Paul Krugman Doesn’t Know T-Shirt Economics

The DOW eked out a slight gain yesterday.  Nonetheless, stocks are falling.  So are oil prices.  Gold too.  This, no doubt, brings good cheer to the Fed.  For it gives them cover to print more money.

Falling oil prices mask the effect of the Fed’s monetary inflation.  Falling gold prices allow the Fed to thumb their nose at all those curmudgeons who bought gold as an inflation hedge.  Falling stock prices increase calls from Wall Street for the Fed to do something.

But why must the Fed print more money?

For one thing, the Fed must print more money because that’s what they love to do…give the world an abundance of cheap money.  In addition to that, the Fed’s compelled to print more money because their guiding Keynesian theory tells them more money will result in more spending, which will solve everything.  More spending, they say, will result in an economic boom, resulting in more jobs…and, before you know it, everyone will grow richer together.

It doesn’t matter that QE, QE2, and Operation Twist haven’t done a lick for the economy. The Fed’s gone all in.  What we mean is they’ll keep doubling down and martingaling the monetary system until they ruin us.

Paul Krugman, Nobel Prize-winning economist and Keynesian par excellence, is even daring them on…

Theory vs. Reality

“It’s not true we’re going over a cliff on fiscal problems,” said Krugman in an interview with Reuters TV earlier this week.  “We are already over a cliff on the unemployment problem, and that is the thing to worry about.”

If you can believe it, Krugman’s solution to the unemployment problem is more of what hasn’t worked.  He wants mass stimulus and inflation…

“Raising the Fed’s inflation target to 4 percent from its current 2 percent, a taboo for many policymakers, would encourage households to spend and businesses to invest, generating more hiring and economic activity,” Krugman said.

It all sounds so wonderful, in theory.  With a little monetary easing the economy will be back on track.  But in reality, things haven’t worked out the way Krugman has advertised.

Since 2008 the Fed’s tripled its balance sheet by adding over $2 trillion of freshly created money.  On top of that, the Treasury’s run $1 trillion dollar deficits – or more – each year.  Yet for their efforts they’ve scored a big fat goose egg on the unemployment rate while running up the debt to $15 trillion.

What’s more, the monetary inflation that’s coming down the turnpike will blow past 4 percent like a runaway semi-truck.  Remember, even 4 percent inflation means the dollar will lose nearly 40 percent of its value over the next decade.  But real inflation may already be over 10 percent.

Still, the Fed will continue to water down your money for, what they believe to be, your own good…whether you like it or not.

Paul Krugman Doesn’t Know T-Shirt Economics

Paul Krugman, of course, is a complete madcap.  His days contemplating apparent aggregate demand insufficiencies and perceived supply gluts seems to have turned his brain to mush.  All his time staring at these graphs while pondering possible government policies to make the graphs show what he wants has had the ill effect of transforming him into a moron.

Through no fault of his own, Krugman’s experienced a higher learning glut from within the confines of Princeton University.  In the pursuit of theory, he’s forgotten one critically fundamental thing…how to think.  Certainly, an off campus field trip to a vibrant marketplace would be a much better place to learn how market’s clear than the bubble of academia.  Here’s what we mean…

The Alley, in Downtown Los Angeles, is a magical place where shrewd entrepreneurs, shameless salesmen, and downright hucksters exist in symbiotic disharmony.  With the exception of the ever-present bacon-wrapped hotdog, new fads take hold and ripple down the alley marketplace going from in-to-out of style from one week to the next.

For example, the day the Lakers win the NBA championship one enterprising vendor, who’s taken the risk of having t-shirts made in advance, will temporarily have the market cornered.  For a brief period he’ll be able to set the price of “official” championship t-shirts.  But within a day – or even several hours – more venders will bring new supply to market.  Soon every vendor on the Alley has Lakers t-shirts for sale.

As supply floods the market, there may be a momentary supply glut…but inevitably the price comes down to where the market clears.  So, too, there may also be some foolish merchants, who overinvest in the zeal of the moment, and are left with boxes of t-shirts no one wants.  If they do this enough, they go broke.

But in Krugman’s world, the t-shirt price should never come down and foolish merchants should never go broke.  In fact, in his foggy mind the government should borrow money and spend it to stimulate the t-shirt market.  But that’s not all…

To achieve the miracle Krugman promises, the central bank should also create an abundance of money from nothing and supply it in the form of cheap credit to consumers so they can buy the t-shirts at the inflated price.  According to Krugman and Keynesian economics, that is how you bailout failing businesses, boost the economy, and cure demand insufficiencies and supply gluts.

They even have graphs and charts to prove it.


MN Gordon
for Economic Prism

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