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XMFSinchiruna (28.57)

History Will Not Judge Krugman Kindly

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October 02, 2009 – Comments (58)

I have grown quite weary of the Nobel Prize.

It remains a powerful award heralding the arrival of a recipient to the pinnacle of success in their field.

Enter Paul Krugman, whose selection for the prize diminishes the legacy of the award itself.

Now, I know he was selected for his contribution to the understanding of trade, rather than for his ruminations on the broader state of the economy and the role of debt in the context of our present crisis. As it becomes clearer and clearer just how incredibly wide of the mark this guy is in terms of grasping the true nature of our present predicament, I suspect that the Nobel selection committee will wish they had not empowered him with this mystique-building title.

What is our venerable Nobel-winning economist saying this week? More stimulus! Nothing new here ... he's been bullish on stimulus for some time. We haven't come close to spending stimulus package #2, and already Krugman is clamouring for more debt to solve our debt crisis. The incongruous logic behind such a call is truly baffling. The dollar is perched on the edge of cavernous ravine, driven by an international crisis of confidence in our national fiscal solvency, and this guy wants to be one more hand pushing the greenback over the edge. If he were the genius that his prized award suggests, then he would understand how completely wrong-headed his entire approach to the crisis remains.

If you're betting the family farm on an economic paradigm that's aligned with this guy's thinking, then you are in grave need of a paradigm shift. If you think that further stimulus will create anything but a more viscious degree of market dislocation, quantitative easing, and an eventual rush to the exits by foreign central banks, then you'd be ignoring the observable impacts of the first two stimulus packages and their ilk of bottomless bailouts. If you think that it's possible to prevent the delevering of the global derivatives market with the printing press, then you'd better be prepared for the hyperinflationary consequences of the strategy.

I have argued from the beginning that the reflation strategy was wrong. As I've mentioned before, I stood on the steps of the capital in Washington on the eve of the TARP vote with a small group of protestors decrying the misguided strategy selection for dealing with this crisis. When you've permitted a shadow market in toxic derivatives to balloon to 16 times the scale of the entire global economy, then you've created a disaster that must de-lever before sustainable recovery can be achieved. Yes, the deleveraging of a $1 quadrillion derivatives market would have been extremely, extremely, extremely painful and chaotic to endure. The number of job losses, bankruptcies, bank failures, and a complex web of falling dominoes would have been nothing short of epic ... but believe it or not that will be viewed in hindsight as the rosier of the two scenarios. You see, the only thing all these trillions have bought us is time. The deleveraging event will continue, as there is no sustainable means to prop up a derivatives market of this scale ... its scale is well beyond the reach of any printing press.

Because printing money can only intensify the critical condition of the currency, the activity can not possible lead to real recovery (as differentiated from the mythical recovery hinged on government-induced equities stabilization). It is a losing battle. When you're fighting a losing battle, the sensible choice is to give up early rather than waste precious resources by more and more leveraged means. Of course, that is not possible at this stage ... the politics would never permit a reversal of the chosen strategy. We are all in ... every card in the USA's hand is on the table, and God help us if I'm right and the entire strategy ultimately does nothing but raise the stakes in the world's first spin at global financial roullette.

Place your bets, Fools. As you know, it pains me to have the outlook that I do. I wish I could believe that my country's future were in the hands of people who were making wise decisions. I do not believe that to be the case. I think former FED chairman Volcker understands this, and is beginning speak out. We can only hope that fiscal sanity prevails, because the stakes are so extraordinarily high ... failure is an unthinkable outcome, but unfortunately appears baked into the present cake.

We need a paradigm shift at the highest levels, and fast!

We need to take our 5-10-year depression, as tragic as that is, and understand that it's the best outcome we can hope for. To continue down the reflation path and further raise the stakes is to ensure only that the consequences will be that much more severe.

Did you see gold today? Did you note the extraordinarily counter-intuitive way in which horrendous jobs numbers translated into strength for gold and weakness for the USDX. The world understands what is happening even if Paul Krugman does not. Mounting economic woes will result in ever-mounting stimulative efforts, and this in turn can only lead to substantial dollar devaluation. The cat is out of the bag.

Listen to Krugman at your own risk.

 

 

58 Comments – Post Your Own

#1) On October 02, 2009 at 11:11 AM, StatsGeek (29.99) wrote:

I'm with you, Sinch.  Krugman is a Nobel-class moron and the dollar is doomed.

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#2) On October 02, 2009 at 11:14 AM, portefeuille (99.75) wrote:

Back from the Brink (pdf)

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#3) On October 02, 2009 at 11:15 AM, XMFSinchiruna (28.57) wrote:

portefeuille

The cunning danger of his position is that it places a stamp of warrantless credibility upon a failed paradigm that we'd be better to abandon entirely. As I said, it's not politically feasible to change course, and I've argued all along that fiscal interventions will continue to mount in scale, but that political catch-22 doesn't alter the overwhelming likelihood of failure.

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#4) On October 02, 2009 at 11:19 AM, dargus (78.44) wrote:

The point of the stimilus, or at least a properly implemented stimulus, has nothing to do with delevering banks and everything to do with providing jobs for the masses of unemployed people. Will this spending decrease the value of the dollar, I suspect so, but how do you think the dollar would fair during a five to ten year depression? Also, don't you think a weaker dollar might increase exports thus creating some jobs? You may be very correct in asserting that all of the government's action in total will only slow and lengthen the deleverging process, but that includes a lot of action beyond stimulus spending. It seems entirely reasonable to me that having the government employ people, especially people building useful infrastructure projects, will be a net gain for the U.S.

