- Jon Hellevig
- September 30, 2015
Krugman, a Well Won’t Keep the Water You Pour into It
This article ties in with my previous post about the lessons we can learn about Japan’s failed deficit and QE policies.
I am fascinated about this phenomenon Krugman and how he epitomizes the pseudo-science of Economics, complete with the Nobel Prize and all. Well, looking at the Peace Prize laureates from the past few years, you get the feeling that all this Nobel business is a form of bizarre entertainment. It seems that the only exception they do is with the literature prize winners, which are not entertaining at all.
Last December, we exposed Krugman spouting nonsense about Russia, claiming Russia had a dire debt problem. Now, about a year later we can see that Krugman deserved that public pillorying, the Russian debt situation developed exactly as we predicted.
Now let’s take a look at what the good doctor Paul Krugman, the Keynesian High-Priest of Stimulus, has to say about Japan, the Western debt binge, and austerity.
Krugman declares Abenomics a success less than a week after it was first announced in 2013
Krugman was jubilant when PM Abe first announced his all-time stimulus and money-printing program. Freshly upon learning about Mr. Abe’s initiative, Krugman wrote in January 2013 in his regular column in the New York Times, an eulogy about this new program congratulating Abe for breaking with the “dismal orthodoxy” of the old guard who has not seen the light of what wonders money printing and deficits can do. Krugman was so taken with Mr. Abe’s program that he immediately declared that the “early indications are that it’s going pretty well”, although he was writing in less than a week’s time after Mr. Abe only announced it. The single thing that could possibly have improved in those five days was the strengthening of Krugman’s faith. As it happens, now two and a half years later, Krugman admits being a bit disappointed with his acolyte. Abe has not been strong enough in his faith, Krugman wrote in September 11, 2015 in a new column on Japan’s economy titled Japan’s Economy, Crippled by Caution. Yes, Abe has been on the right path, yes he “has been making a real effort”, but “he has yet to achieve decisive success.” Krugman is indulgent with his disciple and understands that Abe has been diverted by too many tempters who place the evil sin of “conventional notions of responsibility” and “respectability” on his path. Abe has, as it turns out, not completely abandoned himself to the delights of printing money. “Respectability” is the economy-killer”, Krugman laments like any sectarian priest who fails in drawing in the millions to his faith – it’s “the curse of conventionality”.
Krugman: Japan has not been printing enough
In his analysis of September 11, Krugman admitted that the stimulus policy had failed to kickstart the economy, but this is because Japan has not been printing enough, the insatiable Krugman argues. The one KPI Krugman focuses on is inflation – Japan has failed in generating strong enough inflation, the thinking goes. In this hysterical approach, Krugman ignores all other economic variables.
I, for my part, argue that it is impossible to start any economy with any kind of wasteful spending and money printing. There can be no healthy economic processes which could possibly be ignited by that and then take on a life of their own. Krugman’s thinking in this regards reminds me of a verbal alchemist who imagines himself being able to develop an economy in test tubes. The idea is as looney as trying to get a dried up well to turn into a fresh source by pouring bucket after bucket of water into it. The moment you stop your efforts to sink the water in there, the well dries up again and in the meanwhile the water will damage the surroundings and the habits of the people who have been engaged in that sham. Such planned economy methods cannot inspire entrepreneurship or innovation, on the contrary it damages the real market mechanisms, just as it has happened in all planned economies through history.
Krugman identifies the reason for Japan’s economy not having lived up to his pipe dream theory in that the subsequent governments have not done enough to stimulate the economy. This is a very peculiar contention considering that Japan has racked up a world record public debt-to-GDP of 240%. He says that the governments have “always pulled back before a solid recovery could get established” and “before deflation went away”. One really wonders, in what way Dr. Krugman thinks that the recovery could start from pouring that money into the economy. Certainly he has not presented any theoretical model for how an economy would fly on its on after the fact that you stop fueling it with excess liquidity. As long as they keep flooding the market with easy-money, it will have an effect on the markets. But as soon as the tap is turned off the effect wears away and no memory of that funding can keep the market going on.
