Philip Pilkington: Paul Krugman’s Fairy Fantasyland

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

Fairytales and nursery rhymes are quite popular among the economists. Economists and economic commentators will couch magical thinking in rational sounding phrases — but that doesn’t stop it from being hokum. Some within the profession attack these juvenile tendencies. Paul Krugman, for example, has often lambasted the idea, fostered by some of his colleagues, that the current crisis is due to a lack of confidence among investors. In a flash of irony he labeled this idea that of the ‘confidence fairy‘.

Of course, Krugman is absolutely right; the idea that a lack of confidence is responsible for the current crisis is a fairytale pure and simple. Our current economic problems are caused by a lack of aggregate demand. Investors are absolutely right to lack confidence at this moment in time because, just like in the 1930s, there is no rational reason to invest more because the population lacks the adequate purchasing power to consume more goods and services. Matias Vernengo over at the excellent Naked Keynesianism blog provides a classic quote from Roosevelt’s Fed chairman Marriner Eccles that summarises the situation well:

Confidence itself is not a cause [of economic depression]. It is the effect of things already in motion. What passed as a ‘lack of confidence’ crisis was really nothing more than an investor’s recognition of the fact that new plant facilities were not needed at the time.

Pretty straightforward point, but powerful nonetheless. And I think Krugman and other ISLM-Keynesians would broadly agree with it. That is, peculiarly, until they start talking about inflation targeting.

Proponents of inflation targeting claim that if the central bank sets a higher inflation target investors will react to this by, well, investing more. Krugman sums it up:

If the Fed were to raise its target for inflation — and if investors believed in the new target — expected inflation over the medium term, say the next 10 years, would be higher… [and] higher expected inflation would aid an economy up against the zero lower bound, because it would help persuade investors and businesses alike that sitting on cash is a bad idea.

Now, is it just me or does it appear that Krugman has just smuggled the confidence fairy in through the backdoor? Read that passage again carefully. The ‘idea’ here is to trick investors into investing by scaring them into thinking that the Fed will allow inflation to rise higher than it currently is.

Really? Come on. Does Krugman really believe investors are this stupid? Does he really think that they make their investment decisions based on what some central banker says is the target rate of inflation? Sure, the commentariat are eating this garbage up — the usually sharp crew over at FT Alphaville provided a glowing account of why the inflation-confidence fairy should be unleashed from its bottle — but when it comes to putting your money where your mouth is, are smart people really going to buy into this idiocy?

Short answer: no. Krugman and others treat investors like children. But investors — real investors who provide funds for new goods and services — are not children. Instead, they will continue to look at the economic fundamentals when making investment decisions. And if there is simply not enough demand for goods and services they will not make investments aimed at creating more goods and services. Duh! It really is quite obvious.

Now, the financial investment community might well react to this hocus pocus — but that is an altogether different thing. This is not because paper-shufflers are stupider than their entrepreneurial and corporate counterparts, but because they are concerned with perceptions and fairytales — it is largely upon these that their business rests. They do react irrationally to news simply because they think that their peers might react irrationally to the same news. The financial community is, in many ways, a hall of mirrors with everyone trying to guess everyone elses’ reaction to announcements and news. But just because the financial community may react to a higher inflation target by no means entails that their money will end up funding goods and services that increase employment in the real economy.

If you actually look at how the financial community reacts to unorthodox announcements by the central bank the reality — as opposed to what abstractions like the ISLM will lead you to believe — is much different. The likely outcome of such an announcement in the present economic environment is obvious given that we now have four years of experience with these sorts of pseudo-policies: financiers will move their funds into so-called ‘inflation hedges’ like gold, silver and other commodities. What’s more, if the central bank manages to scare them sufficiently they may even move their funds out of government bonds and into these ‘hedges’. This will lead to increased upward pressure on the interest rate at which governments borrow which will, in turn, give the austerity brigade even more of a mandate to cut government spending and engage in other sorts of economic vandalism.

Unfortunately, Krugman and others will likely continue to publish their fairytales and recite their bedtime stories. Why? Because, to put it somewhat bluntly, it gives them something to do. It gives them something to talk about that makes them appear as if they have some specialised knowledge that only a select few Very Sophisticated People understand and have access to. It also gives them the assurance that their abstract models actually tell them something — something a priori and mysterious — about the real world that cannot be gleaned by simply observing empirical reality. In short, it gives them a power to fascinate the general public and policymakers and lull them to sleep. But of course this is exactly the same power of fascination that the parent exerts over the child at bedtime by telling them of faraway lands; of witches and of warlocks; of goblins and… of fairies.

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  1. Belgo

    This is maybe a little unfair: all that Krugman is saying, is that the real interest rate is too high for current circumstances, which I think, all economists can agree with. The only way to get the real interest rate to fall, is by pushing inflation expectations up. But that isn’t his recipe for pushing up AD.
    Krugman wants a fiscal expansion to push up AD. And with real interest rates negative thanks to slightly higher inflation, investment will react faster to expanding consumption.

    1. Philip Pilkington

      That’s actually not what he’s saying. Look at the quote. He’s saying that by raising the inflation target the Fed will increase inflation expectations which will, in turn, lead to investment.

      My thinking is that it instead lead to financial investors pouring into inflation hedges like gold, silver and other commodities.

      1. F. Beard

        My thinking is that it instead lead to financial investors pouring into inflation hedges like gold, silver and other commodities. Philip Pilkington

        Yep. Particularly essential commodities like food and fuel. And you can bet that leverage (“credit”) will be used.

        The irony is that “credit” was meant to help the general population with new goods, services and jobs. But now it will be used to starve the population it dis-employed.

        1. chitown2020

          Chase has hijacked the commodities markets from what I have heard. Blythe Masters has been roaming around South America doing to commodities what she did with the mortgages. Chase is an outlaw.

      2. steelhead23

        shsh. As I stare retirement in the face, I want Bernanke to think that raising the federal funds rate would save the economy. Look, right now Ts are paying about 2%. Maybe, Paul is worried that that Princely Princeton Pension won’t give him the lifestyle he wants once they tag the emeritus on the end of his title.

        1. chitown2020

          A BOFA rep told me shhhhhhhh when I responded to one of their farsical letters telling me my house is about to be sold and they can save me. I told them they are full of crap and the rep told me shhhhh..and hung up on me. Liars and connivers. I saw a funny Capital One commercial tonite..the people were having a moat with alligators in it built around their house with their Capital One credit card.. I remember one of their commercials before the crash. They were dressed like barbarians and said they have come to pillage. They weren’t kidding.

          1. chitown2020

            Or the one where they are looking for Caeser. Too good..! I think he is hiding in the Church of Jesu…his aliass is The Black Pope.

      3. Matt

        Krugman has been arguing for higher inflation for two reasons:

        One, inflation would reduce the real value of outstanding debt. You can argue this point based on how effectively you think workers can secure wage increases to keep pace with inflation, because this is the mechanism by which higher inflation would reduce the real value of outstanding debt.

        Two, it would help spur investment (and despite the horrible condition of US household finances, corporations are sitting on a ton of cash, which would lose real value if inflation goes up). I don’t think Krugman would disagree that some of that cash would get directed to unproductive things, like buying gold.

        You could also argue that inflation would make the US more competitive with other countries by reducing the value of the dollar, helping drive up exports.

        I’ll again note that Krugman has been a relentless supporter of fiscal policy, which most contributors to NC seem to think is the best channel reducing unemployment. Krugman’s new book is a plea for more fiscal policy. His arguments on monetary policy have always been framed as “fiscal policy is the answer, but because the Republican are d-bags, here’s what the Fed could do, it’s not great, but at least it would be better than nothing”.

  2. Alex SL

    In all fairness you should mention that Krugman also advocates measures to increase the spending power of consumers, and that higher inflation would help with deleveraging.

