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Krugman: Inflation scare makes no sense!



May 29, 2009 – Comments (25)

Conventional logic says that with the government printing money like there's no tomorrow, inflation is a certainty. Well, here's the other side of the argument by Paul Krugman (who's a big supporter of big stimulus):


So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

Entire Article @ NYTIMES.COM

25 Comments – Post Your Own

#1) On May 29, 2009 at 3:05 PM, dbjella (< 20) wrote:

I think this is a fasciniting topic.  I too wonder how we can get inflation when there is little demand for goods and services.  To me people are still belt tightening, out of work and fearfull. 

In my case, if gas starts rising over 2.50, then I will drive less and car pool more.  If my cable company raises my package after their introductory offer, then I drop a feature.  If they raise it again, then I drop cable, if they raise it again....I am not sure I can live without my high speed access :)


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#2) On May 29, 2009 at 3:10 PM, portefeuille (98.88) wrote:

hey, hugh hendry, me and now krugman ...

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#3) On May 29, 2009 at 3:14 PM, motleyanimal (38.31) wrote:

True enough. If a credit card company raises rates and/or starts to charge annual fees, I will reduce to one credit card and probably switch to cash for most purchases, which means I will buy fewer things on impulse.

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#4) On May 29, 2009 at 3:17 PM, portefeuille (98.88) wrote:

hey, hugh hendry, me and now krugman ...

okay, my part in the discussion has been a rather small one (see comment #4 here (featuring a great video(!), also see comment #15 ).

I did say "Hugh Hendry vs. one of those inflation freaks" though ...

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#5) On May 29, 2009 at 3:31 PM, portefeuille (98.88) wrote:

on quantitative easing: 1,2

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#6) On May 29, 2009 at 3:42 PM, SkepticalOx (98.63) wrote:

Yeah well, every so called "market analyst" and their mother have been saying that hyperinflation is around the corner. It's nice to have a few dissenting voices who actually have a decent argument why this might be the case.

These aren't normal times.


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#7) On May 29, 2009 at 4:07 PM, Tak3natheFlood (99.03) wrote:

Velocity of money is very important in the inflation equation. In many senses the consumer drives the velocity of money and right now the consumer is on the sidelines. Therefore there should little or no inflation in the next few years.

Often when everyone thinks the same thing, no one is thinking! Nice post.

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#8) On May 29, 2009 at 4:23 PM, portefeuille (98.88) wrote:

krugman on quantitative easing on march 2

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#9) On May 29, 2009 at 4:55 PM, portefeuille (98.88) wrote:

more on QE here (also see the pdf-document linked to that article: Monetary Policy and the Recent Extraordinary Measures Taken by the Federal Reserve).

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#10) On May 29, 2009 at 6:58 PM, StopLaughing (< 20) wrote:

Krugman is only looking at part of the picture. The weakening of the $ is driving oil and metals up (alternative currencies?). Most of the Central Banks are "easing" so there is a flight from paper money to commodities right now.

However, as oil prices rise, the price of everything else will rise. It is a question of how high they go. Interest rates will also rise to some extent in the longer run partly because the $ is weaker.

It is not just the pumping of the money supply (which can be reversed if Helicopter Ben will do it)? Inflation expectations are also based on the flood of new "pernament" government spending. which may be difficult to reverse especially if the economy does revive.

Inflation pressures are not strong right now. However, there is little faith that government(s) or the central bank(s) will have the fortitude to reverse at the right time. 

That makes the inflation threat real. 

Japan is a bad example. They lost much of thier growth to China during thier lost decade. Thier problems were not all "Zombie Banks" and monetary/fiscal misguidance.

It is possible America will lose massive amounts of growth to China but probably not yet.

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#11) On May 29, 2009 at 11:23 PM, FleaBagger (27.45) wrote:

Demand for food is relatively inelastic. Yeah, we waste a lot of food in the good times, and overeat. But compared to the increase in the money supply, demand destruction for food has been nil. Also, demand for gold and silver, gold, guns, and ammo has kept those prices up pretty well.

The difference between inflation and price increases may seem like a needless ivory tower abstraction, but for unskilled laborers who are laid off and trying to buy food and pay their rent with their savings, it's not so abstract. Money supply inflation affects the prices of goods and services with inelastic demand, even in times of tremendous deflation of stock prices and house prices.

