Although many were up in arms when the Fed said it would buy $600 billion in government debt outright for the previous round, QE2, all seems quiet about the magnitude of QE3 because it doesn’t come with huge up-front total price tag. But by year’s end the Fed’s balance sheet could hit $4 trillion. With no recovery in sight, where’s all this money going? It is creating bubbles. Bubbles in the housing sector, the stock market, and government debt. The stock market has been hitting record highs for the past two months as investors seek to capitalize on the Fed’s easy money. After all, as long as the Fed keeps the spigot open, nominal profits are there for the taking. But this is a house of cards. Eventually, just like in 2008-2009, the market will discipline the bad actions of the Fed and seek to find the real normal.
Although many were up in arms when the Fed said it would buy $600 billion in government debt outright for the previous round, QE2, all seems quiet about the magnitude of QE3 because it doesn’t come with huge up-front total price tag. But by year’s end the Fed’s balance sheet could hit $4 trillion.
With no recovery in sight, where’s all this money going? It is creating bubbles. Bubbles in the housing sector, the stock market, and government debt.
The stock market has been hitting record highs for the past two months as investors seek to capitalize on the Fed’s easy money. After all, as long as the Fed keeps the spigot open, nominal profits are there for the taking. But this is a house of cards. Eventually, just like in 2008-2009, the market will discipline the bad actions of the Fed and seek to find the real normal.
— Ron Paul
With some free time today, I thought it would be interesting to visit the Philadelphia Federal Reserve - specifically its “Money in Motion” exhibit. It felt good traipsing around the displays laughing at the content while proudly wearing my Hans-Hermann Hoppe “Privatize Everything” t-shirt. There was even one area that asked people to determine if a federal reserve note was “real money” or counterfeit - I slapped the “fake” button every time. After a while, though, I needed to get out as my nausea was beginning to overtake me.
The exhibit was… whatever the opposite of “honest and enlightening” is. Notably, and of course predictably, the “What is inflation?” display defined inflation as merely “an increase in the overall level of prices,” instead of what it actually is: an expansion of the money supply and that price inflation is purely a consequence of monetary inflation. This, as I have noted many times before, is a purposeful shift in definition to obscure the cause (monetary policy) from the consequence (price increases): “By divorcing the word from its literal origins, [central planning apologists] cloud the direct effect between money printing and the value of money. This is not unlike suddenly using the word dog to instead refer to dog piss.”
But amidst the half-truths, misinformation, and outright lies there was something I found ironically honest, if only the average observer would be able to piece the truth together. In the “Early Money in America” display was a short nugget on wampum:
“Small, rounded shells with holes drilled through their centers were threaded onto strings and used as a primitive medium of exchange between Native Americans. The first colonists soon learned to use this Wampum as money, and they also learned to manufacture it cheaply, causing the first “inflation” in America.”
There it was, the truth about inflation: “they also learned to manufacture it cheaply, causing the first “inflation” in America.” Even those who would believe the obfuscation offered by the Fed’s “What is inflation?” display, if they weren’t mindless, would have to pause and consider this statement - particularly in light of what they likely held in their hands.
You see, upon entering the exhibit, every visitor is handed a small bag of shredded federal reserve notes (which, according to the packaging, “represents about $100”).
In its shredded form this “currency” is useless - which means its lack of value is revealed. Federal reserve notes, which gain their usability only through fiat (or decree), lack the hallmarks that emergent money has shown for millennia. A stable currency has these characteristics: it (1) must be relatively imperishable (retain its value over log periods of time - thousands of years - without decay), (2) must be easily divisible without losing value, (3) must be malleable and ductile, able to be shaped into more convenient and portable forms, (4) must remain stable in a wide range of temperatures and climates, (5) has never been worth nothing (has intrinsic value, or rather value as something other than an intermediary of exchange), (6) must be fungible (an ounce from one source would be equal and identical to an ounce from another source), (7) supply is finite without being so rare as to be difficult to use (relative scarcity), (8) new supply is relatively uncommon and difficult to acquire, (9) has a long-standing history of being used as currency, and above all else (10) free people have used it as a medium of exchange or intermediary of trade.
Federal reserve notes, like the wampum those many years ago, is manufactured cheaply and ultimately worthless on its own - triggering the same inflationary consequences.
Price inflation is not an unintended consequence or regrettable side-effect of QE3, it is the goal.
“Since this crisis started, Bernanke … has created more than twice as much new money as all previous Fed chairs combined, just in the last four years.” - Bob Murphy on QE3
Turns out central banking is indeed a tool of the Dark Side.
