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Paul Krugman: Fiscal aspects of quantitative easing (wonkish)
The Fed is, however, creating a new liability: the monetary base it creates to buy these bonds. In effect, it’s printing $1 trillion of money, and using those funds to buy bonds. Is this inflationary? We hope so! The whole reason for quantitative easing is that normal monetary expansion, printing money to buy short-term debt, has no traction thanks to near-zero rates. Gaining some traction — in effect, having some inflationary effect — is what the policy is all about.
December 28, 2010
Paul Krugman: Nobody Believes in Supply and Demand
The issue of commodity prices is a curious one; I’m getting a lot of correspondence along the lines of, “Well, which is it? Is it too much money printing, or is it greed?” But why does it have to be either of these? Why can’t it just be supply and demand?
Here's a summary of his opinions as seen above.
1. Quantitative easing will create inflation.
2. Quantitative easing does not lead to higher commodity prices.
You'd think that would be enough of a heckle for one day but I'm not even remotely done yet. I refer you to his second link.
But I was and remain skeptical about the speculation story in 2007-2008, because of the lack of evidence of inventory accumulation;
I'm very disappointed that Krugman does not read my blog. Note the inventory accumulation in my extended pantry. I'm probably the only one in the entire world who is doing it though. *sarcasm*
November 2, 2009
8.6% Return on Investment!
There is currently $51.2 billion sitting in GLD. That's just one commodity fund of many. Would that be considered a speculation story? Is each and every investor planning to take delivery of the gold? Perhaps the thinking here is that investors will be creating jewelry for their significant others? If so, investors will be extremely disappointed. GLD has no intention of ever shipping the gold to its individual investors.
...and this time around, the fact that prices are still well below that previous peak suggests that there can’t be all that much funny business involved.
Let's look directly at oil for any signs of funny business.
The circle in red "suggests that there can't be all that much funny business involved"? That's what Krugman claims. He also claims to be skeptical of the 2007-2008 speculation story. What would it take for him not to be skeptical of it? Would a pink elephant dressed in pink slippers screaming "I'm part of the speculation herd!" do it?
The line in blue apparently suggests that there can't be all that much funny business involved either. Oil will continue to double in price roughly every 5 years. How do I know that this trend will continue? Krugman tells me that "nobody believes in supply and demand". If true, everyone will continue to buy oil no matter how high its price goes. Nobody will even cut back. He's got a Nobel prize in economics. Who am I to argue? *sarcasm*
Krugman wants inflation. He claims quantitative easing will give us inflation. He's then surprised that anyone would think oil prices would rise based on quantitative easing? Perhaps he expected all that awesome inflation to magically appear in wages and housing prices instead? How else could anyone possibly explain his twisted logic?
Can't you just picture it. On a Friday afternoon the Fed announces that it WILL create enough monetary printing over the weekend to force up all prices by an average of 10%. Let's say Krugman is your boss. He calls you into his office. He says...
"I know your review isn't for 6 months, but based on what the Fed is doing today I have no choice but to give you a 10% raise immediately. I'm also sending you home early so that you can go to the mall and do a bit of shopping to help this economic recovery. You must promise me that you won't hoard though. The last thing this country needs is a panic at the grocery stores."
Let's all embrace Krugman's utopian dream. Although that is not how the real world works now, it could happen if we all wish hard enough. I'm sure of it!
December 29, 2010
Global Food Prices in 2011 Face Perilous Rise
This has created two side effects. First, investors have bought exposure to commodities as an economic hedge. Second, the price of foodstuffs has been bid up as low interest rates reduce the opportunity cost of hoarding them — especially in China, where the money supply grew almost 20 percent in 2010.
Psst! Don't tell Krugman these crazy economic theories! He'll think you are a nutcase.
11 comments:
Here's a bonus heckle.
Paul Krugman: Commodity Prices and Inflation
You can clearly see that red CPI line in the chart being pulled both up and down as commodities move up and down.
He says:
"Anyway, it’s worth pointing out that commodity prices do have a habit of fluctuating, a lot — and that historically, such fluctuations have generally presaged neither major inflation nor major deflation."
Note that he conveniently avoids charting the 1970s, not that the "major inflation" of the 1970s would show up much on a CPI chart that has a scale set from -80% per year to 60% per year!
Good grief. I guess he's trying to spot Zimbabwe style inflation on his chart, because from where I stand the inflation we saw in 2008 was the highest we'd seen since 1990.
Also note where oil prices were in 2008 as seen within the chart within this post.
Don't even get me started on the Krugmonster! What a fiing clown. Sadly his ideas are what passes for modern economic theory. How I wish real scientists were in charge of thing financial.
Indeed, inflation is cash accessible assets is the FED and krugmans goal, but sidestepping any nasty things like high food and gas prices. What I cannot figure out to this day is why the government just does not spend the TARP/bailout cash/AIG cash etc on adding 30k to all home values across the nation (it's about the same amount I think) and the answer is that if they did the game is up beacuse everyone knows its rigged! But the way they do things somehow, someway makes it ok? It is like QE, a joke but bond players pretend its real......so dumb.
GYSC,
If we gave the money to the homeowners directly then what would happen to the foreclosure business?
Think ahead!
This way is much better. We wait for homeowners to fail and then we give money to the banks so they don't get dragged down too. They can then use this money to hire foreclosure specialists.
Job creation is job one!