Perversely, rents do not fall alongside house prices, having lagged the increases in house prices for years, and being the only way to have shelter when banks aren't lending to borrowers with your credit or your income (or lack thereof). So the things the poor are paying for are not going down in price, but up. The money supply overwhelms the poor, the unskilled, and retirees with inflation of rents, food prices, and energy prices, and hides behind falling electronics prices, house prices, car prices, and other durable goods and luxuries.

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#12) On May 31, 2009 at 4:48 AM, kaskoosek (30.18) wrote:

Krugman has gotten too many things wrong that he has turned my hair white.



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#13) On May 31, 2009 at 4:54 AM, portefeuille (98.88) wrote:

Krugman has gotten too many things wrong ...

which ones would that be?

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#14) On May 31, 2009 at 5:35 AM, NOTvuffett (< 20) wrote:

I am so glad Krugman said this, now I know that my counterfeiting operation printing money by the truckload is a victimless crime, lol.

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#15) On May 31, 2009 at 5:50 AM, kaskoosek (30.18) wrote:



Krugman quote on October 2001

"Few economists now accept [Milton] Friedman's further view that even monetary policy should be placed on cruise control. Alas, it turns out that a stable money supply is no guarantee of a stable economy. But almost all economists now agree with the position that monetary policy, not fiscal policy, is the tool of choice for fighting recessions. "

It might be a difference in oppinion, but I think that the interest rate targetting is partly to blame for the real estate bubble. 


I hate monetarists a lot, every time they tinker with the economy they create great instabilities. 

In fact with a stable money supply, you will have a stable economy. He was dead wrong on this and that by itself is an unforgivable fault.


1929 bust was a result of an expansion in credit.

"According to Rothbard, the lack of price flexibility in Britain meant that unemployment shot up, and the American government was asked to help. The United States was receiving a net inflow of gold, and inflated further in order to help Britain return to the gold standard. Montagu Norman, head of the Bank of England, had an especially good relationship with Benjamin Strong, the de facto head of the Federal Reserve. "


Easy credit makes people greedy and as they see other people getting richer, everyone will want a peice of the action. It also creates an illusion of profitability due to asset appreciation. Causing more malinvestment.





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#16) On May 31, 2009 at 6:31 AM, kaskoosek (30.18) wrote:

Krugman acts like he knows it all and all economists agree with him. All economists never agree on the same subject.

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#17) On May 31, 2009 at 2:17 PM, automaticaev (< 20) wrote:

sweet i thought printing tons of money was illegall but now i see that i can print as much as i want as long as its during this time period and it wont harm anyone.  Off to buy a printer thx bro.

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#18) On May 31, 2009 at 3:10 PM, SkepticalOx (98.63) wrote:


I don't think Krugman acts like all economist agrees with him. If you read the article, he stated:

Well, as you may have noticed, economists sometimes disagree. And big disagreements are especially likely in weird times like the present, when many of the normal rules no longer apply.

Also, lol, most economists act like that, especially ones with Nobel prizes. Ever wonder why Nassim Taleb is always ranting about economists?


Ever since they ditched the gold standard, when was the government printing money ever illegal? I know you were trying to make a joke, but it makes no sense :P.

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#19) On June 01, 2009 at 1:03 AM, kaskoosek (30.18) wrote:


In a lot of other articles, he stated that all economist agree that the cure is fiscal spending.

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#20) On June 01, 2009 at 1:30 AM, stocking2011 (29.33) wrote:

Thats like saying that a company owned 100% by the public should be able to issue 10% of their market cap more in a share offering just because their earnings are good enough that their original shareholders might not loose value.

The fact of the matter is if value is not lost when new money is printed that means the original money would have gained value otherwise. Currency holders deserve that value increase when it occurs because when the opposite occurs no body substadises their loss.

 plain and simple we ought to stop printing money, adopt a balanced and fiscally sain budget and then elect Ron Paul to the presidncy.

 captalists unite


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#21) On June 01, 2009 at 1:40 AM, arabianmoney (< 20) wrote:

The doubling of yields on T-bonds suggests that the impact of massive public spending is coming faster than Krugman might like to acknowledge, see: 

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#22) On June 01, 2009 at 9:19 AM, SkepticalOx (98.63) wrote:


You are right. Except right now, this company is going through a rough time and needs capital to ensure that it survives, so it will need to issue new equity to get the cash it needs. This will, of course, dilute current shareholders, but their other option could be the company not getting the cash it needs and the stock price going all the way down to $0.

The hope is that if the company can survive and later grow again, all shareholders will reap the rewards... and the company may even buyback some of those shares. 