    1. YankeeFrank

      How exactly will inflation help us to deleverage? The assumption is that debt becomes cheaper relative to income. But this is a specious assumption because with inflation, the cost of living rises while wages DO NOT rise. The fact that economists assume inflation leads to rising wages is just one of their thousand destructive and backwards notions. The old canard was that rising wages caused inflation, hence the justification for crushing workers’ wages. Now apparently its the other way around. Or better yet, both are “true”. Of course wages haven’t risen in quite some time, and in many cases they’ve dropped. This despite all sorts of inflation on energy, food and other commodities, as well as the white elephant in the room — real estate. The more the economists tinker with things, the more of a muck up they make. And no, if prices inflate it doesn’t make it any easier for me to pay off my debts. In fact it means I am more likely to take on further debt just to eat and feed my car. This country is in for a long, sad decline. Idiots like Krugman with their entrenched privilege and status will have to be completely discredited, or buried before those with sense can replace them. The sad thing is he isn’t even the worst, not by a long shot. Yet he is still so wrong about so much. It really shows how hopeless the situation is that we have nobody who actually knows what is going on in positions of influence.

      1. Literary Critic

        It’s so governemnt can pay off debt in cheaper dollars too. They tax your cheaper dollars you earned – even tho your reduced purchasing has resulted in less of them after cost of living. But taxes are withheld before you pay cost of living, so it’s not a problem.

        But we know MMT says this will make you deflate. So eventually you will force the economy to deflate – after a while – which will make everything revert back to the mean, eventually.

      2. kms

        This may sound super naive, but aren’t wages a huge block of the price basket we use to measure inflation? Without a change in the wage level, the consumption level falls, and this offsets rising prices (the recessionary gap position). In order for true inflation to exist, the consumption level has to remain the same in aggregate. This implies rising wages or a falling unemployment rate. But maybe, like in chemistry, the ball and stick model can’t always get you a full answer. Any thoughts?

          1. kms

            Thanks for responding. I was thinking for a minute that the Econ dept at my school had really laid down on the job. But I do have another question, even if financiers hedge heavily instead of investing, that option isn’t available to most corporations. Wouldn’t most corporations holding cash find that the increase in the inflation rate enough of an incentive to invest in their operations? Then they can at least keep up with help from rising prices instead of watching their cash erode. Big hedge type positions can cause some raises eyebrows. I know that if I see a company that’s supposed to be making stuff has a big investment portfolio sitting on its balance sheet- let alone anything large going on in OCI, I say, “thanks but no thanks- safer buying portfolios I have a prayer of controlling.”. But again, this could be super naive…

    2. Mel

      What I got from reading Krugman was that he was arguing for a meaningful stimulus. When he did that he drew fire from people who claimed that spreading money around in any way at all would cause inflation. So he countered that some inflation, if it happened, would be tolerable. Now he’s drawing more fire from people who claim that tuning the economy by setting the inflation rate is wrong. If that were the question at hand, they would be right.

      Meaningful stimulus might keep American society alive long enough to cure it’s real problem — an economy structured to make profit without any production. Finding that cure is an additional task.

      In the meantime, I might give up. This whole game of “Choosing Sides” is ridiculous.

  3. Middle Seaman

    The new fad among economics pundits is bad mouthing Krugman. NC has manifested real diversity by allowing Pilkington, Stoller and others to opine on the financial world on which, it appears to me, they are only marginally informed. That is par for the course for pundits.

    Krugman is right most of the time and I am sure he will readily admit to some mistakes. That doesn’t justify Pilkington’s jihad.

    1. chris

      I can not stop laughing.

      Krugman, masquerading as a Keynesian, is a neo-liberal and a partisan Democrat. Any differences between he and the “conservative” economists he criticizes are superficial. Ultimately his prescriptions will fail to change, essentially, the crony capitalism that owns our polity and destroys democracy around the world.

      Face it, how can any economist who supports this loathsome Democratic Party and its fraudulent leader, Barack Obama, be anything but a shill?

    2. Yves Smith Post author

      With all due respect, Krugman is an economist. That does not make him an expert in finance. In fact, economists in general are allergic to getting their hands dirty and understanding how financial institutions and financial markets work. Krugman is the first to admit that he prefers models, the more sparse the better, as the way to understand reality (as opposed to empirical observation first and abstraction later). I discuss this problem at much greater length in ECONNED.

      And Krugman has turned hugely partisan this year. That is not to say that Romney is not deserving of criticism, but he keeps pretending that there is a sharp contrast between the Dems and Republicans, when the Republicans are simply more up front about their intent to screw everyone but the rich. He’s trading on his brand to promote Obama is a particularly open way, and that isn’t sitting well with a lot of people who are normally sympathetic to him. He has ALSO been intellectually dishonest in his attacks on modern monetary theory, in that he hasn’t bothered to understand it, and makes arguments against it that are pure straw man.

      I suggest you get more familiar with Krugman’s record. He has done some invaluable work, like being skeptical of Iraq when that was a risky and isolated stand. But he seems to have been running on brand fumes for a while, which I’d hazard is the real root of the recent attacks on him.

      1. Dan Kervick

        Yes, I think Krugman has been carrying a lot of water for the party recently. Mainstream Democrats gave up on expanded fiscal activism early in the game for two reasons: (i) they decided they wouldn’t be able to get it past the Republican House any way, (ii) Obama sent out the message that he wanted to position himself as a deficit hawk and member of the party of responsibility seeking a Grand Bargain on shrinking the budget.

        People always blame the President for bad economic performance. Since no significant action would be coming from Washington politicians on the economic front, and economic indicators continue to stagnate as unemployment remains very high, Democrats have chosen to throw most of their energies into a campaign targeting the Fed and Ben Bernanke. They hope the Fed can accomplish what Obama can’t and won’t. And even if the Fed can’t really accomplish what the these neo-monetarist Dems claim it can, by attacking Bernanke incessantly they are setting up a scapegoat for Obama’s failure, and can use that in the fall campaign.

        Krugman has been good about mixing in sincere calls for additional fiscal action with the Fed-bashing, but he has also become the leading spear carrier for the “the Fed can do it” campaign. This undermines his own fiscal message. And he undermines his fiscal message in other ways too. In his recent interview on NPR, he turned at the end of the interview toward the “responsibility” message, suggesting that fiscal action now is some kind of debt imposed on the future, which will have to be paid back later. This is wrong, and making that claim empowers all those who are trying to put the Federal government out of business, including Social Security.

        1. Philip Pilkington

          Yes, that is absolutely the key point. In addition to this his neo-monetarist ‘inflation targeting’ stuff is now being understood to be some sort of Keynesian response (as is QE and all that). If it were ever implemented and it simply led to more commodity price inflation we would have yet another incident in which Keynesianism was supposedly being discredited.

          Krugman provides the Austerians with ammo daily. He should just stick with fiscal stimulus. He might also find some allies rather than some adversaries in the central bank community — I’m hearing some very interesting stuff coming out of the Fed from behind the scenes right now…

          1. alex

            “Krugman provides the Austerians with ammo daily.”

            Ah, no one is more dangerous than a fifth columnist, eh?
            Perhaps that’s why for every line of criticism of, say Mankiw, on this site, I see at least ten lines criticizing Krugman. Even circular firing squads have their justifications.

          2. Dan Kervick

            Alex, I think the focus of the left on Krugman is partly because Krugman is someone the left thinks they can ultimately influence if they keep up the criticism. Nobody thinks there is any hope of turning Mankiw, who has made a career of defending the rich, into a force for progressive change.

            But Krugman has a prominent position and straddles the fence between progressive aspiration and centrist caution. It’s worth the effort to try to pull him over to our side.

