On this holiday I am thankful that Paul Krugman keeps trying to alert us to the BIG iceberg

[Kurt_and_Hunter]

The biggest threat to America and President Obama and the Democratic Party is the economic conventional wisdom.

I don't know what the second biggest threat is, but it's a distant second.

In short form, the dominant ideas in political economics are variants of home-spun yankee virtue: Don't borrow money. Don't create new money. The national debt is a huge problem. Printing new money will lead to hyper-inflation. The FED must raise interest rates to reign in the inflation that inevitably follows loose money policies.

This is largely a political/economic thing.. Actual bond traders spending real money are keen for US Treasuries today (PIMCO just increased their treasury holdings from 48% to 60%), even as republican political/economy types in Congress and op-ed pagesinsist our bonds are on the verge of collapse.

And inflation? Here's what the fed is projecting, and most economic actors are confirming:



The Fed inflation target is 2% as a healthy base-line level to keep the economy from stalling and evan after printing all this money we are unlikely to hit the mark.

Everyone knows that the more money there is the more inflation there is. Everyone knows that the more available bond investment money the US Government gobbles up the higher interest rates have to go. And those things are true... but not necessarily useful. For instance, the federal government is borrowing money with both hands but the amount of total debt in America is down. Private parties are not borrowing! And Banks are not lending, at least not to those of us less credit worthy than the federal government of the USA. Does printing money cause inflation? Yes... if you consider even avoiding a fatal deflationary spiral to be causing inflation, which it is. (If prices were dropping 5%/year and you printed so much money prices stabilized at 0% change would that be 5% of inflation created? And if so, why is that supposed to be a bad thing? Inflation is only bad when it has bad effects. It is not like a religious dietary law.)

This conventional wisdom is the only true bi-partisanship we have... it is promoted from the lowest tea-bag rally to the words of the President himself.

It is a national religion, and an old one. It is the religion that put us into the great depression and then put us BACK into the depression a few years later because even though everyone had just seen the Great Depression with their own eyes and seen it ameliorated through bold application of Keynesian economics they were STILL convinced that spending and debt are always bigger problems than unemployment and stagnation.

That really is a religion!

Paul Krugman is out there blogging every day about how what an economy needs depends on the environment. What might be good advice for a child being given her first piggy-bank is not universal macro-economic wisdom.

We are in a liquidity trap where central bank influence on interest rates has been largely exhausted without creating much growth, investment, or even inflation.

That is an unusual situation. It is like a trauma doctor transfusing a patient with severe internal bleeding... to maintain vital blood pressure sometimes requires pumping in a counter-intuitively large amount of plasma. And rather than speculating about what the patients blood pressure should be you actually measure it.

In this environment damaging inflation does not automatically arise when we print more money. In the last two years we have probably printed more new money than we normally would in a decade, yet there is no inflation! Why? Well, for one thing in the housing and stock market collapse American households lost 8-10 TRILLION dollars.... dollars that went to money heaven. The FED has been trying to stave off big net declines in the money supply.

But it is a religion, so even though the dogma of the religion are being refuted every day that just proves that when the "inevitable" dogmatic truths kick in it will be even worse. If the rapture didn't happen today then that makes it even likelier it will happen tomorrow! We're due.

Why must the health care bill be under $1 trillion? Why was it obvious that the stimulus package had to be under $1 trillion? Why should the FED stop printing all this money? Why is it "obvious" that the FED will have to raise rates soon?

There is, and was, no compelling real-world economic argument for those ideas at this moment in time. Merely a sonambulistic invocation of "common sense."

And why is it "obvious" that the federal deficit is a pressing problem? The federal deficit is not the cause of unemployment. It is not why your home price collapsed.

But what everybody knows that just ain't so threatens to keep our economy weaker than a kitten, keep unemployment high and put Republicans in the WH and Congress.

Paul Krugman (and many others... it's a school of economic thought, not just one guy's ideas) keeps blogging away trying to tell me, you, us, President Obama and anyone who will listen... a literal Casandra. (remember, Casandra's prediction all came true. It's just that they were never believed.)

If you are not familiar with the deficit/bond/inflation hawk menace then read back through the last week or two of Krugman's blog for a general introduction.

http://krugman.blogs.nytimes.com/

The poor man is running around with his hair on fire when it would be ever so much more respectable to harrumph about the dangers of deficit spending and loose money policies.

[bluestateguy]

1. The Fed won't raise interest rates all of next year

And even if they do in 2011, it will be small and rates will still be low.

10% unemployment has a way of keeping inflation down.

[Kurt_and_Hunter]

3. re: rates in 2011

Which raises the question, why is anyone talking about an “exit strategy”? On the Fed’s own forecasts, the economy will remain seriously depressed three years from now.

If we apply the Rudebusch version of the Taylor rule to the mean Fed forecasts, I get the following for what the Fed funds rate should be:

End 2009: -6.3%
End 2010: -5.4%
End 2011: -3.3%
End 2012: -0.6%

Yep: three years from now, we’re still in a liquidity trap, with no reason to raise rates above zero and a continuing need for quantitative easing and fiscal expansion.

http://krugman.blogs.nytimes.com/2009/11/25/no-exit/

[grantcart]

2. The only answer is to tie further government expenditures to investment

that the public understands, and there is only one that is big enough, broad enough and will have the returns to pay for itself.

