The following article makes me angry on
so many fronts; I don’t even know where to begin:
The article can be
found and starts here:
On Thursday, the European Central Bank announced a series of new steps it was taking in
an effort to boost Europe’s economy. There was
a whiff of desperation about the announcement, which was reassuring. Europe, which
is doing worse than it did in the 1930s, is clearly in the grip of a
deflationary vortex, and it’s good to know that the central bank understands
that. But its epiphany may have come too late. It’s far from clear that the
measures now on the table will be strong enough to reverse the downward spiral.
And there but for the grace of Bernanke
go we. Things in the United States
are far from O.K., but we seem (at least for now) to have steered clear of the
kind of trap facing Europe. Why? One answer is
that the Federal Reserve started doing the right thing years ago, buying
trillions of dollars’ worth of bonds in order to avoid the situation its
European counterpart now faces.
To even begin to
compare the US
actions to the European Central Bank’s recent actions is archaic and insane to
the least, and ignorant and arrogant to the most. Europe until
very recently essentially did not have a true “central bank” in the way one
would understand what a “central bank” is.
Each nation in the Euro Currency block has / had its own central bank,
taxing policies, economic policies etc. The European Central bank had almost no
direct power to even purchase bonds issued by member countries let alone
dictate the finances of each member country.
This “one currency, many nations” structure made Europe a completely
different animal from the US where the central bank oversees the entire economy
of a very large nation and has full autonomy to set policies and manipulate
every aspect of monitory authority without any consent from the US
government. NOTHING like this existed in
Europe.
In addition, Europe had a handful of
countries that NEVER should have been converted to the Euro in the first phase
of Euroization of the member countries.
Their governments were completely reckless, their citizens knew full
well their economies were no where near on par with the nations that should
have been included in the Core and they acted recklessly as their governments. It all looked fine for a while, but like any
economic anomaly such as pegging a currency, the flawed structure was doomed to
fail, credit crises or not, until the Euro countries actually established a
strong central bank able to act with autonomy and discretion irrespective of
the desires of member governments.
You can argue, and I would, that the Fed
should have done even more. But Fed officials have faced fierce attacks all the
way. Pundits, politicians and plutocrats have accused them, over and over
again, of “debasing” the dollar, and warned that soaring inflation is just
around the corner. The predicted surge in inflation has never arrived, but
despite being wrong year after year, hardly any of the critics have admitted
being wrong or even changed their tune. And the question I’ve been trying to
answer is why. What is it that makes a powerful faction in our body politic —
call it the deflation caucus — demand tight money even in a depressed,
low-inflation economy?
Krugman is
completely ignoring the true underlying inflation in the US over the
past 35 years. The CPI number
calculations have undergone revisions a couple times in the last 30 years that
have dramatically altered the outcome.
Using pre 1980 data, inflation is and has been running near 10% for most
of the first 15 years of this century, not withstanding a dip during the credit
crises.
Even using data
as calculated in 1990 reveals over 6% inflation over the same period.
Anyone who lives
in the US
knows that the average paycheck adjusted for even the “official” CPI numbers
reveals a paltry $200 annual (yes annual) increase in income since 1980!! This where all you have to do is go to the US
Dept of Labor Statistics and see what the earnings of 1980 are worth in 2013
dollars. You need $294.18 to match the
buying power of $100 in 1980. What does
that tell you about the value of a dollar over this time? What difference does it make that you now
make $47,000 when your parents made $16,354 in 1980? It has the same purchasing power! And this is BEFORE we know the true results
of the Trillions in dollars printed over the last 5 years. Note: the 1980
number came AFTER the serious spiraling of inflation of the 1970’s. So what is Krugman trying to say about
inflation? That it is a “political
issue” whether or not all this money printing is going to have any longer term
affect? Really? What about China? The US
may have used somewhere near $14 Trillion to bail out the “financial system”
during the crises and gone on to print a few Trillion Dollars but China has outshined
all nations combined printing a whopping $15 Trillion!!
One thing is clear: Like so much else
these days, monetary policy has become very much a partisan issue. It’s not
just that talk of dollar debasement comes pretty much exclusively from the
right of the political spectrum; inflation paranoia has, to a remarkable
extent, become a matter of conservative political correctness, so that even economists who
should know better have joined in the chorus. So we can focus the question
further: Why do people on the right hate monetary expansion, even when it’s
desperately needed?
One answer is the power of truthiness —
Stephen Colbert’s justly famed term for things that aren’t true, but feel true
to some people. “The Fed is printing money, printing money leads to inflation,
and inflation is always a bad thing” is a triply untrue statement, but it feels
true to a lot of people. And, yes, a tendency to prefer
truthiness to more complicated truth is and
pretty much always has been associated with political conservatism, and
this tendency is especially strong in an era when leading
politicians get their monetary theory from Ayn Rand novels.
Another answer is class interest. Inflation
helps debtors and hurts creditors, deflation does the reverse. And the wealthy
are much more likely than workers and the poor to be creditors, to have money
in the bank and bonds in their portfolio rather than mortgages and credit-card
balances outstanding. Back in the Gilded Age, the elite mobilized en masse to
defeat William Jennings Bryan, who threatened to take the United States
off the gold standard; campaign spending as a percentage of G.D.P. was far
higher in 1896 than in any presidential election before or since. Are the
wealthy similarly mobilized against easy-money policies today?