          3. alex


            I appreciate the point you’re making, but what’s ridiculous is how vitriolic some of the attacks on Krugman are. I even agree w/ Pilkington, et al, that the “inflation is good” idea is wrong, because labor does not currently have the bargaining power for wages to keep up with inflation. But there’s a difference between saying he’s wrong and saying he dwells in a “fairy fantasyland”.

            Despite my disagreements w/ Krugman I’ll take his policy prescriptions over Mankiw’s anytime. To those who are undecided but open-minded, concentrating almost all criticism on Krugman makes for a circular firing squad.

        2. Crazy Horse

          One shouldn’t forget that job opening at Treasury if Geithner resigns to claim his place at Goldman Sucks. Krugman is certainly working hard to stake his claim by showing that he is a loyal Demothug.

          1. Literary Critic

            GS’s O’Neil on the way to the BOE -> TG gets O’Neil’s old job at GS-> Krugman gets Treasury Secretary job -> Krugman informs US bond market of high inflation/weak dollar policy ……bingo – we are off to the races!!

            O’Neil sells Britain to the BRICs. GS takes 40% off the top of the deal for “underwriting”.

        3. Eric377

          It’s an election year and Krugman is a leading Democrat interested in electing Democrats. He probably understands the situation pretty well and sees that to increase aggregate demand, what is within credible possibility for the Fed to accomplish is some very small fraction of what Congress might do, but that Congress is not going to do any of it. But many voters think like this: I’m unhappy with the way I perceive my life’s prospects are developing; the President is a Democrat; so I am unhappy with Democrats. I can well imagine that there would at least be some marginal political advantage to Democrats that an idea be put into public circulation that if the Fed did more, things would be much better. There is not a thing wrong with letting politics shape your message, particularly in an election year and that’s what I think is going on here. The day I read Krugman writing that further fiscal stimulus is so critical that Democrats should propose eliminating the estate tax, or prevailing wage requirements or similar painful choice is the day that I’ll start to consider that the November election isn’t the first thing on his mind. You don’t get something for nothing, but that doesn’t stop you from complaining about not getting it.

        4. Fiver

          You call what Krugman has said “Fed bashing”? That’s absurd. Nobody, and I mean nobody, has done more to provide cover for the Fed’s despicable performance over the last 20 years than Krugman. He is as far up the Fed’s butt as it’s possible to be.

      2. DP

        Krugman has turned partisan this year? When did he ever stop being partisan? During the Bush 43 years he was horrified by deficits of a few hundred billion dollars and writing that they would cause an economic calamity. Since Obama has been in office, Krugman has shrugged off deficits of well over one trillion (not to suggest that Obama didn’t inherit a disaster).

        One afternoon last week Krugman was on the radio saying that we could get out of this mess with a huge Keynesian spending program, that people were too concerned with the debt and deficits because after all right now the government can borrow for virtually nothing. As if he’s never heard of Iceland, Greece, Italy or Spain and thinks the U.S. will be able to roll over the additional debt at zero forever.

        In my opinion, Krugman is a partisan hack first and an economist second. He fits his economic theories into his partisan agenda.

        1. F. Beard

          and thinks the U.S. will be able to roll over the additional debt at zero forever. DP

          The US is a monetary sovereign; it has no need to borrow in the first place.

          The US national debt is a fascist gift of a risk-free return to the banks and the rich. It should be paid off as it comes due and the US government should NEVER borrow again.

        2. UnlearningEcon

          It’s sad to see this kind of economic reasoning on NC, a place where I used to rate the comments highly.

          Economies vary of time (duh). The reason Krugman didn’t approve of the Bush deficits was because they were in a boom. The reason he approves of Obama deficits is because we are in a bust.

        3. YankeeFrank

          DP, blow smoke elsewhere. I’ll repeat what others have made clear — Krugman was against stimulus under Bush because we were not in recession. Oh, and of course the Bush tax cuts for the wealthy really did so much for the 99%. Bush was more irresponsible monetarily than Obama by a long shot. Of course, you will look at our current deficits and moan about how wasteful Obama is, but the largest reason for our current deficits are the drastic drop in tax revenues and rise in automatic stabilizers due to Bush’s horrifying economic and financial regulatory regime.

          Its funny that with all the things Krugman gets wrong you manage to pick on one of the things he gets right. Keep it up DP and you could get famous here. Or is the better word infamous?

          1. DP

            I voted for Obama. He inherited a disaster.

            Krugman’s current rationale for why he was shrieking about deficits during Bush 43 and not concerned about them now is historical revisionism. He’s a partisan political hack and a generally dishonest little creep.

          2. UnlearningEcon

            DP, you haven’t engaged the responses. Krugman was against deficits then because we are in a boom. He’s not now because we are in a bust. Find a shred of evidence that this is ‘revisionism’.

          3. DP

            Unlearning Econ, the site will not let me address this reply to you but hopefully you will find it.

            Krugman has rightly been the object of widespread ridicule from the right because his attitude on deficits was so much different during the Bush 43 terms than it has been under Obama. Krugman is clearly aware that he is open to this criticism so he has tried to defend himself by revising history. He is now claiming that the reason he opposed deficits during the Bush adminstration is because the economy was an expansion and the reason he is for them now is because the economy remains weak.

            Here’s a link to a typical column of his from 2003 warning about the danger fiscal deficits posed to the U.S.


            So he was opposed to deficits then because the economy was in expansion, as he claims now? No, that’s a lie. Note this from his 2003 column:

            “There is now a huge structural gap — that is, a gap that won’t go away even if the economy recovers — between U.S. spending and revenue.”

            “even if the economy recovers”

            So in a bad economy in 2003 with a Republican President, Krugman was warning about the dangers of deficits, but now he’s lying about what he wrote then as if his old columns can’t be accessed.

            If Krugman is an honest economist as many here seem to believe, why wasn’t he telling us that deficits weren’t important during bad economic times and why wasn’t he encouraging Bush 43 to propose a huge Keynesian stimulus program, as he is doing today with a Democrat in the White House?

            Here’s what Krugman said would happen when the U.S. fiscal deficits caused an economic plunge:

            “What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates.”

            As it turned out, there was a sharp rise in the dollar and a sharp drop in interest rates, both exactly the opposite of what Krugman predicted.

            Have I engaged the arguments yet?

      3. Pwelder

        Yves: “With all due respect, Krugman is an economist. That does not make him an expert in finance.”

        Bingo. And that doesn’t matter too much for theY for the rest of us. But the same is true of Bernanke, and in his case it matters in spades.

        Given how much avoidable grief for the economy seems to originate in finance, why exactly do we presume that academic economists are qualified to be in charge of the regulator that supervises the banking system? Bernanke IMO is a good man and a fine economist/economic historian. But it seems pretty clear that during the runup to the crisis he and his colleagues were clueless as to how the meat-eaters in the big banks were actually making their money. They ran rings around him and Greenspan both.

        When FDR was trying to clean up the mess created by the financiers of the 1920’s, he had on board the likes of Joe Kennedy – i.e. the reforms of that time were built on an informed sense of how things had actually been done. Obama by contrast had – or chose – to make do with Geithner and Summers. A pity, that.

        1. Fiver

          Bernanke is to “good man” as Krugman is to horse’s ass.

          The thought that Bernanke and Greenspan were innocent, naive little waifs is repugnant to anyone who has followed events closely for the last 20 years. There is NOTHING they have not done, or will not do for banks. There’s a series here at NC this week largely concerned with “denial”. You may wish to check it out, as you are certainly in that state vis a vis the character of these vermin. Tens of trillions of dollars were looted and tens of millions of poor people globally are DEAD as a result of this crisis – Bernanke, Greenspan, Bush, Paulson, Blankfein, Dimon, Geithner, Obama and all the rest are sociopaths who belong in jail, or at minimum removed from any position of any responsibility or authority whatever, public or private.

