Friday, July 17, 2009

Krugman best taken in reverse

Krugman best taken in reverse

If all the economists were laid end to end, they'd never reach a conclusion. - George Bernard Shaw

There are numerous versions of Shaw's dictum, boiling down to one thing - no matter how many economists one consults, the actual answer is almost never found, not even one that can be worked with profitably. An argumentative bunch, economists are forever derided for being a dismal bunch who see a cloud in every silver lining and an accident around every corner.

Still, even within this dismal bunch of people who are almost always wrong, there is one bunch that stands out with its habitual, if not predictable, wrongheadedness. That group is of course the folks who call themselves Keynesian economists, followers of a mystic religion formed in the earlier part of the last century and today attempts to pass itself on as a legitimate
science. John Maynard Keynes was wrong about nearly everything, but in not following a lot of his own advice managed to turn a quick penny now and then, he garnered an aura of success where none should have legitimately existed.

As I wrote in a previous article, "the best thing about Keynes is that he is dead".

Leading acolyte who lags
This article, though, isn't about Keynes or Keynesian economics, but about the increasingly silly pronouncements coming out of the columns of America's leading exponent of Keynesian economics, namely Paul Krugman of the New York Times.

Now, perhaps I must confess two incidental points here: first, that there was a time when I was quite impressed with Krugman's acumen and his ability to make sense out of a complex series of numbers. Perhaps the most celebrated of his pieces was one in the mid-90s wherein he exposed the Asian economic "miracle" as nothing more than the effect of increased factor inputs; that is, that taking away the factor inputs (land, labor, capital, and raw materials) would inevitably end the miracle; indeed altering the prices of these inputs would do the same.

As it happened, once capital costs became prohibitive in the aftermath of the Asian financial crisis, the miracle did fall on its face and its most important illusion, that foreigners could benefit from interest rate arbitrages in Asian local currencies, evaporated with it as currencies sharply fell against the US dollar. This was an important statement, and one that went against the consensus of the day, which had been assiduously promoted by the International Monetary Fund as well as Asian regimes.

As foreigners pulled out of the local debt markets of Asia, currencies collapsed and soon investing behavior for the region had also changed so that all savings "had" to be in the so-called hard currencies, including the US dollar, and a few years later the euro. As a matter of policy, Asian central bankers also came to eschewing any currency rises against the US dollar.

In the aftermath of the crisis, I attended some lectures that included Krugman as a keynote speaker; these polemics, as I recall them, were generally in favor of the free market and the need for Asian governments to sell their banks to foreigners.

Today's version of the same person is a different kettle of fish. By now having pinned his lapel on left-leaning economics as a response to eight years of George W Bush, Krugman, winner of the 2008 Nobel Prize for economics, has also forgotten the very points that he made in Asia 12 years ago.

The second point I must confess to is that in general I do not read the New York Times, or its online version; in fact, most of the times that I find myself perusing its website is when redirected by one of the news aggregator websites (Huffington Post, Drudge Report and so forth).

But on a nice sunny day in the beginning of July, waiting in an airport lounge somewhere, I had no choice but to pick up a copy of the International Herald Tribune, the recycled international version of the New York Times. As always, a quick scan through to the editorial pages found the grimacing (smiling?) visage of Krugman staring back at me. His prose was as nonsensical as it had become of late, but one sentence really caught my attention

From his article titled "That 30s Show", dated July 2, 2009
And the deeper the hole gets, the harder it will be to dig ourselves out. The job figures weren't the only bad news in Thursday's report, which also showed wages stalling and possibly on the verge of outright decline. That's a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone?
Dig ourselves out? This is a bit of modern media phraseology that escapes me completely. If you are in a hole, the way I think about it is that you instantly STOP digging, not continue digging (unless you wish to proceed through Earth's hot core and end up coming out in China; which I believe a number of Americans have been trying lately, but that's a different story). Physically and logically, it isn't actually possible to DIG yourself out of a hole; what you need to do is to FILL the hole hopefully in a safe enough manner that those in the hole can walk out of it.

The US Federal Reserve under former chairman Alan Greenspan had to confront the aftermath of the technology bubble and decided to DIG itself out of the hole caused by job losses in the higher technology sector by lowering interest rates and essentially creating an asset bubble that helped to foster higher employment but didn't actually improve the net worth position of Americans. This is the reason millions of Americans chased the dream of easy money through house-flipping, and the Republican Party attempted to capitalize on the trend in order to move leverage down from large construction and homebuilding companies (typically Republican donors) to the poor of America, who typically voted Democrat.

As I wrote before on these pages (see Deaf frogs and the Pied Piper, Asia Times Online, September 30, 2008), Greenspan got away with it because of slavish Asian central bankers, who were following the dictum of Krugman ironically enough and moving away from investing through their local bond markets into investing purely in US government debt . This in turn propped up the stupid policies of the Fed, caused the US housing bubble and so on ... but funnily enough, the intervention of Asian central bankers isn't mentioned in describing the mechanics of the above bubble.

Indeed, the moral pendulum somehow swung to the point of free markets being blamed for the crisis, rather than as being seen as the victims of manipulation (the Fed) and intervention (Asian central banks). In this new "Mad Max reality" it is the Keynesians who are the saviors, led by their cheerleader-in-chief, one Paul Krugman.

Reading other articles posted recently also don't help make sense of where Krugman is going with his pet theories. Take more of his July 2 article cited above:
Wait - there's more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.
Wonderful, and right there, all readers should appreciate the use of the word "unlike" in the second sentence. Cutting through the jargon, what Krugman is saying here is that states in the US do not print the dollar currency, but since the federal government does, different rules apply for the management of debt and deficits.