Where is Nobel Piece Prize awarded?
The Nobel piece is awarded in the United Nations.
I want a "piece" of that action. Where's the one for sarcasm? ;)
Has Krugman ever visited Bonaire? It's an island in the Caribbean that has two industries - tourism and oil storage. That's right, there's a huge oil storage area where people can store oil while waiting for higher prices. It's a bit like our strategic oil reserve, only it has a different function. Speculators buy tankers full when oil is cheap, then do their best to promote higher prices. Every time I see someone on CNBC predicting $200 oil, I'm quite sure they are holding oil somewhere or have some futures contratcs they need to get rid of.
What people don't seem to get is that if gas gets too high (and it's darn near there at $3+/gal) our economy is going to retract. When our economy retracts China, India, etc. have to contract because we are their biggest customer. High commodity prices are not going to create inflation, they are going to create another recession.
For prosperity to reign, this country needs real jobs in wealth creating industries. Environmental restrictions keep that from happening. We are screwed unless or until the Republicans are able to lower the regualtory barriers for the manufacturing, extraction, and utilty industries. Our economy floats on a sea of reasonably priced, secure energy. It is the lifeblood of all economic activity in the modern world. Our priorities should be to produce more. And to regulate the International Commodity Exchange (ICE) which is in London and is where much of the fraudulent rolling over of contracts is allowed to happen. If gas gets to $4/gal. we will be back in the soup. High energy prices were what kicked off this recession. It was made much worse by the financial crisis. The financial crisis is slowly being worked out, but because of bad regulation, the economy is not recovering and high energy prices will give us a double dip.
Jimmy J.,
I could not agree more with all that you have just said.
I will simply repeat what I've said since starting this blog back in 2007 but in a slightly different way.
I am not a believer in commodity driven prosperity. I would not have believed in it in the 1970s and I do not believe in it in the 2000s.
The Bernanke's and the Krugman's of the world think they can avoid the deflationary Great Depression by simply injecting the inflationary 1970s into it.
Two wrongs aren't going to make a right.
Both eras shared one common theme and that was high unemployment. If we continue down this path we'll eventually have the worst of both eras.
Mark, the inflation of the 70s was wage-price inflation. There were shortages of some things (some may have been manipulated), but the key was that people's incomes were actually rising because there were inflation raises built into labor contracts. And there were more unions and people working under labor contracts. I was one of them. I barely noticed the inflation because my wages were rising. Not as much as inflation but enough to keep paying my bills.
That isn't the case today. The only workers who are inflation protected are government employees in government unions. They are not a big enough part of the economy to allow businesses to raise prices and maintain volumes. Rising commodity prices squeeze producers margins because they can't raise prices and maintain volume. There are no real shortages of anything today except perhaps corn. Most of the other so-called shortages are manipulated. In the 70s many stores did not have goods on the shelves because people were buying fast to avoid price increases. With the production capacity of China, India, and the U.S. there is no reason for shortages of anything except energy. That is why we need to concentrate on producing more, not trying to strangle production as the Obamanauts are doing.
Jimmy J.,
There is one way that we can eventually get serious inflation even without wage spirals here in the USA. I'm not saying it is a given. I'm merely suggesting that it is possible.
I wrote the following back in June.
Cumulative Trade Deficit Nightmares
It would be easy to say that hyperinflation/stagflation is coming when looking at such a model, especially for those of us who live in the United States. I did call myself Stagflationary Mark after all. There's certainly a decent chance.
I don't think it is that simple though. This is similar to the economic model of the Great Depression. The world was built on the exponential growth of production capacity then too. When the exponential growth in demand is no longer there to meet it we could just as easily slide into an ongoing deflationary spiral.
Spending Power vs. Trade Deficit
The red line represents our cumulative trade deficit since 1990.
The dashed blue line represents where we might be had we not taken on $4 trillion in new government debt to prop up our spending power. At the end of 2005, we had $8 trillion in government debt. At the end of 2009, we had $12 trillion in government debt. We've borrowed $4 trillion from the future to plug the hole.
If we do not value our currency, then surely we will devalue it.
Jimmy J.,
Here's something I wrote recently that would support your position.
Three Long-Term Inflationary Food Trends
I will say I saw a lot more cars on the road in China this last time. There is a secular demand for commodities from adding a few billion people to the middle class. They also have to buy gold for their daughter's weddings. They also have to buy copper for their home and the 3 empty apartments they bought as investments.
Coba
re: gold and silver
If there was truly a large amount of people in the world who feared their fiat currencies were going to become worthless, and quickly, we could see a surge in gold and silver. (Cement is great, but you need a medium of exchange not just a store of value.) Now, we do have potential problems with all of the major open currencies: USA, Europe, Japan.
I just don't see it happening on the news with people rushing to buy Gold with their Euros...then again, we don't see soup kitchens either because of the food stamp cards...maybe everyone is buying on-line.
There is definite downside to metals - what if everything settles down?
Coba,
"They also have to buy copper for their home and the 3 empty apartments they bought as investments."
It just isn't easy making sense of crazy times.
"If there was truly a large amount of people in the world who feared their fiat currencies were going to become worthless, and quickly, we could see a surge in gold and silver."
Absolutely. I would add that if the USA hyperinflates or defaults outright there will be a surge in gold even from these levels.
It makes it very difficult to profit off of this though. It's a bit like staking your fortune to earthquake predictions.
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