  4. Hugh

    Krugman is a pillar of that same Establishment that is looting you. If you are a liberal, you no doubt laugh at all those idiot movement conservatives for whom it takes only a few meaningless gestures of a few social issues to promptly vote against their wider economic interests. You see right through all that Tea Party nonsense. Yet you are completely blind to how you are being played just as thoroughly by liberal opinion leaders, oh say like Krugman. Krugman throws a little red meat your way from time to time, repeats a few phrases you want to hear, and you fall just as hard for it as your conservative counterparts.

    But you say Krugman, unlike those conservative panderers is right most of the time. But is he? Krugman was a big supporter of free trade and by extension globalization. He is a solid Democratic tribalist, that is he supports one of our two neoliberal corporatist parties. He has shown many times that he does not understand modern banking, how money works, and the importance of debt. His views remain mired in gold standard thinking and neoclassical ideas. For someone who gets it right most of the time, Krugman gets an awful lot wrong.

    And despite his most recent article, he still considers Bernanke a great man. He just wishes that he could have done more on jobs. And this brings us around to his ideas on inflation. They are stupid. For them to work, wages would have to inflate faster than prices. The problem? Real wages have been flat for 35 years, i.e. wages have not inflated faster than prices over this time period. So if you trigger price inflation, wages are unlikely to follow. Companies would just offshore more of their work to China. But what would happen is that the debt levels of the 99% would increase.

    In other words, what Krugman is suggesting would simply further loot ordinary Americans. And no, it doesn’t help to say that Krugman favors more expansive fiscal policies. Obama, the Democrats, and the Republicans all want to make major cuts to spending that would benefit the 99%. All it means is that Krugman is promoting not one unrealistic idea but two. If anything it raises the issue of Krugman’s inconsistencies. If he wants to spend and the Democrats want to cut, why does he continue to support them? If Bernanke has had such a major fail on jobs, why does Krugman remain so obviously deferential to the “eminent” economist? Why does Krugman continue to support those with whom he ostensibly fundamentally disagrees?

    I would say it is tribalism, the same kind of tribalism that keeps liberals tied to Obama, a President who has governed to the right of George Bush, the same kind of tribalism liberals make fun of when they see Republicans doing it.

    Will anything I have just written change or challenge the minds of the tribalists? Of course not, that’s the power of tribalism. Logic and facts are only invoked when they bolster the tribal view. Contradictions are either papered over or ignored. But just because some of drunk the koolaid does not mean the rest of us have to stand silently by and pretend as if they haven’t.

    1. tom allen

      Krugman on the depression reminds me of Friedman on the Iraq War. Sure, he’s critical of the way the Administration is handling it. But we have to keep supporting the President, because the next six months — the Krugman Unit — are crucial.

    2. Max424

      “Krugman is a pillar of that same Establishment that is looting you.”

      Agree. We live in a Looter Economy, and if you can’t (or won’t) acknowledge this, then you are either a part of it, or you are an irrelevant ignoramus.

    3. pelham

      Excellent point about wages. What in the world would lead Krugman or anyone else to think that wages would follow an upward spiral in prices? Where’s the incentive or mechanism that would cause or force such a magical event?

  5. mp

    Yves, you’re a damned good analyst and, when this site started, it was one of only a handful that mattered. It was a “must read.” Sadly, that’s no longer the case.

    Lately, it seems that much of what I’ve been reading here amounts to nothing more than weird populist rants.

    I’m sufficiently familiar with Krugman’s work on liquidity traps to know that Pilkington is wasting my time.

    Mr. Pilkington, if you’d ever worked as a banker, you’d know that Krugman isn’t talking about “tricking” investors, he’s talking about the central bank *convincing* them with a *credible threat*.

    As an aside, Volcker, God bless him, knew how to issue credible threats. In fact, he’d be the perfect guy to work it in the opposite direction. Oh, yeah.

    1. Your Daddy

      I totally agree with you–I value Yve’s insights and remarkable skill in breaking down the world of banking and finance, but lately I’m coming here less and less because I see less of Yve’s writings and more of all these guest writers foaming at the mouth and ranting mad.

    2. F. Beard

      Mr. Pilkington, if you’d ever worked as a banker, mp

      Like you have?

      So we should consider the advice of those who created this mess?

      Yes, we should. To know what NOT to do in all likelihood.

    3. YankeeFrank

      All you are saying is you never really understood where Yves was coming from in the first place. The guest bloggers generally aren’t coming from a point of view that different from Yves. The problem you are having is that you seem to think all of these “ranting” bloggers are off base, when its really the rest of the country that is out of whack. The real problem is that our country continues to move further and further away from reality and, if the guest bloggers sound shrill to you, its because shrillness is called for. Its ironic because Krugman gets pilloried for being shrill and unSerious by the establishment. And now his supporters are doing the same to those who are trying to bring sanity to our discourse. The problem with Krugman is that he is too embedded in the system and cannot see how corrupt and off the rails it has gotten. If you don’t like what you are rea

      1. YankeeFrank

        …ding, provide concrete criticism and people will engage you. Otherwise your comments amount to whinging against the shrill and unSerious.

        1. chitown2020

          Yves, You are doing a wonderfully awesome job exposing not only the masssive cover up for the biggest Ponzi Scheme swindle of our wealth in history but you are also exposing who is helping to cover it up. Thank You…!!!!!!!

          1. chitown2020

            Oops..I left out a very important word…the 1% and their robber barons committed the Biggest Ponzi scheme swindle and HEIST of our wealth in history. They scammed and transferred our wealth to other countries. The repeal of the UPTICK RULE by the SEC in 2007 and the Patriot Act are a couple of the ways the 1% were allowed to commit the robbery and massive transfer of our wealth. Of course the repeal of Glass-Steagall in 1999 was a set up for financial disaster.

    4. Susan the other

      Invoking Volcker disproves much of what you are saying. Politics shut down the Volcker Rule. It’s unfortunate that all economics is politics. Finance is where the rubber meets the road because it is the protocol for running a country. And protocol is pure politics. We need policies that address what is wanted and needed by the majority, now the vast majority, of the population. It is irrelevant how economics chooses to rationalize, or “model” as they like to say, the methods.

    5. Fiver

      Ever occur to you that the US does NOT occupy the position globally it did decades ago, and that US creditors (let alone US savers, fixed-income types, or the rest of the fully
      half of the population that has been completely abandoned by both Parties) just might not like a policy that says their investment will be systematically degraded?

      There is already a full-blown currency beggar-thy-neighbour war underway courtesy of Bernanke. The US has global responsibilities and they do NOT include buggering up the entire global financial system and economy any further.

  6. fresno dan

    Inflation as a panacea seems to me to have a few holes.
    On the one hand, it is suppose to degrade debt. But aren’t we in this mess because the banks have worthless assets? Isn’t tremendous amounts of money created and given (Whoops! “loaned”) to banks to prevent bankruptcy and the implosion of the entire world monetary system? Why are the homeowners who default not bailed out but forced into bankruptcy? Its a strange accounting that the bankrupty of a very few huge banks is a disaster (who don’t understand how to assess risk which is suppose to be their JOB), but the bankruptcy of millions of people is how the system is suppose to work
    Now while all this is going on, aren’t prices going up – but salaries aren’t? How is demand suppose to increase, i.e., how do you buy more stuff if you have the same amount of money, but everything costs more?
    Well, you can look at aggregates like GDP, and it is going up. But when you divide the population into quintiles, you see that most people’s incomes are not going up, and haven’t for quite a while.
    I remember when I read economists who said how great NAFTA would be. Theories are nice, but reality is more important.

