to large countries; the United States on a spending spree. Can we make sense of it all? Will it come to a crashing end? These are the questions taken up by Brender and Pisani. Their answers: Yes, there is some logic behind the apparent madness. And, no, with a bit of luck, things will work themselves out smoothly. I agree with both answers."

If macroeconomists lacked influence, they would not be a nightmare. The problem is that they have enormous influence on the size and shape of governments worldwide. The governing systems are infused with their thought.

The Krugmans and the Blanchards do not abandon their flawed methods and models when confronted with economic actualities. They revise them. They repackage them. The same old nightmare macroeconomics survives despite its failings by reworking the old stories. High IQs are put to work in writing new variations on old themes. The unfit survive by weaving new stories that satisfy the demands of those in power.

Blanchard and his co-authors have a brand new paper "Rethinking Macroeconomic Policy", only there is very little rethinking that is going on.

Blanchard et al absolve macroeconomics of any blame for the worldwide economic problems of the past several years, while simultaneously attempting to provide wiggle room for (mostly) intensifying the macroeconomic policies of old:

"The crisis was not triggered primarily by macroeconomic policy. But it has exposed flaws in the precrisis policy framework, forced policymakers to explore new policies during the crisis, and forces us to think about the architecture of postcrisis macroeconomic policy."

It's quite a feat to deny and ignore the fact that mistaken macroeconomic fiscal and monetary policies created real estate prices that were wildly out of line with real income growth, and in the very next breath to mention flaws in something called the "policy framework" that now require "us" (the macroeconomists) to rethink (and make a more than comfortable living by being paid for rethinking) macroeconomic policy.

What sort of rethinking do Blanchard et al suggest? Certainly not the U.S. constitutional course of coining Money (specie), of ending emission of bills of credit, of ending U.S. support of Federal Reserve notes, and of other such steps to disestablish the Federal Reserve system. Instead, they propose more and higher inflation!

"Should policymakers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range?"

Inflation of what? In what prices? New Keynesians conceive of only a single price level. To them, constant inflation never has ill effects. According to Blanchard et al,

"...the intellectual support for inflation targeting [is] provided by the New Keynesian model. In the benchmark version of that model, constant inflation is indeed the optimal policy, delivering a zero output gap (defined as the distance from the level of output that would prevail in the absence of nominal rigidities), which turns out to be the best possible outcome for activity given the imperfections present in the economy."

By contrast, Austrian economics recognizes that inflation is never economically neutral. It always distorts the structure of production, which invariably leads to recessions and worse. Even Blanchard et al pay an oblique degree of lip service to this insight:

"What is clear, however, is that the behavior of inflation is much more complex than is assumed in our simple models and that we understand the relationship between activity and inflation quite poorly, especially at low rates of inflation."

This is not at all a concession to the Austrian insight, however, which goes unmentioned, unrecognized, and unreferenced by Blanchard et al. This is a mea culpa that is designed to open the way to new wine in the old bottles.

Stubbornly refusing to acknowledge a real estate bubble even after it has crashed and continues to crash, they unbelievably tell us of the price distortions that arise from inflation:

"the empirical evidence is, however, that their effects on output are difficult to discern, so long as inflation remains in the single digits..."

Refusing to acknowledge the fact that the Greenspan FED encouraged the housing bubble and failed in its duties to regulate risk-taking among the banks it regulates, Blanchard et al favor centralization of bank regulatory powers at the central bank:

"Central banks are an obvious candidate as macroprudential regulators. They are ideally positioned to monitor macroeconomic developments, and in several countries they already regulate the banks."

Of course, in the U.S. it is already unconstitutional for the FED, to the extent that it is a private entity, even to possess government-sanctioned powers to control and regulate member banks. This kind of cartelization under government aegis went out with the National Industrial Recovery Act, or should have.

Blanchard et al are intent on bringing about the full employment of central bankers, for their next recommendation is to expand the range of central bank lending:

"The crisis has forced central banks to extend the scope and scale of their traditional role as lenders of last resort. They extended their liquidity support to non-deposit-taking institutions and intervened directly (with purchases) or indirectly (through acceptance of the assets as collateral) in a broad range of asset markets. The question is whether these policies should be kept in tranquil times...The argument for extending liquidity provision, even in normal times, seems compelling."

I commend the authors for so openly revealing their preferences, which call for an extension of a centralized banking-state alliance that reaches further into the financing of what we ordinarily term the private sector of consumer and business finance. In the 1930s, this kind of systematic alliance was called fascism. It still is.

There simply cannot be enough debunking of the prevailing winds of macroeconomic thought if the American people and other people of the world are to awake from the nightmare of government fiscal and monetary policies that work hand in glove with nightmare economics.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

    © 2009 Copyright Michael S. Rozeff - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - 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