Is Krugman
serious when he quotes Stephen Colbert, a comedian, then waste 3 paragraphs
telling us all the concerns about the recent policies of Central banks from
China to Europe, policies that have taken humankind into completely uncharted
territory with respect to Central Bank policy and experimentation to counter
the largest credit crises in history which was preceded and followed by the largest expansion of debt in history at EVERY
level of the economy and continues to expand under near forced direction by
central banks today where they are saying “buy debt and issue debt and if you
will not we will do both”, is nothing but a political / class issue? Does he
even understand inflation? Saying the
“wealthy” are only to be hurt by inflation because they have “bonds in their
portfolio” rather than “credit-card balances and mortgages”? Does he even understand that the “wealthy”
own real property that tends to keep up with inflation not the mortgaged and
credit-card poor. In fact, by pure
definition, if the “poor” wages rise relative to their mortgage at fixed rates
and credit cards capped interest, they would actually be better off as long as
they don’t loose their jobs!! What is he
trying to say here? In one paragraph he
is trying to say the rich are not complaining so why should we worry? Are the wealthy not the ONLY class of people
that have benefited from the huge injection of cash which has allowed companies
to refinance and issue debt to buy back their stocks and increase dividends
with almost free money driving the stock markets higher and higher in the
process? The wealthy are the ones who
have seen their bond portfolios increase in value year after year as interest
rates fell to zero and are kept there under central bank policies. The distortions in managing “risk” at every
level are so outlandish today in the markets that this distortion is now being
called “the new normal” on Wall Street!
Complacency is ripe, risk is high, volatility at historic lows, and
everyone is chasing yields pushing rates down on essentially bankrupt nations
like Spain, with 20%
unemployment below that of the US! High yield debt almost does not exist as
spreads of low grade bonds of all kinds’ trade at premiums to US Treasuries at
levels not seen since 2006, at the height of the credit bubble. I could go on. So all Krugman has to say is the debate is a
political and class debate and not to worry, all central banks should follow
the US lead, irrespective of the dynamics on the ground and just print money,
buy bonds, support risk taking, force banks to lend, lend, lend….
As far as I know, we don’t have rigorous
evidence to that effect. There are certainly a
lot of wealthy investors in the debasing-the-dollar crowd, but we don’t
know for sure how representative they are — and you could argue that big
investors should like the Fed’s expansionary policies, which have been very
good for the stock market. But the wealthy may not trust that connection, in
part because the inflationary ’70s were very
bad for stocks. And we do know that the very wealthy are much more likely
than the general public to consider budget deficits our biggest problem, even though
fiscal austerity is probably bad for profits. So perceived class interest is
probably also a key motivation for the deflation caucus.
Is Krugman
serious here? Comparing today’s Fed’s
expansionary policies to the 1970’s?
Does he even have the capability to differentiate the 1970’s oil price
driven global inflation surge which came on the heals of the end of the US
productivity surge of the 1950-60’s, the tail end of a protracted pointless and
expensive war, and the end of US industry’s life cycle of post war investment
in production which started the long decline of industrial production? Does he really get away with comparing this
era to today? Fiscal Austerity? Does he even comprehend the level of
recklessness of the budgets of ALL nations who command the “hard currencies” of
the world today and how this is going to radically alter the shape of global finance
in the future?
A side note: Europe’s wealthy aren’t as
wealthy or influential as their American counterparts, but creditor interests
are nonetheless even more powerful than they are here because creditor nations,
Germany in particular, have
ended up dictating policy for the whole of Europe.
Is he serious
here? Europe’s wealthy may not be on the
front page of Bloomberg every day, but they hold their wealth in “productive
capacity” and “hard assets” accumulated over a very long time, not just in
“paper” i.e.; stocks that have ever risen to unrealistic heights catapulting
them to the stratosphere and making them de-facto mouthpiece of the American
multinational and reminding people that our nation’s economic structure far
more resembles the same 1896 he quotes in this article, with the robber barons,
oligopolistic structure of industry and bought out government then some 21st
century successful economic system? To
make a statement like this is completely ignorant, arrogant and ethnocentric as
one could make!!
And the important thing to understand is
that the dominance of creditor interests on both sides of the Atlantic,
supported by false but viscerally appealing economic doctrines, has had tragic
consequences. Our economies have been dragged down by the woes of debtors, who
have been forced to slash spending. To avoid a deep, prolonged slump, we needed
policies to offset this drag. What we got instead was an obsession with the
evils of budget deficits and paranoia over inflation — and a slump that has
gone on and on.
Once again, even
his final statement is hogwash to no end.
He suggest NO structural remedies for what we all know was a “crises”
predicated on a never before seen debt bubble facilitated by ever creative
“products” designed to off load risk that became the core of the irresponsible
lending mantra. All of these “products”
were created and traded in casino fashion, were completely unregulated, dragged
in the participation of every financial institution including taxpayer insured
banks, were built on the back of every possible category of debt imaginable
(and some unimaginable creations). Yet
he suggests that the role of central banks is to somehow “counter” this? All the central banks on the planet did not
have enough firepower to counter the crises. This is blatantly obvious. They have had to print Trillions of Dollars,
everywhere, to make a dent in the disaster.
Yet people like Krugman have NOTHING to offer to cure this complete
collapse and failure of the “free market system” other than to say, just print
more money so the party can go on! What
a complete looser!