That view is nonsensical of course - the only way to issue debt is to convince someone else that you are good for it come the time to make interest and principal repayments. US states, starting with California, have quickly come to realize that their wells could run dry rather quickly so why does anyone believe that the story is magically different for the US federal government?

There are only two possible answers: Convince someone else to buy all your debt (developing countries, commodity exporters and so forth) or print your own money (thereby debasing its purchasing power). The US government is clearly doing both - witness the rounds of "investor" meetings being done by Treasury Secretary Tim Geithner in Asia even as the Fed openly has started purchasing US government securities.

In a very short while, the US government could find that the strike by creditors afflicting California could adversely impact federal debt too.

But I digress. Here is Krugman again, in an article titled "The Stimulus Trap" dated July 9:
As soon as the Obama administration-in-waiting announced its stimulus plan - this was before Inauguration Day - some of us worried that the plan would prove inadequate. And we also worried that it might be hard, as a political matter, to come back for another round. ... Unfortunately, those worries have proved justified. The bad employment report for June made it clear that the stimulus was, indeed, too small. But it also damaged the credibility of the administration's economic stewardship. There's now a real risk that President Obama will find himself caught in a political-economic trap. ... And that's what the Obama administration should be doing right now with its fiscal stimulus. (It's important to remember that the stimulus was necessary because the Fed, having cut rates all the way to zero, has run out of ammunition to fight this slump.) That is, policy makers should stay calm in the face of disappointing early results, recognizing that the plan will take time to deliver its full benefit. But they should also be prepared to add to the stimulus now that it's clear that the first round wasn't big enough.
This stuff is delightful, if a geeky, guilty pleasure. Right in the beginning, Krugman pre-determines that the sole method of fighting an economic downturn is to expand the fiscal stimulus. And when that policy fails obviously in the next few months, his refrain isn't so much about "Is that the RIGHT policy?", but rather that "It was the WRONG amount".

There is the mumble about the Fed having no more ammunition because interest rates are close to zero; quite ignoring the fact that the failure of the economy to rebound at zero interest rates suggests obvious structural flaws, that shouldn't be made worse by Japan-style pump priming. He goes in the article as below:
Unfortunately, the politics of fiscal policy are very different from the politics of monetary policy. For the past 30 years, we've been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression ... But there's a difference between defending what you've done so far and being defensive. It was disturbing when President Obama walked back ... [Vice president Joe] Biden's admission that the administration "misread" the economy, declaring that "there's nothing we would have done differently." There was a whiff of the Bush infallibility complex in that remark, a hint that the current administration might share some of its predecessor's inability to admit mistakes. And that's an attitude neither Mr Obama nor the country can afford ... What Mr Obama needs to do is level with the American people. He needs to admit that he may not have done enough on the first try. He needs to remind the country that he's trying to steer the country through a severe economic storm, and that some course adjustments - including, quite possibly, another round of stimulus - may be necessary.
I loved the bit about the Bush infallibility complex in the statement, but it should have been directed not so much at the poorly advised Mr Obama, as the people advising him; an august group of Keynesians that includes Krugman himself. It is they who have ridden the infallibility complex that has failed to make the most important observations about the US economy:
1. Leverage needs to shrink across the economy, not merely get shifted around between the hands of private individuals and the US government;
2. When consumption is almost three-quarters of any economy, you cannot cut leverage without hurting consumption. So live with it;
3. For the economy to generate profits, it probably needs to become smaller, a lot smaller.

Recycling waste
All that said, Krugman's uselessness is actually quite useful, with the right application. To turn George Bernard Shaw's maxim on its head, it is futile to follow any gaggle of economists not because they are wrong as a group but because individually some of them are right sometimes, but not always. It is almost impossible to find someone who is right all the time, but failing that it would be great to find someone who is wrong all the time.

Unfortunately for all of us, Krugman's pronouncements don't actually have enough market views thrown in for any of us to make money by taking the opposite view. The good news, though, is that it appears, with Fed chairman Ben Bernanke on a very short leash, he may be succeeded by Larry Summers in January 2010, and it could well be Krugman's new beat to take over the job that Larry Summers leaves - namely as head of the US president's economic advisory team.

Now, if only we could convince him to make market suggestions while in that new job (for example, "the economy will rebound in two quarters so the US government can cut borrowings"), then it would be trivially easy to position on the opposite trade (that is, "borrowings will continue to rise"). But don't tell him any of that.....

the united states taxpayer and voter and citizen has just the politicos and business thieves it deserves, because the great majority of us think and talk as if we know what is going on up on wall street and down on capitol hill and Pennsylvania avenue, and that same great majority of us don't do a d*** thing about it.......

we keep on watching and expecting our favorite mouthpiece radio and TV talkers to make our points for us by proxy, but only a few of us probably realize that these same mouthpiece talkers are the interference runners and smokescreeners for the same disingenuous wall street and capitol hill tribe that has sold us out for the past 30 or 40 years.......

oh, yeah, it has been that long that the united states taxpayer, voter and citizen has been asleep at the switch, hypnotized by consumerism gluttony, mesmerized by the fake patriotism of mass-market cults, and brainwashed by the past glories of yesteryear.......

when the average Joe and Jane quit screaming bloody murder; revoke the proxies they have given to congress, the white house, and Madison avenue; quit buying junk they don't really need, the money-grubbing ruling class on wall street and in Washington might get the message........i doubt it, though......

United states democracy is a memory........only a second American revolution can bring that memory back to least Mr. Farrell is finally talking about it..........



A WARNING to the One-World Elite

Adrian Salbuchi