We have to invest trillions to transform our economy from a carbon based system to one that is based on renewable energy.


The public can understand it, even some conservatives are for it, even some long time energy people are for it.


Oh and a completely unintended side effect is that it will save our oceans, and slow down climate change and make the earth healthier, all of which actually constitute the real number one issue we have to face. We can have a bad economy on a healthy earth but we can't have a great economy on a dying earth. The new absorption rates of CO2 into the oceans have left scientists absolutely shocked.

[Kurt_and_Hunter]

4. Worthy but too slow, IMO

I appreciate what you're saying but have always had a problem with it. It is a good thing trying to piggy-back a crisis, not an optimal crisis management strategy.

When we look at what FDR did we must recall that America had a vastly higher tolerance of pain back then. FDR's GOOD results were worse than this nation will tolerate in the 21st century.

Of course our industrial and consumption approach must change, but such measures will not do much for the economy in our political time-frame. (Unless the effort is poorly done... front-loading expenditures for technologies that will be much better five years from now, hiring people for jobs that aren't needed yet. That's okay stimulus but will certainly not gain political good-will for the effort.)

And our political time-frame is pressing because political set-backs will push back the good things you're talking about to the brink of never.

[drm604]

5. I'm not an economist but I've been thinking something similar.

If we had X amount of dollars in the economy, and Y dollars have disappeared from that, leaving us with X - Y dollars, then what's the problem with adding Y dollars back into the economy? If X wasn't causing hyper-inflation before, why would it cause it now?

[Kurt_and_Hunter]

6. Because a Democrat is in the White House

re: "why would it cause it now?"

Because a Democrat is in the White House, silly.

Just like how deficits cause plague and rains of fire... except when rung up by Reagan and BushII.

Same thing happened when Clinton was in office. Suddenly fiscal discipline became OMG ESSENTIAL!!1!!

But when Reagan's budget director said "deficits don't matter" it was a strictly inside-the-beltway curiosity.

[Oregone]

7. Adding back the missing dollars will have more of an inflationary effect than if "X" persisted

The added in dollars will be printed/borrowed, thereby devaluing the US dollar (and increasing the price of international goods, while perhaps stimulating exports).

Though, its the least of our worries.

[Kurt_and_Hunter]

8. True.

[drm604]

22. Why?

I'm not saying that I disagree with you, I don't know, but you state that it will have an inflationary effect without saying why.

[Oregone]

23. I explained why

The additional money needed to make up to output gap will have to be borrowed/printed, thereby adding more money into circulation (and the withdrawn capital is still counted in the total summation of currency, although it may be idle). In that scenario, you have more monetary notes representing the same level of wealth. By these means, and simple division, its easy to figure out why each note would represent less wealth than if no additional money was borrowed/printed at all.

Whenever you add additional monetary notes into circulation (without the proportional creation of additional wealth), it will cause an instant devaluation of the existing notes.

Regardless, its the least of anyone's worries. The US is in a deflationary period, and such inflation is a good thing aiding recovery by improving exports and decentitizing savings

[drm604]

24. In all respect, you're simply making assertionsns.

Why, under present circumstances, does printing more money cause inflation? Why does it cause an instant devaluation of existing notes?

If the money is printed to pay for things like infrastructure improvement, then doesn't that improvement make the country wealthier (in real goods, not tokens like dollars) and doesn't that mean that the money is backed by more real value?

If the money represents the creation of real goods and services, or improves the means to create and deliver those goods and services, then we have more goods and services available and that balances out the increase in the money supply, right? More money (causing more demand) might have a tendency to increase prices but more goods and services (more supply) would have the opposite tendency.

You just have to spend the money in the right way. It has to result in the creation of real material wealth.

I'm not saying that's easy to do that in our pork filled political system, but it seems like if it was done right then it should work, at least in theory.

[Oregone]

25. "It has to result in the creation of real material wealth"

And creating it, per printed note, at the same existing ratio of notes per wealth, is not really a plausible in planet America. Half of the printed/borrowed dollars normally just go to tax cuts (reference the last stimulus). Do you think fixing cracks in roads and doing some random projects than for no other reason than to increase production and employ people really creates wealth efficiently?

Look, in theory, I see your point. In operation, in America? Fill me in on that. If printing money potentially allows the US to create wealth at the existing ratio, foreign investors wouldn't run for the hills when they fire up the presses. The US dollar would never fall into decline (my exchange rate has SUCKED the last year while Ive lived abroad). But, well, we know the dollar isn't looking incredibly lively.

So while, in theory, perhaps potentially if the money was being used to fund a non-profit socialized gold mining venture, sure, but in the meantime, just look at where the greenback is trading at. Why? It doesn't happen

[AllentownJake]

9. Well it will be about 5 more post to the same people touting Krugman's healthcare commentary

Bash the commentary on what he won a Nobel Prize for.