There is no such thing as kickstarting an economy with QE
That is to say, that no positive economic processes can be turned on in this way, but certainly there is a downside to it. This kind of sham funding will inevitably hamper the normal functioning of markets in various ways. It adapts the economic actors to an artificial planned economy environment. It interferes with the normal market mechanisms and allocation of labor and resources. There will of course also be a direct adverse effect on the real economy and stock and bond markets when Krugman’s manna from heaven eventually dries up. You cannot start anything with such a spending and money printing strategy, it can only rely on being perpetual, that is, the government must continue with it till the bitter end as long as they can go on before it all ends in the ultimate catastrophe. Or, the government can, as I propose, chose the painful path of sobering up and return to a market economy.
On another note, we must really wonder what for Dr. Krugman yearns for that inflation. He has never been specific about that, but in the already cited article he says that seeking higher inflation would help “to inflate away part of the government’s debt.” This betrays a serious lack in Krugman’s knowledge of market theory, namely the fact that if inflation rises in a market economy, so do interest rates. Thus with a rise in inflation comes a rise in interest rates, which raises the cost of serving the government debt, therefore the inflation would not alleviate the debt situation at all. The government debt is on such an astronomic level that a mere one percent hike in interest would mean devastation. Similarly the hike in interest rates would hamper corporations and households with a decrease in purchasing power resulting in a recession.
However, it is true that you can inflate away debt in a planned economy where the central bank can (temporarily) suspend the market mechanisms, regulate the interest rates and establish negative real interest rates. In fact, as we have shown in this study there have been negative interests in the Western countries for several years and this has not brought any relief in the debt levels, which on the contrary have kept growing at exorbitant rates. At the same time all other macroeconomic imbalances have accumulated as we have shown. There is no reason to expect that more of the same would in anyway bring a turnaround.
There is no market in Japan, the Central Bank is buying up all the bonds
Dr. Krugman does not seem to understand that in Japan the real markets have been suspended. This is evident from his boasting that “Japan’s government can still borrow long term at a rate of less than 1 percent” against the warnings of the critics that “the bond markets will punish us”. But the point is, that there are no bond markets. There is only a racket where the central bank keeps buying up all the government bonds at the yields it decides by itself. It has been reported that the Bank of Japan has been already buying around 90 percent of all the bonds in the market. The Japan Times wrote in April that if “the BOJ continues buying government bonds at its current pace of ¥8 trillion to ¥12 trillion a month, the central bank will by 2020 hold more than 80 percent of all outstanding JGBs with a remaining maturity of 10 years or less.”
Finally, it is interesting to note that according to Dr. Krugman “all around the advanced world governments are engaged in fiscal austerity”. Nothing could be further from the truth. All over the western world governments have been running huge budget deficits in collusion with the central banks and their money printing programs. Spending more than they earn in order to stimulate the economy. It is delusional to call these persistent deficits austerity.
Krugman is careful selecting the facts he wants to bring up. He says that Mr. Abe’s policy has been successful in bringing up inflation (which it hasn’t) while keeping the interest the government pays on its bonds down. Then he admits in the passing that as a consequence the yen has fallen considerably, “but that’s actually very good news”, he says, “Japanese exporters are cheering”. Krugman omits to say that while the exporters are cheering the consumers are suffering. The sharp devaluation of the yen means austerity for the consumers who must pay 35% more for imported goods.
According to the theory of Dr. Krugman persistent stimulus would create jobs, but in fact it works the other way around. Because of the platform inflation, the rise of the general cost level, manufacturing in the Western countries is becoming less competitive and jobs are lost abroad. For example, take the case of Japan, which Krugman so much applauds. As a result of this artificial stimulus jobs have been moving abroad at a steady pace, as reported above. And the same process is going on all over the Western world. That the production has moved abroad is probably not so bad for Japan with its sinking workforce, but the same medicine for the EU countries and the USA has been disastrous.
This article is an extract from the Awara Accounting study about how the dollar and euro monopolies have destroyed the real market economy in the Western countries, and therefore in the whole world. The whole study can be accessed HERE.