“Myths” Paul Krugman Does Not Want To Talk About

  By Greg Hunter’s USAWatchdog.com 

I have been telling you for months there is going to be a double dip in the economy.  Nobel Prize Winning economist Paul Krugman also thinks the economy is so bad we need to keep on stimulating the economy.  In a New York Times Op-Ed piece last week, Krugman said, “. . . somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.”  In short, cut backs, or austerity, is not what the economy needs right now.  (Click here for the complete NYT Op-Ed from Krugman.)    

In a nutshell, Mr. Krugman thinks America will do no harm in the short term if the U.S. government prints money to prop up the economy until it can stand on its own.  He thinks it is a myth to believe in “invisible bond vigilantes” who financially attack countries with sky high debt.  Krugman wrote, “Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.   What reason do we have to believe that any of this is true? Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems.”   

What evidence does Krugman give that America can keep printing money until things get better?  Interest rates on government debt are staying low.  For example, the 10 year Treasury is paying around 3%.  Krugman said, “Far from fleeing U.S. government debt, investors evidently see it as their safest bet in a stumbling economy. Yet the advocates of austerity still assure us that bond vigilantes will attack any day now if we don’t slash spending immediately.”   

What Krugman glosses over is the government has spent trillions keeping rates down and the economy going.  The Fed has bought at least $1.25 trillion in mortgage backed securities with money printed out of thin air.  There has been “quantitative easing” (code for money printing) to the tune of at least $300 billion to buy, what else, government debt.  Congress has raised the debt ceiling to more than $14 trillion.  That helped fund an $862 billion stimulus plan and a $700 billion TARP bailout for the banks. (Part of TARP has been paid back, but taxpayers are still owed around $296 billion.) Now, the Fed is considering ways to head off another plunge in the economy.  A recent Telegraph UK story said, Fed watchers say Mr. Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. . . .Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed’s balance sheet from $2.4 trillion . . .to uncharted levels of $5 trillion.”  (Click here for the complete Telegraph UK story.)    

There is also evidence the government is buying its own debt from hedge fund manager Eric Sprott.  In December of 2009, Sprott took a hard look at who was buying Treasuries.  Sprott discovered a sector the Treasury Department calls “Households” that bought $528 billion in government debt by the third quarter of 2009.  The Sprott report said, “We must admit that we were surprised to discover that “Households” had bought so many Treasuries in 2009. They bought 35 times more government debt than they did in 2008. Given the financial condition of the average household in 2009, this makes little sense to us. With unemployment and foreclosures skyrocketing, who could afford to increase treasury investments to such a large degree? . . . -who is the Household Sector? They are a PHANTOM.  They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.”  (Click here for the Sprott report.)

 In June of 2010, according to a CNN story, “Households” held nearly $800 billion in Treasuries.  This “phantom” buying has people like Eric Sprott thinking, “It makes us wonder if it’s all just a Ponzi scheme.”   Are “Households” and the world really flocking to the safety of Treasuries?  Or is the Fed becoming a buyer of last resort?  I think it is probably both.  When the government buys its own debt, it creates false demand and artificially depresses interest rates.

The idea that interest rates are being magically held down by extreme demand for our ballooning debt is the real myth.   Krugman fails to recognize any downside of all this money printing.  Maybe he has fallen victim to his own prejudices.  As Krugman says in the beginning of his Op-Ed piece, “Much of what Serious People believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions.   

Milton Freidman, another Nobel Prize winner in economics, summed up the result of a loose monetary policy in his famous quote, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” If the country takes the path Mr. Krugman is suggesting, we might not have a double dip in the economy, but we will have some very big inflation because you just can’t have it both ways.

Economist Paul Krugman

 

By Greg Hunter

Comments
  1. Stephen Clifton

    This boils down to simple history. Can Mr. Krugman and his Keynesians name one instance in world history where a country has achieved long term prosperity while using a fiat currency and obligations that can never be repaid? When I say “long term prosperity” I am referencing a time span of greater than 150 years.