This is a unique situation, and what Paul is leaving out is that none of this occurs in a vacuum. You have other nations holding our debt and pissed off at the chaos we have brought on their own economies right now and you have a hostile opposition party that is looking to attack anything...oh and 5 members of the US Senate are members of that hostile opposition party but get keys to the President's caucus room because they aren't as bat-shit insane as the rest of the opposition party.

There is no political will for a second stimulus. The Health Care debate has pretty much eaten all the democratic political capital for a year and the war in Afghanistan is about to erupt a civil war in the democratic party.

Krugman is 100% right, but in the reality of human affairs, there is nothing that can be done to implement what he is calling for.

[glitch]

10. fubar to the extreme

I used to call that fubush.

[AllentownJake]

11. The country has been doing stupid things for 30 years

and borrowing its way to prosperity since the mid 80s.

Paul Krugman is probably right, the fact of the matter is the American People are too stupid to save themselves, and the leaders are either too cowardly or too opportunistic to lead.

[Hippo_Tron]

13. I believe Krugman won the nobel for his international trade model, not monetary policy

[Kurt_and_Hunter]

14. you are correct (Though he may have *really* won for his 100 anti-Bush op-eds)

[AllentownJake]

15. Broadly speaking economics

He isn't exactly a Health Care policy wonk.

[Kurt_and_Hunter]

16. Though his chief controversial point on the topic was subsequently adopted by Obama

Krugman isn't a full-time health delivery policy expert but he's probably more competent on the topic than any of the other well known op-ed columnists.

Healthcare is a big topic. Some aspects are narrow, others rise to the level of big-system economics.

What Krugman will always be remembered for in the context of healthcare policy was saying that no universal or near universal system could work without mandates, which was a big-picture economic behavior sort of thing.

God knows he wasn't the first to note that. Almost everyone who ever looked at the topic had already said as much since day one.

But that observation that was so controversial in the primaries was pretty obvious to anyone looking at the whole system from an economic perspective and was subsequently adopted by Obama, as it was widely predicted during the primaries that he would have to do after the original policy had exhausted its pander-value.

I am not sure what healthcare policy statements Krugman has made that are comical or absurd. They may be out there--I genuinely don't know.

[AllentownJake]

17. I'm not bashing Paul

I just find it funny on this website, when Paul publishes an article that is supportive of something i.e. mandates, than he is a hero to be cited, by some people that were bashing the concept a year and a half ago, and when Paul publishes an article saying the stimulus wasn't big enough or the unemployment projections with growth are wrong, he is a villain and the attacks become personal.

My position on mandates is without a strong public health insurance plan that competes with the private sector and has some government support financially, you aren't going to combat costs very well.

[Kurt_and_Hunter]

18. Understood. "wonk" is a very relative term

There is academic wonk and policy wonk and politician wonk.

People think of Obama as a wonk because he's pretty smart for a politician. Same for Bill and Hillary Clinton.

But an actual wonk should be able to run rings around politician wonks.

The very brightest people do not chose to kiss babies and shake hands for a living.

That's not a knock... the very smartest people would probably make poor executives.

But the "Obama is always the smartest guy in the room" thing cracks me up. If that were true it would be damning. Obama is very, very smart but hardly an awe-inspiring intellect. (I was somewhat surprised to see, in their head-to-head match-ups, that Hillary is a tad more intelligent than Barack. Having been so annoyed by Hillary over the years it wasn't expected. But she is in that same "extremely smart for a politician" category.) One of his best traits is supposed to be that he surrounds himself with the best and brightest and listens to them, so if he is doing what he does well then he is, almost by definition, not the smartest guy in the room.

Smart isn't everything. And having the confidence to surround yourself with smarter people and flexibility to properly understand and weight their views is a more rare, and probably more valuable, trait than being super-smart.

Anyway, I am not really responding to what you said. Just kind of typing for fun. (The Cowboys-Raiders game is less than compelling.)

[AllentownJake]

19. The only worse game for an Eagles Fan like me

is a Cowboys/Giants game. Cowboys are in the division lead, so I root for the Redskins. Somtimes in those type of a game though, you wish for a tie.

[Hippo_Tron]

21. When one win's a nobel it's usually for a specific advance in the field

And in Krugman's case it was international trade. That doesn't mean he's not well versed in macroeconomics and monetary policy (although he doesn't focus much on these areas in his academic research).

[HughMoran]

20. I thought most people agreed with this position

The best we can hope for is that the 1st stimulus should not be used to pay down the debt. A second stimulus is probably needed but not politically viable.

[Kurt_and_Hunter]

12. PS to the OP: The conventional wisdom is idealogical & has the effect of opposing government

It is no coincidence that the political economic conventional wisdom opposes government spending.

It hates deficits... unless they are caused by tax-cuts.

Then they're awesome!

The crippling CW is just another Republican Trojan Horse. Fuax home-spun wisdom that has the effect (purely coincidental, I'm sure... :eyes:) of aligning with the policy objectives of the reactionary party.