History Will Not Judge Krugman Kindly
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.