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#5) On October 02, 2009 at 11:21 AM, PdoBear (< 20) wrote:

Sorry, but Krugman will be deified. Two years before the 1929 crash, Keynes was talking about how a significant depression would never happen again. Look at what marketing has done for him.

Krugman acts as a spokesman for politically acceptable action. He is also a master of story telling and after-the-fact analysis. It doesn't matter if his past analysis has been wrong, he simply changes the thesis.

"We need a larger stimulous." If he gets it, and he will, when it fails he will simply say it wasn't done quickly enough. Krugman is strongly in the deflation camp. I've saved his articles.

The dollar is already crashing and his deflation argument is getting crushed. I guarantee you he'll say inflation is good five years from now. The guy is a joke but the masses listen.

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#6) On October 02, 2009 at 11:32 AM, XMFSinchiruna (28.57) wrote:

PdoBear

Unfortunately, I think you're probably 100% right on the mark!

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#7) On October 02, 2009 at 11:34 AM, XMFSinchiruna (28.57) wrote:

dargus

It will appear like a "net gain", until people grasp the unintended consequences.

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#8) On October 02, 2009 at 11:40 AM, dargus (78.44) wrote:

I agree there will be unintended consequences. Anytime the government becomes interventionist there are. However, are we sure they are consequences, or might there be unintended benefits? You know when the private sector goes about spending money there are also unintended consequences. No matter what anyone does there are unintended consequences. I’m simply suggesting the unintended consequences of not employing people might be worse than the unintended consequences of employing people who build useful things.

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#9) On October 02, 2009 at 11:41 AM, portefeuille (99.75) wrote:

Economic scarring: The long-term impacts of the recession (pdf)

The Budget and Economic Outlook: An Update (pdf)

The Budget and Economic Outlook: Fiscal Years 2009 to 2019 (pdf)

 

output gap



enlarge

(from here (pdf))

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#10) On October 02, 2009 at 11:45 AM, outoffocus (24.47) wrote:

Anytime the government becomes interventionist there are. However, are we sure they are consequences, or might there be unintended benefits?

Of course, but for which group of people? I can guarantee you it isn't the poor and middle class.

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#11) On October 02, 2009 at 11:51 AM, dargus (78.44) wrote:

Of course, but for which group of people? I can guarantee you it isn't the poor and middle class.

 

Really? You can guarentee that? Are you the Oracle at Delphi? Oh, I forgot that government can never, ever do anything right. I'm quite certain the poor and middle class didn't benefit from the CCC.

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#12) On October 02, 2009 at 11:52 AM, Option1307 (30.51) wrote:

Good post sinchy!

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#13) On October 02, 2009 at 11:57 AM, portefeuille (99.75) wrote:

output gap



enlarge

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#14) On October 02, 2009 at 12:00 PM, goldminingXpert (30.87) wrote:

 Listen to Krugman at your own risk. -- Couldn't agree more. 

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#15) On October 02, 2009 at 12:09 PM, portefeuille (99.75) wrote:

World Economic Outlook, October 2009 (pdf)

 

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#16) On October 02, 2009 at 12:29 PM, whereaminow (75.43) wrote:

Of all the horrbile economic fallacies put forth by Paul Krugman over the last decade or so, personally I find his response to 9/11 among the most disgraceful.  In an essay titled Reckonings, After the Horror, Krugman engaged in the classic Broken Window Fallacy, surmising that the terror attacks will bring about some "good" since it will increase employment in the construction sector. I'm not kidding. Nor was he.

"The driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I've already indicated, the destruction isn't big compared with the economy, but rebuilding will generate at least some increase in business spending." 

Now, it's one thing when a foolish politician makes such a claim, or perhaps a family member or co-worker with no background in economics tells you that it's ok to destroy something since it will create jobs to rebuild it.  It's quite another thing when a Nobel Prize winning economist engages in such rhetorical nonsense. 

If such a man of Krugman's economic stature can not grasp the economic lesson of the Broken Window Fallacy, how can he possibly be taken seriously on anything he says.

Only the most unprofitable, backwards, and culturally irrelevant newspaper would ever hire such a man. Oh, wait....

David in Qatar

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#17) On October 02, 2009 at 12:31 PM, Tastylunch (29.97) wrote:

I think former FED chairman Volcker understands this, and is beginning speak out

A bad sign since that means he's likely given up on trying to actually influence the president's team.

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#18) On October 02, 2009 at 12:35 PM, Deepfryer (28.16) wrote:

""We need a larger stimulous." If he gets it, and he will, when it fails he will simply say it wasn't done quickly enough."

Well, so far the stimulus programs have been an incredible, unprecedented success. But I don't see you admitting that you were wrong.

This thread so far is a perfect representation of the Keynesian/Libertarian debate. The Keynesians make their points for government intervention by using statistical analysis, graphs, figures, projections, etc, to show why gov't spending is necessary.

The Libertarians respond by saying that big government is bad. That's it. No numbers, no compelling arguments, just the same tired old argument that big government is bad. Talking to a libertarian is like talking to a slightly more eloquent version of Sarah Palin. Take a look at post #5 in this thread, or the original post, for examples. Where is the numerical, real-world analysis? Where is the justification for the Libertarian position?