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#23) On June 01, 2009 at 9:30 AM, XMFSinchiruna (26.56) wrote:

Krugman is seriously off the mark. Did anyone happen to catch the panel discussion on C-Span Friday featuring Krugman, Roubini, Soros, etc.? It was a fascinating discussion, but in my opinion Krugman's views did not stand up to the scrutiny of fellow panelist Niall Ferguson (despite Ferguson's less-than-gentlemanly demeanor in the discussion).

Here are some excerpts:


Niall Ferguson: This is the end of the age of leverage, which began, I guess, in the late 1970s, and saw an explosive rise in the ratio of debt to gross domestic product, not only in this country, but in many, many other countries. Once you end up with public and private debts in excess of three and a half times the size of your annual output, you are Argentina. You know, it's funny that people refer all the time back to the collapse of Lehman last September. Let's remember that this crisis actually began in June 2007. It fully became clear in August of 2007 that major financial institutions were almost certainly on the brink of insolvency to anybody who bothered to think about the impact of subprime mortgage defaults on their balance sheets.

But we were in denial. And we stayed in denial until September, more than a year later, of last year. Then we had the breakdown. Notice how psychological terms are very helpful when economics fails as a discipline. After the breakdown, we came out of denial and we realized that probably more than one major bank was insolvent. Then in September and October the world went into shock. It was deeply traumatic.

Now we're in the therapy phase. And what therapy are we using? Well, it's very interesting because we're using two quite contradictory courses of therapy. One is the prescription of Dr. Friedman—Milton Friedman, that is —which is being administered by the Federal Reserve: massive injections of liquidity to avert the kind of banking crisis that caused the Great Depression of the early 1930s. I'm fine with that. That's the right thing to do. But there is another course of therapy that is simultaneously being administered, which is the therapy prescribed by Dr. Keynes—John Maynard Keynes—and that therapy involves the running of massive fiscal deficits in excess of 12 percent of gross domestic product this year, and the issuance therefore of vast quantities of freshly minted bonds.

There is a clear contradiction between these two policies, and we're trying to have it both ways. You can't be a monetarist and a Keynesian simultaneously—at least I can't see how you can, because if the aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.

After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don't quite know who is going to buy them. It's certainly not going to be the Chinese. That worked fine in the good times, but what I call "Chimerica," the marriage between China and America, is coming to an end. Maybe it's going to end in a messy divorce.

No, the problem is that only the Fed can buy these freshly minted treasuries, and there is going to be, I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates, which will also have an effect on mortgage rates—the precise opposite of what Ben Bernanke is trying to achieve at the Fed.

One final thought: Let's not think of this as a purely American phenomenon. This is a crisis of the global economy. I'd go so far as to say it's a crisis of globalization itself. The US economy is not going to contract the most this year, even if the worst projections at the International Monetary Fund turn out to be right; a 2.6 percent contraction is far, far less than the shock already being inflicted on Japan, on South Korea, on Taiwan, to say nothing of the shock being inflicted on Europe. Germany is contracting at something close to 5 or 6 percent. So we are faced not just with a problem to be dealt with by American policy, we are faced with a crisis of global proportions, and it's far from clear to me that the prescriptions of Dr. Friedman and Dr. Keynes together can solve that massive global crisis.

Paul Krugman: Let me respond to that a bit. Let's think about what is actually happening to the global economy right now. On the one side there has been an abrupt realization by many people that they have too much debt, that they are not as rich as they thought. US households have seen their net worth decline abruptly by $13 trillion, and there are similar blows occurring around the world. So the people, individual households, want to save again. The United States has gone from approximately a zero savings rate two years ago up to about 4 percent right now, which is still below historical norms; but suddenly saving is occurring.

That saving ought to be translated into investment, but the investment demand is not there. Housing is flat on its back because it was overbuilt; housing bubbles collapsed not only in the United States, but across much of Europe. Many businesses cannot get access to capital because of the breakdown of the financial system. But even those that do have access to capital don't want to invest because consumer demand is not there. Between the housing bust and the sudden decision of consumers to save, after all, we have a world with lots of excess capacity. The GDP report that just came out says that business-fixed investment, non-residential fixed investment, essentially business investment, is falling at a 40 percent annual rate.

This causes a problem. There are lots of people who want to save, creating a vast increase in savings, not only in the US but around the world, combined with a sharp decline in the amount that the private sector is willing to invest, even at a zero interest rate, or rather even at a zero interest rate for US government debt, which is what the Federal Reserve has the most direct impact on.