    Very simply, our politicians embrace Keynesian economic theory because it serves their interest. Through Keynesian economic theory, they have given a spend-a-holic a blank check and justification.

    The Great Depression was the first time in US History our government stepped in to prop up the economy and the Depression lasted over 10 years. If this is not an indictment of Keynesian theory then these people cling to a belief similar to a religion and are no longer capable of rational thought.

    Stephen

    • Greg

      Thank you Stephen.
      Greg

  2. Ron

    It is very apparent that our leadership has no thoughts of cutting the budget and reducing debt in the near future. Only when a catastropic meltdown of our economy causes a complete default on our debt will anything happen. This most likely will happen in our kids senior years as the government will keep playing games until they can not hide the problem any longer.

    • Greg

      Thank you Stephen and Ron! I agree with you both.
      greg

  3. Stephen

    Greg – Thank you so much for addressing this UTTER NONSENSE from Krugman. I read his piece and wondered if this guy had really gone off the deep end. Is it even possible to continue to print money non stop? It has got to stop somewhere right? The idea of “phantom houshoulds” should scare the crap out of all of us. Keep up the good work.

  4. MarkM

    Hey Greg,

    I know I am a lowly, uneducated dolt from fly-over country. I am told everyday how my non-ivy league education has endowed me with the reasoning ability of a mentally handicapped person. But, I keep reading history. And, I keep listening to economists who back-up my eighth grade attempts at rational thought.

    How can Krugman, et allia, be so well educated, so well plugged-in, so admired, and so wrong?

    I keep asking myself: What am I missing?

    You know, the right-wingnuts may be correct, this is part of a neo-Marxist agenda!

    I dunn-no!

    markm

    • Greg

      MarkM,
      You’re one of the smart ones my friend. You are missing nothing! Thank you for your comment.
      Greg

  5. Kevin

    Flight check complete. Laden with dollars, Mr. (cough!) Bernanke’s helicopter resumes flight.

    “Sometimes I wonder whether the world is being run by smart people who are putting us on…or by imbeciles who really mean it.” – Mark Twain

    • Greg

      Kevin,
      Great stuff. Funny and true!!!
      Greg

  6. benjamin

    You only get inflation if
    A. you print the money for wasteful purposes (the military, bank bailouts, or
    B. The nation is at full employment.

    If you print money, and use it to hire unemployed people to produce goods and services, then both the quantity of money and the quantity of goods and services rise together, meaning, no inflation, and many people’s lives saved from unemployment.

    You’ve been reading too much of the Austrian monarchist school of thought, try reading some good ol’ American economists like Benjamin Franklin, a life-long advocate of paper money issued by state-owned banks.

    • Greg

      Benjamin,
      I disagree with you on this, but opposing viewpoints are always welcomed here. Thank you for the comment.
      Greg

  7. Kelly

    Krugman is a smart guy, I’ve read his books among many others from many different economic perspectives. It is unfortunate he is becoming such a partisan tool. He should stick to economics.

  8. Slug

    I think Ben probably was talking about printed money that had something to back it.(gold) Printing paper and ink does not make it have value, look at the dollar’s devaluation in the last 40 years.

  9. Mountainaires

    Mr. Hunter, I continue to be impressed by your site. I appreciate your work!

    • Greg

      Thank you Mountainairs for the support.
      Greg

  10. Peter

    The trouble with the economy seems to be short term profits for profits sake at the expense of the masses, employees, the environment or long term sustainable growth. Business plans and mission statements don’t include an obligation to society for society’s benefit. Economical props benefit too few and are short term fixes. We need long term economic growth that includes all of society and disenfranchises no one. Too big to fail means they’re too big to have selfish interests at the expense of long term growth and their obligation to society as a whole. We need private sector economic growth that represents and takes care of the consumer rather than trying to suck the greatest percentage of their hard earned dollars. What if we invested in national cooperatives that represented us all and put people back to work? What if too big to fail companies recognized their obligation to society by putting it in their mission statement or better yet by issuing one supremely superior share to every man, woman and child? Then they’d be legally required to act in the best interests of their superior shareholders. Governments shouldn’t own businesses, but business needs to recognize their obligation to us all. Radical? What do you think?