I realize that it feels good to "go with your gut" and criticize gov't spending... but sometimes you have to dig a little deeper. I would encourage everyone to read the excellent article on "Economic Scarring" from post #11.

To respond to a statement from the original post:

"We need to take our 5-10-year depression, as tragic as that is, and understand that it's the best outcome we can hope for."

I hope that in 5 years you are willing to admit that you were completely and utterly wrong on this. Because we aren't going to experience anything even close to a 5-10 year depression.

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#19) On October 02, 2009 at 12:36 PM, russiangambit (29.98) wrote:

>A bad sign since that means he's likely given up on trying to actually influence the president's team

Yep. That is exactly what I think. He is been quiet and then suddenly he started appearing everywhere and speaking out about 2-3 weeks ago. Bad sign. He must think the situation is very dire indeed.

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#20) On October 02, 2009 at 1:22 PM, rofgile (98.98) wrote:

I have to second DeepFryer's post #20.  

I've supported Keynesian views for how to deal with the crisis, because there is a mathematical basis to them.  

GDP = private consumption + gross investment + government spending + (exports − imports), or,

GDP = C + I + G + (X − M).

----

In modern economic theory, a growing GDP is a good thing (that's when we have higher employment, increasing wages, etc).   We're seeing a drastic cutoff in private consumption (possibly a restructuring event for the US - which would be a good thing), exports and imports have both fallen with the global slowdown.  The last supporting agent is the government.  Increased government spending on projects balances the GDP loss (to some degree - as we saw in the last 8 months, it didn't stop us from getting as high as near 10% unemployment, to government chagrin.  But without the stimulus, we would be at 15-20% unemployment, no?)

The increase in government spending and debt will likely weaken the US dollar.  This helps the US GDP by increasing the export revenues and decreasing import demand.  For US manufacturing (such as the tire industry, solar industries, steel makers, and car makers) such a change would be great.  

------

A weakening dollar will mean an increase in prices for us.  That's the tax.  But, it's better for me (who is still relatively young) to have employment and a future, than to keep a strong dollar - and be unemployed and broke.  Sure, my first house will cost more than it could otherwise, but at least I will be able to pay for it.  I've recently become aware how dependent I will be for all my future happyiness to have a decent paying job that can support a home, a family, and taxes on the home and income.  That's a lot to deal with, and I want to be in the future where I have a job that can make regular payments.

-Rof 

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#21) On October 02, 2009 at 3:21 PM, whereaminow (75.43) wrote:

Deepfryer ,

I can show you unemployment statistics, CEO hiring plans, earnings numbers, commodity prices, etc.   You will dismiss them all. 

I can teach you about stagflation, how Keynesians thought it was impossible, how Austrian School economists predicted it, and you would dismiss it.

I can teach about the "bridge being built" so you can understand the fallacy of government spending, and how including government spending in GDP renders it worthless, and you will dismiss it.

I can explain the difference between physical sciences and sciences of human interaction.  I can explain the logical basis of economics and that every economic action is a purposeful action. You will dismiss it.

I can point you to hundreds and thousands of economic and economic studies, 4,000 of price and wage controls, failed central planning experiments from every corner of the world. You will dismiss it.

You are the pot calling the kettle black.

David in Qatar

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#22) On October 02, 2009 at 3:22 PM, whereaminow (75.43) wrote:

 of economic and economic studies

econonomic and historical studies

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#23) On October 02, 2009 at 3:23 PM, whereaminow (75.43) wrote:

4,000 of price and wage controls

4,000 years of price and wage controls

(I need an editor)

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#24) On October 02, 2009 at 4:30 PM, rofgile (98.98) wrote:

whereaminow:

 How does consumer spending differ from government spending in effects?  Cannot money from either source result in the construction of buildings, new power plants, or purchases of trucks?  And don't these spending of money result in maintenance of jobs?

 If consumer spending is low, cannot government spending balance out the loss of demand from industries until consumer demand returns?  

 -----

 We are talking about government spending as related to maintaining a GDP and jobs, and if you have good points against this from happening, please post them.  I totally agree with you on price and wage controls and other interferences of supply, demand.  But, I think the model of treating the US government like a consumer is pretty accurate.  He might not be the most intelligent consumer (perhaps he buys a bridge to nowhere that isn't a useful investment and is wasteful), but if the investments he makes are good - they can be beneficial in the long run.  Examples include the CCC, or highway system.  A smart power grid, or building fields of renewable energy (with help of American companies) would be good investments in technology.  

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#25) On October 02, 2009 at 4:39 PM, Deepfryer (28.16) wrote:

whereaminow:

Laziness is no way to win an argument. If I'm the pot calling the kettle black, what does that make you?

You don't have to respond if you don't feel like it, but don't waste our time with a post that contributes nothing.

I'm really not interested in your speculation about CEO hiring plans... I work for an industrial company and with my own two eyes I've seen how our plants in Ohio are working around the clock to fill all the orders coming in from GM, Nordex, Siemens, Airbus, etc, etc.

And, let me point out that digging up some 50-year old example of a failed policy does not contribute anything to the current debate, unless the situation was a direct parallel to what is happening in the world right now.