Business cycles are caused by the governmental intervention of bank-credit expansion. Unemployment is caused by unions or government keeping wage rates above the free-market level. Only coercive intervention, not private spending, can bring about inflation.
— Murray Rothbard, Power & Market
The word “inflation” originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean “a rise in prices” is to deflect attention away from the real cause of inflation and the real cure for it.
Henry Hazlitt, What You Should Know About Inflation (1960)
Under Austrian orthodoxy, the money supply works in extraordinarily predictable ways: namely, if you increase it, inflation follows. Austrians have always defined inflation solely as an increase in the money supply.
A quick point: yes indeed “Austrians have always defined inflation solely as an increase in the money supply.” But then again, so did everyone else. I’ve discussed this before:
That this definition is less common today is a direct consequence of what can only be considered many years’ worth of Orwellian language restructuring [by the neo-Keynesians and monetarists*]. As I previously explained, “Inflation was and is definitionally printing money, or more specifically inflating the money supply. By divorcing the word from its literal origins, [central planning apologists] cloud the direct effect between money printing and the value of money.”
This is not unlike suddenly using the word dog to instead refer to dog piss.
*in case my point wasn’t already clear, this refers to most modern-day Keynesians and monetarists
Advocates of government stimulus are running victory laps on recent developments that appear to vindicate their strategy. In particular, Paul Krugman compares the sluggish growth in Europe to the somewhat-less-sluggish growth in the US to prove that stimulus was more effective than austerity. Other economists are using government inflation measures to defend Fed Chairman Bernanke’s easy-money policy. The only problem is, they’re calling the race before the finish line is even in sight.
As usual, Paul Krugman overlooks basic economics (which, despite his Nobel Prize, is a science about which Mr. Krugman really knows very little). The reason stimulus is so politically popular is that it appears to work in the short-term. However, appearances can often be deceiving, as they are right now in the US. Stimulus merely numbs the pain of economic contraction, as the underlying trauma gets worse. Austerity might slow an economy down, but at least the wounds are able to heal. America has chosen the former and Europe the latter, albeit not quite as large a dose as needed. The fact that in the short-run Europe is suffering more than the US does not vindicate Washington’s approach. On the contrary, this is exactly what is to be expected.
What we’re seeing is like a race where each runner has a broken ankle. One has a coach who tells him to pace himself and not worry so much about winning this one, while the other coach gives his runner a shot of painkillers and tells him to give it all he’s got. Of course, early in the race, the doped-up runner is going to be flying down the track like nothing’s wrong, while the other runner might be limping at half his normal speed. However, when the drugs wear off, the sprinter is liable to collapse from pain, leaving the better-coached runner to limp across the finish line.
The true test is not the immediate effects of stimulus or austerity, but the long-term results. For that reason, Krugman’s conclusions are meaningless. The apparent success of stimulus simply results from spending more borrowed money on government programs and consumption. But don’t we all agree now that this is exactly what caused the financial crisis in the first place?
As far as inflation is concerned, a vindication of Federal Reserve Chairman Ben Bernanke is equally premature. First of all, it’s not that Quantitative Easing will lead to inflation; it’s that QE is inflation. Secondly, there is a lag between QE and rising consumer prices, so the jury is still out as to how high consumer prices will ultimately rise as a result of current and past Fed policy mistakes.
But even more fundamentally, it is absurd to look solely at government price measures, which are built to understate inflation, and conclude that QE has not already produced an elevated cost-of-living. For example, the 2.4% rise in the Personal Consumption Expenditure (PCE) Index in 2011 is more of an indictment of the accuracy of the index than a vindication of Bernanke. In fact, of all the ways the government purports to measure inflation, the PCE is perhaps the most meaningless, as it relies on built-in mechanisms like goods substitution to hide a lower standard of living. As an example of how this works, imagine you are used to eating farm-fresh butter but have to switch to cheaper but also less-healthy margarine from a factory; the PCE would say you are no worse off. That’s exactly why the Fed chooses to use this uncommon metric.
1. Don’t think Krugman or Keynesian economists support war for the sake of benefitting the economy. This misconception stems from the analysis that WWII, a time of total war and production for war, this led to high levels of employment and helped bring an end to the depression.
I guess I should say thanks for giving me the opportunity to back these up? Cheers. Most of the sources here directly link to ones that contain the requested material. Two birds with one stone. Enjoy.
Keynesian economists and Krugman actually do support the broken window fallacy.