    • Greg

      Thank you for weighing in.
      Greg

      • Peter

        Hi Greg,

        Do you ever contemplate solutions for the economic issues we face? Our best and brightest seem to be at a loss for real progress. As a reporter, maintaining objectivity and avoiding promotion of your own ideas must be a constant challenge. Our politicians are leaving because they seem to feel frustrated or are being replaced by almost anyone who’s not part of the present establishment. Do you see any positive signs out there? Any movements that attract your attention because of their inherent value to society?

        • Greg

          Yes Peter,
          I think housing will offer great value for people in the future. I think that if you position yourself correctly before the coming crash you will thrive when the country rebuilds itself. Thank you for your comment and question.
          Greg

          • Peter

            Thanks for reply, Greg.
            By housing, do you mean acquiring foreclosed property? I’ve heard of people going to the Detroit area and buying up property at 10 to 20 percent of the former value. One of my concerns is the vast quantity of property being acquired by banks through foreclosure. It reminds me of the pernicious banker taking advantage of widows and orphans. Along those same lines is the selfish aspect of corporations whose operations have no benefit to society and actually are a detriment to society. An example is the food commodities trading by large banks which created an artificial shortage. I think national and international cooperatives are the answer. Large corporations have to have the best interests of society as their overarching priority. Thanks for reading.

            • Greg

              Peter,
              Only buy housing if you really need and can afford it. We are nowhere near a bottom in housing. Who knows how this will end but the best advice is be a safe and conservative as you can.
              greg

  11. James B

    According to Freidman’s quote about inflation, how come we don’t have inflation currently? We have printed mountains of money, and the U.S. does not have a manufacturing base so our output is weak. Also, based on our trade deficit we are consuming much more than we produce, so what am I missing here? What is keeping inflation in check?

    • Greg

      James,
      According to shadowstats.com the “real” inflation rate is north of 9%. John Williams of SGS makes that calculation using the same methods as the U.S. government did in 1980. A 9% inflation rate cut the value of money in half, in less than 10 years. We are just getting started up the inflation ski jump. Watch what happens next, when the idea we are in for a real hard crash landing hits the public and politicians. Money, money, money will created to cushion the landing. Thank you for the question and reading USAWatchdog.com.
      Greg

  12. nm

    I have found websites like yours to be invaluable in terms of my basic understanding of economics. Thank you. It is because of blogs like yours and because of listening to people like Jim Sinclair and Peter Schiff, that I can no longer read conventional news outlets when it comes to economics. I shutter to think how little other Americans know because 99% of them do not read blogs like these. When will they get it?

    I believe the vast majority of wage earning middle class Americans will begin to get it when massive inflation kicks in and they realize that their paychecks aren’t going to cover their standard living expenses anymore. Right now, most aren’t getting it, especially those who still have jobs. Rising gas prices will be their first hint of what’s in store for them.

    When do you think people will begin to realize what’s about to happen?

    Thanks

    • Greg

      NM,
      When prices go up and their savings are crushed. Thank you for your comment and question.
      Greg

  13. Ramius

    How can the government buy its own debt?

    • Greg

      Ramuis,
      That’s what some of the “quantitative easing” was about. The Fed actually printed money to buy its own treasury debt. This is how interest rates on 30 year mortgages are under 5%. The government crates false demand to sell the bonds so rates are suppressed. You will see much more of this in the future. I hope this has answered your question.
      Greg

  14. snook

    If we have saved and invested, how do we protect our family, wealth?

    • Greg

      Snook,
      You must have physical gold and silver coins in your direct possession as a core investment. This is NOT a trading position but a financial insurance policy. I am not a money manager or investment advisor but the brokerages are not safe. Look at the latest with Knight Capital Group. Are they going to end up like MF Global and PFG Best–bankrupt. It sure looks that way. I wrote a post on “How to buy gold and silver.” It is on the site below my picture. I do not sell gold or silver coins so I do not care where you get them. Please protect you wealth. Time is short. Good luck.
      Greg

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