I'd like to hear your thoughts regarding the IMF report, which contains this sentence on page 1:

"The triggers for this rebound are strong public policies across advanced and many emerging economies that have supported demand and all but eliminated fears of a global depression."

Or how about the Economic Scarring article and the point it makes regarding the lasting effects of a recession? For everyone's convenience, here is the conclusion of that article:

Recessions can and do have lasting impact. As such, we should consider the costs of fighting recessions as longterm investments.

In a globally competitive environment, the loss of investment, R&D, education, and skills more generally are even more important as they can undercut the United States’ global competitive advantages. In a global context, righting the ship as quickly and completely as possible is essential in limiting the long-term damage.

The American Recovery and Reinvestment Act has and will add to the fiscal deficit, but those costs—in terms of added interest payments—should be viewed as necessary to provide a short-term boost that allows us to avoid even greater long-term damage to families and to the economy.

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#26) On October 02, 2009 at 4:55 PM, whereaminow (75.43) wrote:

Deepfryer,

40% of CEO's expect to cut jobs in next 6 months

That's not my speculation.  That's a statistic that you claim I can not provide.

There you go.  Feel free to apologize at any time.  Do you want more?  I can go on and on.

David in Qatar

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#27) On October 02, 2009 at 5:01 PM, whereaminow (75.43) wrote:

rofgile,

If you believe that government spending benefits the people then you will agree that it should be included in GDP.

If you believe, however, that government spending just moves money from effecient sectors to inefficient ones, and provide an unnecessary and costly bureaucracy in addition, then you will wonder why anyone would take GDP seriously.

For example, I can pay you to dig a hole.  I can count that as spending, then say I created a job, and everyone will hail me as a hero.  If it was my money that I used to pay you, then I will go broke quickly and my assets will be handed out in bankruptcy court.  If it was someone else's money I used, through taxation and inflation, then I will cheered as the greatest savior of all time. 

That is the difference between government spending and consumer spending.

David in Qatar 

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#28) On October 02, 2009 at 5:09 PM, whereaminow (75.43) wrote:

Deepfryer said: 

And, let me point out that digging up some 50-year old example of a failed policy does not contribute anything to the current debate, unless the situation was a direct parallel to what is happening in the world right now.

I love this line of reasoning.  I could get away with so much if only I could use it for all things.  Like, hey, I realize that I killed that hooker, but every other example of dead hookers is from years ago, man!  Those were totally different situations!  My hooker was from Philadelphia and was a runaway with Hep A.  And she didn't smoke or drink.  And she had a cat named Charley.  So your logic is totally blown.  These are totally different situations.  Now let me show you some statistics that prove that killing that hooker actually created jobs and stimulated the economy.

David in Qatar

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#29) On October 02, 2009 at 5:30 PM, NOTvuffett (< 20) wrote:

The Nobel prize?  Are you kidding?  Yasser Arafat won a prize for peace.  Maybe it is because he thought of an inventive way to use Alfred Nobel's primary contribution to mankind- dynamite.  

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#30) On October 02, 2009 at 6:04 PM, Deepfryer (28.16) wrote:

"

Deepfryer,

40% of CEO's expect to cut jobs in next 6 months

That's not my speculation.  That's a statistic that you claim I can not provide.

There you go.  Feel free to apologize at any time.  Do you want more?  I can go on and on.

David in Qatar"

LOL!

Where exactly is the bad news? I hope you realize that 40% is not exactly a majority. It's hilarious how you thought you made a good point here. Just look at the start of that article:

* Business Roundtable CEO Economic Outlook Index rises

* 51 pct of U.S. CEOs see sales rising in next 6 mos

* 40 pct expect to cut jobs in next 6 mos

* 35 pct expect to trim capital spending

Where is the bad news??? What if it said that 1% of CEOs expect to cut jobs... would that still support your claim???

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#31) On October 02, 2009 at 6:27 PM, buildgreen (< 20) wrote:

So Lets say this horror story you all paint does not come to pass. Something you have not calculated on comes into play and in 2 years, we have job growth, no major problems (other than the never ending line of problems that face all peoples over all times) and new industries taking root (clean tech). Will those of you who predict the fall of our economy still be singing this song? Its easy to shift your argument to something not as drastic as a date when the event never happens from what Ive witnessed here.

or Will you allow for your world view to shift to reflect new facts/ opinions/ views?

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#32) On October 02, 2009 at 6:35 PM, whereaminow (75.43) wrote:

Deepfryer,

Wow. You can't be serious. Are you joking or just acting "blonde?" I'm serious.  I can't tell if that was a serious comment or not.  Nobody can be that stupid.  

Well just in case... Uh, the bad news is that more CEO's expect to cut workers than hire workers, this on top of a dozen months of job cuts already on the books.  I honestly think that you would have to be somewhat retarded to think this is good news.  I mean, I met PFC's in the Marines that had more sense than that.

buildgreen,

What if your grandmother had wheels?  She'd be a bicycle.  What's your point? 

David in Qatar

 

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#33) On October 02, 2009 at 7:00 PM, dbjella (< 20) wrote:

David -

You are in rare form.  I know you have tried to express logic, but sadly, I don't find many people who think logically (ex-wife comes to mind).  

I also find it funny how people continue to throw at models showing how the economy works and how if you raise this, then this will happen....  Do these people ever ask themselves how long they have to wait before these models can get it right.  I guess we will keep trying.  Those in power are sure smarter than us.