    1. Philip Pilkington

      This is an important point that I should have dealt with in the article. Yes, Krugman seems to assume that wages will keep pace with inflation if it can be induced. However, as you point out, workers have very weak bargaining power right now due to the amount of unemployment — so, if inflation were induced, wages might not keep pace and demand coud be eroded.

      1. F. Beard

        A universal bailout bypasses the need for a wage-price spiral.

        And it is the moral thing to do also since credit creation cheats both debtors and non-debtors.

    2. Chris Cook

      Good to have an outbreak of common sense among the comments.

      There’s an underlying point here which falls into the ‘financial pornography’ category of the unmentionable.

      This is that ‘inflationary expectations’ is a canard. It is a false meme used to justify suppression of wages.

      Of course, investors have ‘inflationary expectations’ – they wouldn’t buy financial assets otherwise would they?

      Since the debt market died and QE was pumped in to keep the banks clinically alive, passive investors with inflationary expectations have been sold by investment banks on ‘hedging inflation’.

      This has led to the correlated commodity and equity bubbles which will IMHO shortly collapse. Banks did this because the funds are a ‘capital lite’ asset class where the muppets take the market risk.

      But do inflationary expectations drive behaviour of the non-investing public?


      In the real world Joe Sixpack does not say:

      “I believe prices are going to rise: therefore I need a pay rise”.

      He says.

      “Prices have gone up: therefore I need a pay rise”.

      The fact is that to conventional mainstream economists who are funded by the wealthy and privileged there is never a reason why wages should go up.

      If the Economy is doing well, then to increase wages will kill economic growth and/or cause inflation.

      If the Economy is flat; then to increase wages will lead to recession and/or inflation.

      If the Economy is in recession; then to increase wages will lead to depression and/or inflation.

      The true cause of inflation – by accounting identity and by definition – is the demand for profit and economic rent.

      ie something for nothing.

      1. Fiver

        Am in complete agreement re the extended war on wages.

        However, I recall you called for oil to collapse (I believe you said $45/barrel initially, then changed it to $60/barrel) by the end of H1, 2012.

        Given that an attack on Iran has been effectively taken out of the play, with Netanyahu facing elections in the fall (far easier for Israel to act militarily on Iran should talks fail with a perceived “moderate” or “left” of centre government) and with the clear turn in European political sentiment away from “austerity” (Hollande in, Netherlands neutered, Merkel doubtless out) along with rumours already flying re a “Marshall Plan” for Europe, do you still hold that view? How far away is “soon”?

        I cannot imagine Bernanke not acting “robustly” should conditions weaken materially in order to ensure Obama is re-elected. Obama has been Wall Street’s greatest asset throughout the crisis. If there is any “correction”, it will be a controlled one, of the type we’ve seen since March 2009, i.e, even if the oil and equity markets are allowed to correct as much as 20%, the re-flation will be anticipated and jumped on by speculators almost immediately, and any “losses” recovered to march higher.

        I expect the real bust a couple years from now – because not 1 thing has been done on any front of importance to correct the enormous imbalances that underlie the crisis to begin with – corporate globalization between central to said imbalances.

        1. Chris Cook

          I stand by my prediction that the crude oil price will collapse by the end of H1 2012 and I believe that this post yesterday on the Alphaville site

          supports that view in illustrating the extraordinary concentration of risk and futures positions.

          Absent a conflagration in the Persian Gulf – and it is my view that an accommodation between the US and Iran has already been reached which will play out in Baghdad and subsequently – we will soon see the oil price decline rapidly at least, and catastrophically at worst.

          Re Bernanke, I think that the Fed is currently as much use as a chocolate teapot: the only solutions at the moment IMHO are fiscal.

          1. Fiver

            Thanks for your response.

            If I may:

            1) Interesting article. I’d suggest though, that the US Government knows exactly what’s happening – not just a few at the CFTC as alluded to in the piece. And really, if you know it (assuming true) how could the combined resources of the US Admin NOT know it when oil is at the heart of US policy? I don’t think there’s a “who knew?” when it comes to oil. There is for that reason no chance of a “catastrophic” drop, though perhaps a good clipping might be allowed for re-election insurance. And for all we really know, that Chart could be Bernanke’s QE3 & 4 just in another form (direct intervention through intermediaries, of course). And I just cannot see pensions being allowed to be smashed to bits again prior to this election.

            2) Where do European banks unloading positions to raise their required couple trillion $ in capital fit?

            3) What do you mean re some understanding reached in Baghdad? Is there a particular event/story you’re referencing?

            Thanks again.

    3. diptherio

      Ah, but you see, wages are assumed by our models to track inflation and therefore your empirical evidence to the contrary is inadmissible. Facts that do not match theory must be ignored…don’t you know anything about economics? :)

  7. Robert Asher

    A possibility. Paul Krugman knows there will be no fiscal stimulus from the U.S. government for the forseeable future (barring a big war, of course…we all do know the past history of military Keynesianism). Krugman hates to be a total pessimist. So he has been searching for a government action (in this case to be taken by the FED) that would provide a boost to the economy. Econmic valium.

  8. Otto

    Another tiresome screeching post full of wild exaggerations and mischaracterizations by Pilkington. Long term interest rates are closely tied to expectations of future short term rates. Pilkington might as well indict Economics 101 as secretly harboring the confidence fairy because of this relationship. However, this relationship is empirically established, so let’s also indict empirical science as harboring the confidence fairy. Let’s see … what else can we smear?

    1. Philip Pilkington

      “Long term interest rates are closely tied to expectations of future short term rates.”

      And where in the article do I deny that? My claim is that if inflaion targeting is initiated investors will pile into hedges rather than invest. You should read more closely before you make somewhat ironic accusations of “wild exaggerations and mischaracterizations”.

  9. Narg

    “Now, is it just me or does it appear that Krugman has just smuggled the confidence fairy in through the backdoor?
    Yes, Krugman seems to assume that wages will keep pace with inflation if it can be induced.”

    Krugman is talking about something that is technically achievable. And he makes no secret of the fact that he’d prefer a fiscal stimulus. The way it works is that government borrows and spends massively to bring down significantly the unemployment rate. After a while this creates a wage-price inflation as there is increasing competition for available workers, which are harder to get as the unemployment rate is lower. Then, if the Fed does a good job, there is a higher but stable inflation in the 3-5% range.

    There is no “confidence fairy” here although my understanding is that it would involve government action, not just the Fed.

    1. F. Beard

      The way it works is that government borrows Narg

      Why? A monetary sovereign has no need to borrow its own money. People are near hysterical about the national debt as it is.

      and spends massively to bring down significantly the unemployment rate. Narg

      And have the Austerians complain about wasteful spending? No, just hand out the money equally to every adult citizen. Who can complain then?

      1. Narg

        “Why? A monetary sovereign has no need to borrow its own money. People are near hysterical about the national debt as it is.”

        Huh? Whatever, print it. The way I see it, it doesn’t really matter.

        “And have the Austerians complain about wasteful spending? No, just hand out the money equally to every adult citizen. Who can complain then?”

        Well the point of the stimulus is to get the economy going again, but also to reduce unemployment. Using the money directly to hire people (more civil servants, big construction projects) is better targeted and more efficient. And really, who cares about the austerians.

        1. F. Beard

          Using the money directly to hire people (more civil servants, big construction projects) is better targeted and more efficient. Narg

          No it isn’t! Was building the Pyramids efficient or a huge waste of time?

          Just hand out the money and MEANINGFUL (by definition) jobs will appear as the population spends or invests that money as it sees fit.

          1. Narg

            Okay, that’s weird. Following one of the greatest asset bubbles of all time it’s funny to say that the private sector knows The Truth regarding asset allocation. It’s equally funny to assume that hiring firemen and school teachers is Always and Everywhere Bad.

            Whatever. I’m not going to continue to argue on this all day so we’ll just agree to disagree.

