It was interesting to see both Ron Paul an Paul Krugman on Bloomberg TV last week. Truly these two are polar opposites on money, the Federal Reserve's role and the level of involvement a government should play in the economy. Ron Paul supports "sound money" while Paul Krugman supports printing new money until the depression ends (His words not mine as you will see)Though I'm quite familiar with Ron Paul, I am much less familiar with Paul Krugman beyond him being an uber-Keynesian who has stated that Obama's $787 billion stimulus failed only because it was not "big enough". The two didn't really break any new ground in the "debate" but it was fairly interesting. For those interested in watching, it is below:
What was much more interesting was the interview with Krugman before Ron Paul came on. I was truly stunned by what he had to say. Here are the highlights:
- We are in an economic depression.
- We need higher inflation. 3-4%
- Higher inflation is good for consumers.
- Higher inflation is associated with job growth and higher markets.
- High inflation during WWII wiped out consumer debt.
- Governments never pay debt. They merely devalue currencies.
- Britain is an advanced country with high debt and no problems during the 20th century.
- "I actually was a deficit hawk during the Bush years".
- Food and gas inflation is not driven by Fed policy.
- We have not had a depreciation of the dollar.
- On QE: We need enough until we solve the problem.
- Would be happy with national debt at 130% of GDP (Its at 100% of GDP now) or another $5Trillion in national debt.
Now let me first just state that I am not a Nobel Prize economist nor did I go to Princeton. I have twenty years of experience in finance with about twelve of that in capital markets. Economists are often criticized for "living in an ivory tower" and not being connected to the real world. This seems to be the case with Krugman.
What I was most stunned by was Krugman's views seem to be entirely academic without any grounding in the real world. If the President is consulting with academics like Krugman on the economy then its entirely understandable why he's made so many poor decisions and why we are still in a depression.
I strongly take issue with some of his assertions. I do agree that we are in an economic depression. A depression is a period of both positive and negative economic growth, but growth that is anemic as we have now. I also agree that governments never pay debt. They simply roll it over and issue more debt.
But I was shocked to hear him use Great Britain as an advanced country with high debt and no problems during the 20th century. Has he ever read a history book? Britain was once the world's super power with a global navy and an empire that spanned the globe. It was once said, "The sun never sets on the British empire". It was literally true 100 years ago. And their currency of the time, the pound sterling, was the global reserve currency. But their profligate spending devalued their currency and made their empire unsustainable. Is this really the policy he suggests for the US, today's global superpower with the world's reserve currency? Perhaps the "conscience of a liberal (The title of his NYT blog)" has a different idea of America's role in the world. If so, let's have an open discussion about it rather than trying to reduce our role through economic decline.
I was additionally flabbergasted by his statements:
Food and gas inflation is not driven by Fed policy.Does Krugman not buy gas or food for himself? As I noted in a previous post the increase in aggregate supply of dollars is leading to more dollars needed for gas and food. General Mills reports 10-11% increase year over year! Did demand for gas increase during this economic downturn? No, Americans are driving less. The demand for commodities hasn't changed. But the number of dollars in our economy has changed. He does qualify his statement on the dollar the way only an academic can: by comparing it to the Euro and other currencies that have also been defiled by their own massive currency printing. So if they're all dropping together through, in his book, they have not depreciated. He does not even try to explain why it is that twelve years ago you could buy an ounce of gold for about $200 but today, the same exact ounce of gold costs $1,600!
We have not had a depreciation of the dollar.
Finally, previously when he was asked about the effects of higher inflation and zero interest rates on savers and retired people, he responded that this, "just affected a small number of people". I guess the "conscience of a liberal" doesn't extend to retired Americans on fixed income.
From Jim Quinn of The Burning Platform via ZeroHedge
Despite the assertion by the good doctor Krugman that there are very few Americans living on a fixed income being impacted by Bernanke’s zero interest rate policy, there are actually 40 million people over the age of 65 in this country that might disagree. There are another 60 million people between the ages of 50 and 64 years old rapidly approaching retirement age. We know 36 million people are receiving SS retirement benefits today. We know that 49 million people are already living below the poverty line, with 16% of those over 65 years old living in poverty. Do 0% interest rates benefit these people? Those over 50 years old are most risk averse, and they should be. Despite the propaganda touted by Wall Street shills and their CNBC mouthpieces, the fact is that the S&P 500 on an inflation adjusted basis is at the same level it was in 1996. Stock investors have gotten a 0% return for the last 16 years. The market is currently priced to deliver inflation adjusted returns of 2% over the next ten years, with the high likelihood of a large drop within the next year.
A fixed income senior citizen living off their meager $15,000 per year of Social Security and the $100,000 they’ve saved over their lifetimes was able to earn a risk free 5% in a money market fund in 2007, generating $5,000 or 25% of their annual living income. Today Ben is allowing them to earn $150 per year. From the BEA info in the chart above you can see that Ben’s ZIRP has stolen $400 billion of interest income from senior citizens and prudent savers and dropped it from helicopters on Wall Street. This might explain why old geezers are pouring back into the workforce at a record pace. Maybe Dr. Krugman has an alternative theory.
I don't believe that Krugman is a stupid man that doesn't understand basic economics. I do believe, however, that Krugman is speaking more from the perspective of politics than economics. And this troubles me. We have enough politicians squabbling amongst themselves. We need real answers to get this economy moving again.
We need real honest debate on economic policies not political grandstanding. When he says:
"I actually was a deficit hawk during the Bush years".
He seems just a little disingenuous.