Go Fed go.  Inflate us and continue to drive down our standard of living :( 

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#34) On October 02, 2009 at 7:20 PM, eddietheinvestor (< 20) wrote:

Sinchurina,

 

What a great post.  It's very astute.  The stimulus seems to have been a failure so far, but Krugman won't admit it; look at the terrible unemployment numbers that came out today.  The stimulus is more about repaying political favors than anything else.  And how can jobs be quantified?  I heard an Obama official (Hilda Solis) today on CNBC say that the stimulus has been a huge success because it saved jobs.  What does "saved" mean?  And the CNBC commentator didn't seem to mind that Solis didn't answer any questions directly.  When Bush left office, millions of Americans had jobs.  I'm so thankful that Bush saved those jobs for people!

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#35) On October 02, 2009 at 7:37 PM, whereaminow (75.43) wrote:

dbjella,

Heh, I think you inspired me yesterday :)

David in Qatar

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#36) On October 02, 2009 at 10:41 PM, Deepfryer (28.16) wrote:

dbjella

"David -

You are in rare form.  I know you have tried to express logic, but sadly, I don't find many people who think logically (ex-wife comes to mind).  

I also find it funny how people continue to throw at models showing how the economy works and how if you raise this, then this will happen....  Do these people ever ask themselves how long they have to wait before these models can get it right.  I guess we will keep trying.  Those in power are sure smarter than us.

Go Fed go.  Inflate us and continue to drive down our standard of living :( "

 

I don't understand how you think David is making any sense here. But to address your point, Iet's re-visit the following quote, which came directly from an IMF report:

"The triggers for this rebound are strong public policies across advanced and many emerging economies that have supported demand and all but eliminated fears of a global depression."

David failed to respond to this point, but I hope you can see that it has nothing to do with models. It's just a statement of fact. I'm not sure why David continues to ignore reality... the reality that we are all living in... where the stimulus programs around the world have had a positive effect on the global economy.

Are you as quick as David to dismiss an IMF report? Is this not even deserving of a response?

And again, no one has responded to the points raised by the "Economic Scarring" article. But I'm not surprised. You have to pick your battles carefully when you have no ammunition. No one has responded to any of portefeuille's figures either... but again, I'm not surprised.

Lastly, regarding the CEO thing... David is just grasping at straws, and frankly it's pathetic. For starters, the 40% number is meaningless unless we can correlate it to something. Is this an increase or a decrease from the last time they asked this question? Who knows? Without more information it's an utterly meaningless statistic.

Regardless, the article that he quoted has a lot more good than bad. For instance, it leads off with this line:

"Business Roundtable CEO Economic Outlook Index rises"

Obviously they have taken his "40%" number into consideration, yet the CEO Economy Outlook has still risen dramatically, from a value of 18.5 all the way up to 44.9. So, here we have an economic index which is showing great improvements... and David is trying to use this as a negative indicator? Seriously?

The article even explains that employment levels are a lagging indicator, whereas spending (which is already increasing), is a leading indicator. I don't expect you to understand what this means, so just take my word for it, that your "point" does not indicate in any way that the stimulus has failed.

One more:

"CEOs expect real U.S. gross domestic product to decline 0.9 percent in 2009, up from their June view of a 2.1 percent decline."

So, their views have improved dramatically over the estimates that they made in June. But this doesn't indicate that conditions are improving?

What exactly would it take for you to admit that the stimulus has had a positive effect on the economy?

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#37) On October 02, 2009 at 10:46 PM, Deepfryer (28.16) wrote:

"If you believe, however, that government spending just moves money from effecient sectors to inefficient ones..."

I seem to remember you bringing up the concept of Marginal Utility in a previous conversation.... it's too bad you can't understand how to apply it to a real-world situation. For instance, if you really understood the idea of marginal utility, you would be able to see why having higher tax rates on the wealthiest people in the country results in a net increase in overall efficiency.

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#38) On October 02, 2009 at 11:39 PM, AvianFlu (39.70) wrote:

DeepFryer:

In response to your claim that Libertarians offer no proof to back up their claims: I suggest you read some Milton Friedman. "Free to Choose" would be a good choice. Friedman was a Nobel prize winning economist and a reformed Keynesian. I am not sure why any rational person would support Keynesian economics since we now have a record of 75 years of Keynesian failure in one country after another.

Simply put, Keynesianism is an economic tumor. It needs to be cut out.

As for Krugman, since the 9/11 attacks were so great for the economy because we could now have some new construction jobs I have a suggestion. Let's extend the logic a little. Let's blow up all the existing structures in the United States and then they can be rebuilt....thus providing all sorts of new construction jobs! That makes about as much sense.

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#39) On October 03, 2009 at 12:34 AM, whereaminow (75.43) wrote:

Deepfryer,

I love it when people question my world view, considering I actually live overseas, have done so for most of the past 13 years and have travelled more in a year than most travel in a lifetime.  Please.  You make laugh.  I'm sure your world view, encompassing an IMF report and the network news far exceeds mine.  That is rich.

Since when is the IMF the bastion of economic prescience?  Am I supposed to read their entire report?  Let's make a wager.  I'll download the 251 page IMF report, read it in my spare time and get back to you.  What would you like to wager that I can find several statements in there where they hedge against what they said on Page 1?  What would you like to wager that I can tear apart that report with ease?   '

You read page 1 and then flaunt it as fact and we are all supposed to be amazed at how ridiculous you make us look. Well, something here is ridiculous all right.