- Krugman’s war fantasies by William Anderson
- Does Capitalism Require War? by D.W. MacKenzie (commentary on Krugman throughout)
- Posted by Lew Rockwellon June 5, 2011
Writes Andrew Penn Fitzgerald:
Actual quote from Krugman on ‘This Week’ this morning: “If we had the threat of war, had a military buildup, you’d be amazed at how fast this economy would recover.”
And here I thought that we were currently waging offensive war in at least four countries with troops in more than 150 foreign countries and currently spend more on our military than every other country in the world combined. Clearly we just need to do more in the militarist direction (similar to Krugman’s other advice that we throw more money down the bailout hole to make it work).”
- A compulsory draft is AMAZING at reducing “unemployment”, you know - forcing people to join the army and get shipped off to die in war does wonders for reducing the % of employable people.
- Check out Robert Higgs lectures; totally demolishes the myth that the war ended the depression.
- Disastrous Economic Fallacies - Terror as Stimulus? [2min video] *Another Krugman quote.
2. Even if you pay people for seemingly menial or unimportant tasks, the people working these jobs generally will either have been unemployed or have a low enough income that they spend what they make, thus one accomplishes both putting people back to work and increasing personal consumption/spending levels.
- Public Works Mean Taxes - Economics in One Lesson, Henry Hazlitt.
- Fetish of Full Employment - Economics in One Lesson, Henry Hazlitt.
3. Find me an article where Krugman supports a housing bubble, or any bubble for that matter.
It’d be my absolute pleasure.
- Krugman Did Cause the Housing Bubble by Mark Thornton
- Krugman’s Intellectual Waterloo by Daniel James Sanchez
Last Monday evening, Lew Rockwell, from a tip by someone named “Travis,” posted this damning quote of Paul Krugman’s from a 2002 New York Times editorial:
”To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
Krugman. 2002. Calling for a housing bubble.
4. “Debt” isn’t killing the economy. And “debt” isn’t the only problem. More like, “Unemployment stagnating economic growth? Spending will fix that”.
- “The annual government deficit, plus the annual interest payment that keeps rising as the total debt accumulates, increasingly channels scarce and precious private savings into wasteful government boondoggles, which “crowd out” productive investments. Establishment economists, including Reaganomists, cleverly fudge the issue by arbitrarily labeling virtually all government spending as “investments,” making it sound as if everything is fine and dandy because savings are being productively “invested.” In reality, however, government spending only qualifies as “investment” in an Orwellian sense; government actually spends on behalf of the “consumer goods” and desires of bureaucrats, politicians, and their dependent client groups. Government spending, therefore, rather than being “investment,” is consumer spending of a peculiarly wasteful and unproductive sort, since it is indulged not by producers but by a parasitic class that is living off, and increasingly weakening, the productive private sector.” ~ Repudiating the National Debt, Murray N. Rothbard
5. Again, I’d ask when Krugman ever advocated that, and would also say there are times when either inflation or deflation are ways to correct economic fluctuations.
- Krugman Strikes Again by Peter Schiff
”In today’s column, Krugman analyzes the Greek debt crisis, arguing that the best solution for Athens would be to simply inflate away its debt burden with printing-press money. Krugman laments that this sensible option is being foreclosed by the monetary priggishness of the German heavyweights in the European Union, who are “foolishly” seeking to prevent inflation and impose fiscal discipline.” ~ April 12, 2010.
- Inflation and Deflation, Human Action by Ludwig von Mises
6. This one doesn’t really make an argument, but rather seems to assert that your own belief is we are spending too much.
More a fact that I accept, as opposed to a ‘belief’ which requires faith.
7. This actually would be more beneficial to the economy, as anyone who has taken even one economics course knows that consumer spending is an essential part of any economy and yet human behavior is irrational in that when the economy slows instead of spending and pumping money to help get businesses moving and people hired, the savings rate increases thus further exacerbating the problem in the first place. Those with more disposable income ought to spend it. Just saying.
Hate to burst your bubble [pun intended ;D], but that ‘economics’ course you took - whilst being an appeal to authority fallacy - was also a waste of time & money. Don’t worry, I was also forced to sit through them aswell.
- Consumers Don’t Cause Depression by Robert P. Murphy
“There’s one saving grace about Paul Krugman’s column at the New York Times: when an Austrian economist wants to explain how mainstream economics leads to ruin, he can always trust Krugman to set up the target in a clear, concise manner. This saves us a lot of work, because we don’t have to first build up the position before knocking it down.”
Long story short, I get this is supposed to be a joke, or “meme” but with little backing and sense to these particular ones I don’t think this is anything more than partisan mockery of legitimate challenges to your own economic viewpoints.
A long story short… “It’s funny because it’s true.”