One way to think about the global crisis is a vast excess of desired savings over willing investment. We have a global savings glut. Another way to say it is we have a global shortage of demand. Those are equivalent ways of saying the same thing. So we have this global savings glut, which is why there is, in fact, no upward pressure on interest rates. There are more savings than we know what to do with. If we ask the question "Where will the savings come from to finance the large US government deficits?," the answer is "From ourselves." The Chinese are not contributing at all.

Those extra savings are, in effect, the savings that America has wanted to make anyway, but that US business is not willing to invest under current conditions. That is the way Keynesian policy works in the short run. It takes excess desired savings and translates them into some kind of spending. If the private sector won't do it, the government will. There is actually no contradiction between the Federal Reserve's actions and the actions of the US government with a fiscal stimulus. It's very much necessary to do both. By buying a lot of private securities, the Federal Reserve is essentially going out there and playing the role that the private banking system is no longer playing properly; by engaging in investment, the federal government is playing the role that businesses are not now willing to play. All that debt-financed spending on infrastructure by the Obama administration is basically filling the hole left by the collapse in business investment in the United States. There is not an excess demand for savings that is going to drive up interest rates. The only thing that might drive up interest rates—and this is a real concern—is that people may grow dubious about the financial solvency of governments.

Now, the great concern I have is that although we understand these things fairly well, there are thirty-eight Republican senators who say that the answer for the crisis is another round of Bush-style tax cuts that will reduce revenues by $3 trillion over the next decade.

This crisis has been so large and the political process has been so sluggish that the difficulties have been greater than expected. And yes, there are some green shoots. Things are getting worse more slowly, but we have not managed to head off a crisis that could turn out to be self-reinforcing, and leave us in this trap for many, many years.

Then, later...


Well, if you listened carefully to what Paul Krugman said, he actually agreed with me. Because what he said was that everything is just fine as long as the financial credibility of the United States isn't called into question, but my point is that it will be called into question. Of course it will. According to the administration's crazily optimistic forecast for a recovery, it's going to be a 3 percent growth rate next year, 4 percent the year after that, 4.6 percent the year after that. If you believe those numbers, you'll believe absolutely anything, but they are there in the administration's budget document. Even if those numbers turn out to be true, the federal debt will rise over the next five to ten years to around 100 percent of gross domestic product.

But since those numbers are clearly wrong, and the trend growth rate of the US will be much closer to 1 percent than to 4, it seems reasonable to anticipate a much more rapid explosion of federal debt to somewhere in the region of 140 or 150 percent of gross domestic product. Even if the private savings rate rebounded to its highest point in the postwar period, it would still account for no more than 5 percent of gross domestic product. But this year's deficit, as I said earlier, is likely to be north of 12 percent of gross domestic product. So it doesn't quite add up.

The Fed has committed itself to buying $300 billion worth of treasuries this year, but clearly it will have to buy a great many more than that. Remember, $1.7 trillion or so are coming onto the market. And you assume that the credibility of the United States in the eyes of Americans, as well as foreign investors, is going to withstand this? At some point the United States does start to look like a Latin American economy, not only to people abroad but maybe to people at home. If the Fed's balance sheet explodes to up to $3 or $4 trillion, who knows how big it could get. At what point do people stop believing in the US dollar as a reserve currency, or even as a store of value for their own savings?

    After this exchange, Paul Krugman gets visibly agitated, and pleads with Ferguson to take the discussion of current account balance numbers OFFSTAGE! Ha! That's no way to win a debate, Mr. Krugman!  


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#24) On June 01, 2009 at 9:50 AM, phwill (< 20) wrote:

The recession has set the stage for a classic debate between Keynesian and Moneterist economists to play out:  inflation as a demand or supply side phenomenon.  


As a previous poster stated, we're starting to see signs of monetary inflation, as one side from the debate has loaded up on commodities, currency alternatives, or any other possible store of value they can find outside the dollar.


I would probably agree with Keynesians, that hyper-inflation, as opposed to high inflation, is more of a psychological change in demand.  The entire population has to assume that the dollar is, or will soon be, approaching zero, to create such a high-level of demand.  Monetary inflation can be curtailed more easily by the Fed slamming on the brakes; a psychological change in the consumer can't as easily be corrected by policy. 

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#25) On June 02, 2009 at 1:48 AM, kaskoosek (30.18) wrote:



One of the few people who understand the mechanics of a hyperinflationary enviroment.

The issue becomes trust rather than growth in money supply.

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