David in Qatar

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#40) On October 03, 2009 at 2:13 AM, starbucks4ever (99.49) wrote:

"We need to take our 5-10-year depression, as tragic as that is, and understand that it's the best outcome we can hope for. To continue down the reflation path and further raise the stakes is to ensure only that the consequences will be that much more severe."

I only disagree that it would be a 5-10 year depression. A 6-month contraction would be more like it. They could have coined $10^24 worth of derivatives, but what goes down in the end is still the same 5-6 banks. 

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#41) On October 03, 2009 at 2:16 AM, awallejr (79.94) wrote:

"Yes, the deleveraging of a $1 quadrillion derivatives market would have been extremely, extremely, extremely painful and chaotic to endure. The number of job losses, bankruptcies, bank failures, and a complex web of falling dominoes would have been nothing short of epic."

We certainly don't know what the future will bring as a result of current policies. Time will ultimately tell.  But by your own admission Sinch, you have depicted a horrible scenario for following yours. I don't know how old your are.  I don't know what your financial staus is. But try justifying your scenario to an 80 year old living on social security.  Sorry Mr. 80 year old you must be sacrificed for the greater good.  And then in 20 years when things get screwed up again, we have to sacrifice some more people for the greater good.

It's a silly argument.  It is inhumane, and fortunately it is a minority view.  This isn't to say that current policies will achieve the desired results either, your crystal ball notwithstanding, but at least it is the humane thing to do, and the desired results might very well be achieved.

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#42) On October 03, 2009 at 2:39 AM, uclayoda87 (29.91) wrote:

Job losses will continue to grow as a monument to the President’s economic wisdom.  He will of course share this glory with his advisors and with the previous administration that taught him the joy of reckless spending.  Like the American Graffiti drag race, this acceleration of debt will get out of control and end badly.

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#43) On October 03, 2009 at 3:03 AM, buildgreen (< 20) wrote:

My point is simple. There seems to be a lot of cherry picking here about data. The data from our own portefeuille seems to be ignored.. perhaps its just too darned positive. Not sure but there seems to be a argument here that is rooted in something other then figuring out where we are and where we are going. Ive seen people here not change there tune no matter what the ongoing changes indicate.. ive seen some people insist on making public trade predictions that have probably wiped out some of us that listened to the pretty words and supposivedly accuarte analysis. (not me fortunatly)   Simply.. what would it take for you to buy into an american/ global recovery and prosperity story?

 

 

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#44) On October 03, 2009 at 6:44 AM, abitare (99.44) wrote:

Great write up. I have always hated Krugman.

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#45) On October 03, 2009 at 10:29 AM, Deepfryer (28.16) wrote:

AvianFlu:

Maybe there are a few historical examples where Libertarians used facts to support their claims. But, for whatever reason, that is clearly not the case right now. Maybe all the prominant Libertarian intellectuals are long gone... or maybe the living ones just don't know how to look at numbers. But I think you have to admit that, in the vast majority of cases, people who call themselves Libertarians are not performing any sort of numberical or statistical analysis before reaching a conclusion.

For instance in the current debate over the effects of economic stimulus, the Keynesians have been able to provide a wealth of economic figures and indicators to support their position.

The Libertarians have not. The reason is simple: reality is not on their side.

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#46) On October 03, 2009 at 1:44 PM, AvianFlu (39.70) wrote:

Deepfryer:

Naturally, I have an opposing view.

There was a very long period of time when this country operated under libertarian principles, including economic principles. In general, that was a period of great growth in which the wealth and standard of living for the average person was greatly enhanced. The rich got richer. The middle class got richer. The poor got richer. There was a lot of mobility between segments of society. Poor persons through hard work and luck could become rich. Rich persons could become poor due to bad decisions and bad luck, only to pick themselves up again and start over.

During our 75 year experiment experiment with Keynesianism the situation has been reversed. The rich have gotten richer. We now have a permenent underclass of poor people who are trapped in poverty...perhaps indefinitely. The middle class is disappearing. It was once possible to support a family with one income. Now it takes two, maybe even with multiple jobs...if you can find a job. Mobility between wealth classes has been greatly reduced. How long do suggest we wait to see if the Keynes experiment works? Maybe another 75 years?

In my opinion, it is time to call a halt to the experiment. It was a failure. Let's go back to something that works...free markets and minimal government intervention. Yes, there are problems with that, but they are not worse than the situation we have now.

Luckily for you there are hardly any Libertarians left and the few that exist have no power.

I am surprised you place such a premium on numerical and statistical analysis. Even if your TI-89 is glowing red hot because you are typing so fast you will still produce bad results if your underlying assumptions are wrong. This is the situation that  Keynes supporters are in. I would know. I am a former college mathematics professor. I graduated cum laude. I collect calculators. There are plenty of places you can go if you have a desire to see the mathematics behind the Libertarian economic policy ideas. I would suggest the book "Money Mischief" by Milton Friedman. I didn't mention it before because some of the mathematics will lose most readers. But those of a technical inclination will find it fascinating. Perhaps you have heard the phrase "helicopter Ben" when referring to Ben Bernanke. That phrase was inspired by a segment from this book.

In summary, Libertarian ideas have been tried in reality and they work. Keynesian ideas have been tried also. They have been disappointing, to say the least.