          2. F. Beard

            Following one of the greatest asset bubbles of all time it’s funny to say that the private sector knows The Truth regarding asset allocation. Narg

            That bubble was blown with “credit” – which is essentially counterfeit money. To not borrow from the counterfeiting cartel was to be priced out of the market by those who did borrow.

            It’s equally funny to assume that hiring firemen and school teachers is Always and Everywhere Bad. Narg

            I said nothing about those people. However, a universal bailout should restore local tax revenues too.

            I’m not going to continue to argue on this all day so we’ll just agree to disagree. Narg

            Well, thanks for the exercise.

  10. ZA

    As a lowly prole, if I anticipate inflation, it means I will have to hoard even more cash to pay for the food and fuel products investors front-run on the rumor.

      1. YankeeFrank

        Right. Because the American people have all sorts of excess cash lying around to purchase food and other commodities months in advance. They are not living paycheck to paycheck and barely scraping by, going a little more into unpayable debt each month just for the necessities. I like the world you live in, its in much better shape than the one I live in.

        1. F. Beard

          Must be nice to have the storage space too – especially the gasoline storage.

          Btw, this is an argument for genuine private currencies so people can escape the destruction of the dollar for the sake of the banks.

  11. craazyman

    Actually real-life faeries are more credible than the confidence fairy.

    Being an Irishman, Phil, you may be aware of W.Y. Evans-Wentz’ “Fairy Faith in Celtic Countries”, which W.B. Yeats himself found more than credible.

    At least there is evidence for the existence of real faeries if people look for it. Not so true for the confidence fairy.

    1. Literary Critic

      “A leprechaun (Irish: leipreachán) is a type of fairy in Irish folklore, usually taking the form of an old man, clad in a red or green coat, who enjoys partaking in mischief. Like other fairy creatures, leprechauns have been linked to the Tuatha Dé Danann of Irish mythology.[1] The leprechauns spend all their time busily making shoes, and store away all their coins in a hidden pot of gold at the end of the rainbow. If ever captured by a human, the leprechaun has the magical power to grant three wishes in exchange for their release.”

      They are gold bugs too! Humans always wish for money – or higher inflation targets in the case of keynesian humans – so they flood humans with fiat currency – knowing that their pot ‘o gold will be safe!

      Most are Irish-Austrian economists – and know that human economies will collapse.

  12. Jeff N

    I agree, but you can’t help but start thinking of investors as children when there are such huge market swings whenever Bernanke chooses a turkey club over the chicken salad.

  13. Narg

    “Now, is it just me or does it appear that Krugman has just smuggled the confidence fairy in through the backdoor?”

    I just read Krugman’s piece again and he’s saying himself that there’s a chance it might not work:

    “Suppose, for example, that the Fed announces a higher inflation target. It might not work: markets might not consider the Fed’s proclamations credible and believe instead that no matter what the Fed says now, it will return to its traditional focus on price stability.”

    So who’s building straw men here? He doesn’t know finance, indeed. What I see is a man trying to think outside the box to find a solution.

    You guys are on the same side of the fence, you both want stimulus. Krugman is getting attacked by all sides since more than a decade, and the title of this piece isn’t going to be helpful at all. Just give him a break, bury the hatchet and focus on your real opponents.

    1. Philip Pilkington

      That’s not why I don’t think it would work. I don’t think it would work:

      (a) Because real investors will not see any change in demand for goods and services and:

      (b) Even if the central bank manages to fool investors it will likely result in inflation hedging with gold, silver and commodities rather than real investment.

      Frankly, this isn’t a team sport. Krugman’s economics are dodgy and he hasn’t even begun to think through the implications of what he’s saying. He also continues to deny commodities markets bubbles despite evidence like this [] due to his market-clearing fundamenatalism.

      If he wants to think outside the box he should engage in real arguments with his critics. I don’t think he’s intellectually honest enough to do it, to be frank. He prefers straddling the neoclassical fence and attacking the Rational Expectations clowns. Easy pickings, if you ask me. The second real criticisms are raised ala Keen or Fulwiller he turns tail.

      1. Narg

        Well, I’m not an economist myself so some of the finer points are flying over my head, but Krugman’s points all seem internally consistent to me, which is already better than most.

        > Krugman’s economics are dodgy and he hasn’t even begun to
        > think through the implications of what he’s saying.

        His model says, if you raise inflation, it all works, and other economists agree. The question on how to get there. I don’t think Krugman has the solution, he’s just saying we should at least try.

        And anyway, in that specific piece he was picking on Bernanke but it’s public knowledge that he favors a fiscal stimulus.

        > Because real investors will not see any change in demand
        > for goods and services and:

        Well if you inject lots of cash in the economy, at some point some of that money is bound to go into the real economy. You say people will buy gold, fair enough. It takes two to make a transaction, the other side will have lots of cash, and what are they going to do with it? Some of it will have to be spent, it can’t all just sit in bank reserves.

        > If he wants to think outside the box he should engage in
        > real arguments with his critics.

        That’s what he’s doing. You may not like what he said but at least he answered, once again, that’s better than most economists. And he’s spending his days on panels at the moment…

  14. Dave

    I don’t find either Krugman’s or Pilkington’s arguments terribly convining either way. I am compelled to sya however, surely to god you can rip someone apart eithout all this churlish name calling. For crying out loud don’t you realize how badly you embarass yourself arguing like a sixth grader?

  15. Eric L. Prentis

    Delusional, ignorant, naïve and raving double-agent bankster shill Paul Krugman—-needs an intervention. Please remove all sharp objects from Paul’s possession, or he may hurt himself.

  16. JIm

    Re: Dan Kervick comment 11:34 A.M.

    “But Krugman has a prominent position and straddles the fence between progressive aspiration and centrist caution. It is worth the effort to try and bring him over to our side.”

    It progressive aspiration boils down to the belief that resolving this financial/economic/political/culture crisis should center on replacing key personnel of the state( particularly at the Fed. and U.S. Treasury) in order to institute a more expansive fiscal policy that can stabilize aggregate demand, then, I would argue MMT has succeeded in narrowing this economic/political/cultural debate to such a point that its apparent operational strategy(electing politicians who are influenced by the appropriate MMT intellectuals) becomes, in effect, an endorsement of the present structure of power, only with a different set of politicians and bureaucrats in decision-making positions.

    Hopefully a few of us at Naked Capitalism will continue to argue that harnessing the state as the key instrument of ameliorating social inequalities is no longer an adequate strategic response to this crisis, because if it is, then politics continues on as a never ending truncated discussion between competing elites (Krugman versus MMT) or co-operating and competing elites (Krugman moving to MMT camp versus Neo-liberals elites) with the vast majority of us watching passively from the sidelines.

  17. kabosht

    The thing is this: yes, austerity measures adopted in pursuit of the imaginary confidence fairy are incredibly harmful, and demonstrably counterproductive. As most of us on this site would acknowledge, austerity is not only directly bad for the people feeling its impacts, but also economically bad, in that it lowers longer term revenues and lowers spending and demand, pushing the economy back toward recession. Trying to get the Fed to commit to a credible higher inflation target, on the other hand, even if they ultimately can’t get investors to believe in it, doesn’t really have a downside. If they can get some real, albeit moderate, inflation going, or get investors to believe they will do so, good; if not, so what? Krugman isn’t arguing “pursue a credible inflation target, and don’t do anything else.” He is, and has been, arguing, “pursue fiscal policy (stimulus), pursue unconventional monetary policy, and pursue a credible inflation target to try to prompt investment.” Unlike austerity, it’s hard for me to see the downside of trying the full range of policy prescriptions to spur demand, even if some of them end up ineffectual.

    1. F. Beard

      If they can get some real, albeit moderate, inflation going, or get investors to believe they will do so, good; kabosht

      You don’t get it. Workers don’t have much bargaining power so inflation will drive up their cost of living but not their wages.

      OTOH, if new fiat was simply handed out to the entire population then the need for wage increases would be bypassed.

      1. kabosht

        No, I get it, I just don’t agree. I think the benefits of investment-spurred job growth, and the declining value of debt, that could be generated by moderate inflation, outweigh the downside of potential wage erosion. At this point more people with more jobs is worth potential real wage declines, imho; we are in desperate straits, and I’m much (much!) more worried about unemployment and underemployment. If we could get a twofer of inflation-driven investment *and* modest wage growth, even better. And yes, I’m all in favor of money handed out directly to the population (much more than already is through transfer programs), which would be a wonderfully effective direct form of stimulus– but I’m not holding my breath for that.

        1. F. Beard

          I think the benefits of investment-spurred job growth, kabosht

          The “investment” would likely be speculation in essential commodities like food. That’s a sure bet even in a down economy (at the risk of being effectively cursed – see Proverbs 11:26).

          which would be a wonderfully effective direct form of stimulus– but I’m not holding my breath for that. kabosht

          Make the moral (as well as pragmatic) case for a universal bailout and who can resist it?

        2. Fiver

          Cutting rates to zero did not increase investment nor spur borrowing for consumption, except by those who were already in fine shape and did NOT need any prodding. Corporations went on a junk-bond spree, so rather than being simply the ‘cash hoards’ we hear about constantly in the press are actually also marooned in record debt if interest rates ever spike (goodbye what’s left of the corporate pension system if that happens).

          Nor did QE1 or QE2 assist the economy, as opposed to privileged interests. All those perverse moves accomplished was feed money to the worst of the worst to plow into currency and commodity speculation along with stocks.

          Bernanke loves banks, the Treasury, Wall Street, the wealthy at large, and the merely well-to-do (top decile to top quintile) all of whom owe the “value” assigned to their “wealth” today to Bernanke – even though a very large portion of that wealth, which evaporated in 2008, was not real in the first place, having been generated in bubbles, so should NOT have been restored. Anyone in the lower 80% got nothing but a kick in the nuts.

  18. Yancey Ward

    In Krugman, we find the “Non-Confidence Fairy”. I have no confidence in staying ahead of inflation, I had better invest!

  19. Susan the other

    Be careful what you wish for. And go to war for. We won oil. We control the oil industry. And now? It is a mirage because in order to keep the energy market functioning we must keep everything underneath it functioning. If prices begin to fall, it’s curtains. And if prices cannot fall, it’s stagnation. If the price of energy falls, the entire house falls. I would guess that the big effort to keep the system from imploding has less to do with the social function of banking and almost everything to do with the price of energy. That is why we are so slow to quit fossil fuels. What a mess. We are unable “economically” to progress.

  20. Martin Ranger

    This is truly an idiotic post. Instead of accusing Krugman of dodgy economics (and intellectual dishonesty), maybe its author should spend some time trying to understand some really basic macroeconomics.

    The confidence fairy argument is based on the lack of mechanism through which austerity leads to economic growth.

    The inflation expectation argument is based on the widely aknowledged and empirically supported argument that – ceteris paribus – a lower real interest rates lead to higher investment. In normal times central banks lower the interest rate to boost investment. In situations where this is impossible because interest rates are practically zero, the only way to reduce real interest rates is by raising inflation expectations. That’s all. No fairy anywhere in sight.

    Whether the Fed is able to raise inflation expectations is a different matter, and even Krugman does not claim it will work.

    I know it’s popular to bash Krugman, but it would be nice if the bashers had any idea what they are talking about.

    1. Mike Hall

      Perhaps you ought to consider the reality that investment did not occur when interest rates were dropped to the floor.

      IE the make money cheap gambit has failed throughout.

      Doing the same things over & over again & expecting different results springs to mind…was it Einstein offered this definition of insanity?

      The real economy has been bled dry (& the 1% are still squeezing). Shuffle all the deckchairs you like, unless some (ideally debt free) money gets shoved in main streets paws, the ship is going down (Euroland 1st).

      To paraphrase, ‘It’s the demand, stupid!’

      1. Martin Ranger

        Perhaps one also should consider the counterfactual of what would have happened to investment if interest rates had remaind higher before claiming that lowering interst rates has no effect.

        Which is not to say that fiscal policy would not be far more effective than monetary policy (which is something that Krugman has stated before). Unfortunately the political realities preclude fiscal expansion.

      2. SM

        Actually, Mike, investment is quite high given the lack of aggregate demand. This is due to the fact the rate has been dropped to zero. And, as pointed out, if we could get the rate *below* zero, it could lead to additional “consumption” by the business sector (also known as “investment”) because the cost to *not* invest is now higher than the cost to invest, and projects that were marginal will now be given the green light.

        1. kabosht

          Precisely- and inflation in a zero-bound environment is equivalent to a negative interest rate, or at least that’s the argument.

  21. Fiver

    Krugman is simply an elite Toady whose “flock” it’s his job to keep in check, meaning keeping them all believing in the Official Version of the Federal Reserve Banking System (trumpets, please) – how else but via the great K do we learn that we “good guys” too can embrace the stalwart Fed’s noble mission, especially when we all absolutely depend on the Heros that glide through its corridors….

    I nonetheless had had enough of going after Krugman per se well before this piece.

    Why isn’t the author out campaigning his ass off trying to secure a victory for the “NO” forces in Ireland?

  22. Knut

    I got an advance copy of Krugman’s new book End This Depression Now, for a salon I will be hosting on FDL in May. He comes down strongly on the side of fiscal policy. It is a real cri de coeur. I think he should quit writing for the Times twice a week (once would be enough), as it is sapping his energy. He should put his enormous talents to work destroying Lucas and the full equilibrium school. I agree with Yves above that he is not into finance. The section on Repos is obscure (my test is whether when you read something you could explain it to somebody else, and his discussion of shadow banking does not pass that test). That is what comes from doing journalism. It dulls the mind. To a lesser degree the same thing happened to my friend Steven Jay Gould.

  23. K Ackermann

    I like Philip’s articles, and he’s always gracious enough to hang around in the thread for a while.

    However, this post felt a little evangelical on a subject that Krugman may well be correct.

    There’s nothing cut and dry on the subject, but Philip is correct to zero in on the roll of confidence with the scheme.

    I think though, the effects Krugman are talking about are more tangible than, for instance, the wealth effect – at least in these turbulant times.

  24. Hugh

    All of this encouraging investment talk is just supply side/trickle down economics redux. It didn’t work in the 80s. It didn’t work in the 00s. And it won’t work now, period.

  25. JCC

    Right now Mr. Williams at ShadowStats, among others, puts inflation right around 6%. Gas and food are probably higher. For a single person such as myself, this means that 18 months ago it cost me about $45.00 for a full tank to drive round trip to the nearest “mall” area to load up on “long term” staples, frozen foods, underclothes, pants, shirts for work, essentially basics.

    Today that same trip costs me about $60.00 and the food and clothing have almost doubled in price. This means the trips happen about once every three to four months instead of once every two months.

    Meanwhile I’ve received about a 1.5% increase in wages over that same time period. I consider myself lucky to have such a generous employer; a friend of mine doing the same work at less money with the same drive times was just laid off last month.

    I believe that anyone who thinks that 4%, 5%, or 6% inflation is “acceptable” either has more money than he or she knows what to do with, or he/she is generally clueless about what the average person goes through to keep the wolves at bay, especially when the average person sees no wage compensation for inflation, or worse, no job.

    The Ivory Tower arguments on inflation are a joke as far as I’m concerned. The minute any inflation whatsoever is discussed, all I plan on are the costs that will increase and the wages and savings that won’t.