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#47) On October 03, 2009 at 2:13 PM, whereaminow (75.43) wrote:

Deepfryer,

So how do you respond to today's report that job losses accelerated in September, bringing unemployment to the highest level since 1983?  How do you respond to the continued decrease in capital spending?  These are simple facts.  How will you dance around them? 

Where do Keynesian ideas come from?  Since the late 1800's, in both Europe and America, free market economists have been kept out of teaching posts in universities.  Ludwig Von Mises himself was unable to get a teaching post in America after he fled Nazi persecution.  Murray Rothbard damaged his own career by speaking out against the new "conservative" Republicans.  Even Carl Menger, 100 years ago, could find no advancement in his academic profession.  Socialist economists have dominated the universities in the West for 100 years.  Keynesian ideas started there, not in the real world.  Keynes himself was not even an economist, merely a government bureaucrat who developed a large academic following. 

I invite you to research the history of Keynesian economics.  Investigate something called a Phillips Curve, learn about Stagflation, read General Theory. Learn about Keynesianism and the history of economic thought.  Then read the opposing views. Read Human Action by Mises or Man, Economy, and State by Rothbard. Then we'll see if you still believe the Left is the bastion of intellectualism.   

David in Qatar

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#48) On October 03, 2009 at 2:26 PM, NOTvuffett (< 20) wrote:

Wow AvianFlu your mention of the TI-89 brought back some old memories for me, I had a TI-55 in high school.

http://www.rskey.org/detail.asp?manufacturer=Texas+Instruments&model=TI-55

Programmable, with an amazing 32 step memory, lol.  We were so primitive back then.

Some readers may not know that the first commercially available microprocessor was a 4 bit device, and originally designed for use in calculators.

http://en.wikipedia.org/wiki/Intel_4004

It didn't take long to figure out that 8 bits were better than 4:

http://en.wikipedia.org/wiki/Intel_8008

 

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#49) On October 03, 2009 at 4:21 PM, Deepfryer (28.16) wrote:

Avian:

The United States has done pretty well for itself over the last 75 years.

I don't think you have a very good understanding of just how low the standard of living was for the average, working-class family in the early 1900's. Contrast that with the strength of the middle class in the 1950's after the "Great Compression", and I think you will see that maybe, just maybe, the Keynesians weren't so bad after all.

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#50) On October 03, 2009 at 4:44 PM, Deepfryer (28.16) wrote:

Avian:

You said, "The rich have gotten richer. We now have a permenent underclass of poor people who are trapped in poverty...perhaps indefinitely. The middle class is disappearing"

It is absolutely true that in recent years there has been an increase in inequality, and a weakening of the middle class... but this is certainly not the fault of the Keynesians. Rather, this has been caused by the rising influence of movement conservatives. Please take a look at this blog post by none other than Paul Krugman, and tell me what you think:

http://krugman.blogs.nytimes.com/2007/09/18/introducing-this-blog/

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#51) On October 03, 2009 at 4:50 PM, whereaminow (75.43) wrote:

Deepfryer,

Following World War II, as I documented here, and more information can be found here and here, it is one of the few times that the government did not follow Keynesian policy positions.  Government spending was slashed over 60% from 1945-1946. 

Along with this slash in government spending, the Federal Reserve created a boom through loose fiscal policy.

Specifically, in FY 1945 the deficit was 21.5 percent of GDP. Yet two years later, the budget surplus was 1.7 percent of GDP! 

Mainstream economists predicted disaster.  After all, despite what the history books say, they knew that the economy was still in a Depression.  The war had merely masked it.  Once again, the Keynesians were wrong.  The reduction in government spending freed up private capital investment and a new entrepreneurial class erupted. At the same time, the Federal Reserve expanded the monetary base - purposely initiate a boom - which led to misallocations that eventually resulted in another bust. The M1 and M2 statistics from that period are in the link above.

The key to economic recovery is to reestablish a proper balance between capital investment and consumer spending.  An artificial credit boom encourages excessive investment in the capital goods market, so that when the economy heads toward depression, the collapse in the capital goods market can be just as extreme as the boom. - Mark Skousen

David in Qatar

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#52) On October 03, 2009 at 9:00 PM, Deepfryer (28.16) wrote:

Nonsense. The US was out of the depression (or at least, well on its way to a recovery) before we entered WW2. Nothing was "masked" by the war:

(not sure how to include images, but here is what I'm referencing:)

http://en.wikipedia.org/wiki/File:US_GDP_10-60.jpg

Having a budget surplus does not mean that Keynesian economics was out of favor - it just means that there was no need to run a deficit at that time (underconsumption was not a problem at that time). Keynesians have never stated that the government should never have a budget surplus. As Richard Nixon stated in 1971, "we are all Keynesians now".

Keynesian economics remained widely-accepted until the late 70's, when conservative policies came into favor... and that is the experiment which has failed us, and is destroying the middle class:

http://img30.imageshack.us/i/greatcompression.jpg/

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#53) On October 03, 2009 at 9:12 PM, whereaminow (75.43) wrote:

Nonsense huh?  Stagflation. Get used to it.  It's going to make quite a comeback AGAIN.

http://en.wikipedia.org/wiki/Stagflation

Early Keynesianism and monetarism

Up to the 1960s many Keynesian economists ignored the possibility of stagflation, because historical experience suggested that high unemployment was typically associated with low inflation, and vice versa (this relationship is called the Phillips curve). The idea was that high demand for goods drives up prices, and also encourages firms to hire more; and likewise high employment raises demand. However, in the 1970s and 1980s, when stagflation occurred, it became obvious that the relationship between inflation and employment levels was not necessarily stable: that is, the Phillips relationship could shift. Macroeconomists became more skeptical of Keynesian theories, and the Keynesians themselves reconsidered their ideas in search of an explanation of stagflation.[11]

The explanation for the shift of the Phillips curve was initially provided by the monetarist economist Milton Friedman, and also by Edmund Phelps. Both argued that when workers and firms begin to expect more inflation, the Phillips curve shifts up (meaning that more inflation occurs at any given level of unemployment). In particular, they suggested that if inflation lasted for several years, workers and firms would start to take it into account during wage negotiations, causing workers' wages and firms' costs to rise more quickly, thus further increasing inflation. While this idea was a severe criticism of early Keynesian theories, it was gradually accepted by the Neo-Keynesians.

================================================

Do you know why GDP jumped from 1941-1945? It's something called World War II.  I know it's hard to understand, but the government really increased spending during that period.  Crazy as that sounds.

David in Qatar

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#54) On October 03, 2009 at 9:50 PM, portefeuille (99.75) wrote:

not sure how to include images, ...

binve has given instructions in comment #18 here.

If there is no need for the "enlarge" feature the first line of the following will do.

 

-------------------------------

In fact, let me start this blog off with a chart that’s central to how I think about the big picture, the underlying story of what’s really going on in this country. The chart shows the share of the richest 10 percent of the American population in total income – an indicator that closely tracks many other measures of economic inequality – over the past 90 years, as estimated by the economists Thomas Piketty and Emmanuel Saez.I’ve added labels indicating four key periods. These are:

 

-------------------------------

(from that article by Krugman mentioned in comment #50 above)

 

(from here)

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#55) On October 03, 2009 at 11:52 PM, Deepfryer (28.16) wrote:

Port: Thanks man. 

David:

I knew you would try to redirect to another concept, since your little "history lesson" has gone tragically wrong.

You tried to claim that Keynesian economics went out of favor right after the end of WW2. That is absolutely wrong.

You tried to use WW2 itself to explain all of the economic advances of the Keynesian period, from roughly 1933-1981. That is ridiculous and obviously wrong.

Keynesian economics helped the US emerge from the Great Depression, and it helped to greatly improve the standard of living of the American middle class in the mid-20th century. It is also helping us to emerge from the current economic crisis much faster than anyone originally anticipated.

Lastly, I want to point out that a refutation of the Philips Curve is not a refutation of Keynesian economics. The Philips Curve is a flawed concept - I agree with you on that. But I hope you realize that the Philips Curve was not developed until long after Keynes was dead and buried. It was not an original Keynesian idea, nor is it a modern Keynesian idea. So, stop grasping at straws, and address some of the areas where you are being proven wrong.

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#56) On October 04, 2009 at 10:34 AM, whereaminow (75.43) wrote:

Port,

Why did the Soviet Union's GDP grow for decades while they got poorer?  Charts are for salesman. Grow a pair of balls and engage the debate.  I'm sure you've heard of the Economic Calculation Problem of the Socialist Commonwealth.  Governments can't calculate, that's why the majority of government spending is wasteful. 

Deepfryer,

I have nothing to sell you. You asked for evidence and I provided it.  In return, you offer GDP, the most laughable stastic in the technocrat's arsenal.

The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory.[i] - John Maynard Keynes, Foreward to the German Edition of General Theory, 1936.

David in Qatar

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#57) On October 04, 2009 at 11:02 AM, whereaminow (75.43) wrote:

That's possibly my favorite thing about Keynes. People who call themselves Keynesians don't actually know anything about him.  He respected Mises and admitted that he didn't read all of Mises because his German wasn't good enough to grasp it all. He idolized Hayek and had glowing praise for Road to Serfdom.  He despised the policy of inflation and felt it was only necessary in extreme circumstances.  He couldn't explain concepts he originated, like the paradox of thrift and other nonsense.  He had no business background and was a career bureaucrat.  He claimed to love liberty but he greatly admired Hitler, and found the Nazi Socialist Party to be the ideal of his economic planning ideas. 

I could go on, would you like me to?

David in Qatar

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#58) On October 06, 2009 at 10:52 AM, FreeMarkets (99.32) wrote:

DARGUS asks: Will this spending decrease the value of the dollar, I suspect so, but how do you think the dollar would fair during a five to ten year depression?That depends - will they continue printing it and giving it away at 0%?

Also, don't you think a weaker dollar might increase exports thus creating some jobs?Not at all.  The price discrepancy between labor in China and the USA is too great.  Plus, China pegs their currency to ours - the lower ours goes the lower theirs goes.

You may be very correct in asserting that all of the government's action in total will only slow and lengthen the deleverging process, but that includes a lot of action beyond stimulus spending. It seems entirely reasonable to me that having the government employ people, especially people building useful infrastructure projects, will be a net gain for the U.S. Their are many useful infrastructure projects, but we don't need deficit spending to make them happen.  Stop defending the world with our military, slow entitlement spending, and eliminate pork projects; then we'd have plenty in surplus to rebuild infrastructure.

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