    I read an interesting article recently on Jelle Ziljstra, a former president of the BIS where he described inflation as “the most gross social injustice” which “hits the less fortunate the most”. Truer words were never spoken.

    If Krugman’s plan is to help the Banks, then I say to hell with the Banks and the Fed that got us into this mess, and to hell with Krugman and people like him.

    1. SM

      You funny. I’d love to know what you’re eating that has doubled in price, or what you’re wearing for that matter. There has been almost no inflation in the price of food or clothes over the time period referenced. Maybe your servant is pocketing the change. And as i recall, the “inflation” in the cost of energy is nothing over the last few years. Gas is the same as during the bush years, $4, and natural gas/electricity are down.

      Good luck with your “shadowstats.” The rest of us will stick to reality.

      1. chitown2020

        Ron Paul talked today about how the FED is robbing us. Mr. Paul said the FED has devalued the dollar 98% since 1913. The dollar has lost its value..$500.00 worth of groceries is like $250.00 worth or less. The dollar buys you less every day. That is why the prices of utility bills and gas are double. They are in reality half of that price. I find the grocery bill to be my largest expense. My mother told me years ago if we did not have to eat we would all be rich. The FED is committing fraud and robbing and bankrupting us with sneaky class warfare ala Nietsche. They must be stopped or we will all wake up broke and homeless in the land our fathers conquered.

      2. JCC


        When I moved out here to the Mojave Desert gas was around $3.25/gal, now it’s $4.25/gal. A quart of Half ‘n Half was about $3.00, now it’s about $3.79. I don’t care what gas cost when Bush was President, that was longer ago than my 18 months timeline above.

        As for clothing, a pair of pants at Kohls, on sale 18 months ago, cost about $15.00, now about $22.00.

        Even my “servant” is costing me more, the cat’s food has easily gone up 10% in the last 18 months, my wages have increased 1.5%

    2. chitown2020

      I agree with you JCC…there will be food riots and it will be Anarchy if the FED is not stopped. The dollar buys nothing. I couldn’t afford to stock up if I wanted to. These no good crooks know exactly what they are doing. I feel sorry for the elderly on fixed incomes. It reminds me of the episode of George Lopez when they decided to cut back on their spending so they wouldn’t have to eat cat food when they got old. Pretty soon God forbid, we might be passing around the meow mix.

  26. SM

    Dean Baker’s take on this:

    “The question at hand is whether the Fed can plausible generate more inflation, and thereby lower real interest rates and reduce the unemployment rate by announcing a commitment to higher inflation rate over the near future. This could mean, for example, committing itself to 4 percent inflation over the next 5 years.

    If this policy was successful, it would lead to lower real interest rates, which would in turn lead to more consumption and investment. Ideally we would also see a decline in th real value of the dollar, leading to more net exports, the essential long-term path to full employment.

    My view is that this path would likely be successful, if the Fed were really committed to it. That means continually buying up vast amounts of assets if the inflation rate did not appear to be rising. This should ultimately freak enough investor types into thinking that Bernanke was sufficiently nuts that he could cause inflation. They would then hedge themselves against this risk by buying up all sorts of commodities to protect against inflation, which would then lead to inflation.

    That looks like a pretty compelling story to me, but perhaps at least as important, I don’t see the downside. Bernanke’s obsession with the Fed’s inflation fighting credibility (like the ECB’s) is really pathetic. How much is this worth when you just wrecked an economy with your incompetence in protecting against asset bubbles?

    Other things equal, it is better to have central banks that have some credibility in fighting inflation, but how does this compare against tens of millions of people in the U.S. and euro zone being unemployed? If the latter is such a small matter, would the inflation fighters volunteer to surrender their jobs so that some of the unemployed can work?

    Finally, if buying up tons of assets will not cause inflation, then there is definitely no excuse not to do it. The Fed can hold $10 trillion in assets and pay the interest to the Treasury each year. Currently it is refunding about $80 billion a year to the Treasury from its interest in assets.

    Suppose this was instead $400 billion a year or $4 trillion over a decade? That should make even the most ardent deficit hawk happy. There would be no deficit problem in that story, which would mean that we can freely spend on all sorts of things that can boost growth and help people. Tell me again that story about Fed credibility?”

  27. SM

    PS. I agree with all the above posters that point us this is another attempt by the MMTers to say


    Get over it already. What is with your non-sensical hatred of one person who shares well over half of your policy prescriptions? Why not bitch about the 99% of economists who share NONE of your views? What about krugman is so important to you people that you need to engage him in arguments non-stop?

    A lot of us are on team Obama-isn’t-as-bad-as-Romney. So what? People are alive right now, and there is no reason to make them suffer further when your two options are not-so-great, and much-worse. I’ll choose the least worst option everyday, and twice on sunday, because i don’t know what picking the worst option will ever prove.

    1. Hugh

      A fine example of the mindless tribalism I was talking about. We all should just shut up and let those our elites have chosen to be our spokesmen talk for us. We should just accept and thank our lucky stars for the crap awful Tweedledum and Tweedledee choices they deign to grace us with, whether these be Presidential candidates, the two political parties, or NYT columnists. We should basically continue on the course that got us where we are today, because that has worked out so well, hasn’t it?

  28. Roland

    Krugman not only overestimates labour’s negotiating power, he ignores the double-digit inflation in much of the developing world that has taken place in the past decade due to the loose-money policies driven by the American central bank.

    e.g. the unrest in Egypt was partly related to soaring world food prices.

    How can a globalist neoliberal like Krugman believe that US central bank policy will create inflation only in its own country?

    There is so much room for wages to catch up in the global labour market as a whole that it is quite possible that Krugman’s proposed inflationary policy would drive up the world prices of fuel and food, even while American wages continue to lose pace.

    1. Defiant

      Think about this for a minute. Do you believe in supply and demand? If do, than you would agree that the market would adjust prices to conform to demand. You would believe that the market is a self clearing mechanism. You would agree that price setting is manipulation, it is unethical and immoral. Fiat systems are immoral so is creating currency to meet the wants of a few free loaders. Free markets work…

  29. Defiant

    For those confused souls, the end of the Kenesyan road ends at 0% prime. Their model only appears to work so long you can lower rates and so long the printing create fake demand. Note that tholis model is not the same as printing, as printing is a direct infusion into the economy, while kenesyans create credit which only gets into the economy if banks want to lend and people botlrrow. There comes a time inwhich the amountof printing required to have a net positive impact on the economy is massive. Meaning the danger outweighs the benefit. We are there. Ben and Paul know this and are filthy liars.
    The fed and government have destroyed the wealth of the people, yet we have fools asking for printing control to go from ass to jackass. Yeah that will for sure make a difference.

    Geniuses.. excuse my spelling.. typing from cell is not an easy task.

  30. Fiver

    Want to see what a policy of extreme negative interest rates gives you? Have a look at the unfolding disaster in China. Any policy at this point that aims to “stimulate” with no overall sustainable development/growth plan is simply buying some very expensive short-term jobs in exchange for ever-bigger medium-to-long term migraines.

    China and Japan are both in very serious trouble. We would do well to pay a good deal more attention to what’s unfolding there. Here a piece from one of those speculators who has some very interesting things to say, even though his politics and ideology can be off-putting. In other words, he makes an interesting case if you can bring yourselves to look past both his own self-interest and, as noted, some ideological blind spots. Came across this at ZeroH. I know some dismiss that site completely, but I find they have some good stuff amongst the chaff.

    1. Defiant

      You are 100% right about China and Japan. But you know what the kenesyans and socialists will say? They did not do enough or it’s due to austerity. Here we are 4 years into the the crisis, Oboso has spent in 4 years what all other president spent in 200 years and its stiill not enough. We have lost the ability to think as a nation.

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