September 5, 2014
Two questions for Krugman
By Brady Willett

Paul Krugman is at it again. That is, Mr. Krugman continues to myopically attack anyone who has warned that money printing could lead to ‘inflation’. 

“…as I have written many many times, this inflation paranoia has proved remarkably resilient, enduring despite five-plus years of utter empirical failure.” Three Roads to Hard Money

Before going further, this idea that an ‘inflation paranoia’ has been running wild for 5-years is partly being imagined by Mr. Krugman. To be sure, along with the ‘money printing causes inflation’ theme, those railing against the reckless actions from the Fed since 2008 have also argued that the Fed is punishing savers, the Fed is promoting dangerous asset bubbles, the Fed is monetizing U.S. debt, QE does not create jobs, and the Fed could, longer term, endanger USD hegemony. As efforts to ‘normalize monetary policy’ in the U.S. have yet to really begin, the verdict is out on whether the Fed’s ongoing schemes will prove a longer-term positive.

But rather than objectively analyze the precarious state of U.S. monetary policy, Mr. Krugman continues to pat himself on the back and attack the ‘inflation’ theme:

“Think about CNBC economics (aka Santellinomics, aka the finance macro canon). This stuff, with its prediction of soaring inflation and interest rates, has been utterly wrong for more than five years. Yet it remains very popular among wealthy investors.” Sept 2

“Inflation hawks rarely lay out any specific model of how inflation is supposed to take off in a depressed economy; nor do they talk about testable implications of their view, or for that matter offer any explanation of why they’ve been so wrong for so long…Inflation hawks know what they want, and don’t feel any need to explain clearly why or how they might be wrong.” Aug 25

“The real story here is the remarkable resilience of inflation panic: people who worry about inflation never seem daunted in the least by the repeated failure of their predictions. It’s an interesting question why.” Aug 21

Suffice to say, while Mr. Krugman is absolutely correct that the traditional inflation statistics have failed to suggest monetary wrongdoing by the Fed, at this point who really cares?  Think about it: leading into each of the last two asset meltdowns (and recessions), the Fed’s favorite inflation indicator, the PCE price index, didn’t foretell of impending doom, and the widely followed Consumer Price Index hasn’t clocked a 4% handle on an annualized basis in more than 20-years.  Thus, if the inflation statistics were never worthy of serious attention during the last two booms and busts (the latter of which was the most devastating since the Great Depression) why, Mr. Krugman, are they worth looking at today? 

Which brings us to the point: Krugman’ fixates on ‘inflation’ because it is an easily winnable battle (i.e. Paul Ryan has indeed been wrong about ‘inflation’), but he downplays or fails to mention many of the other objections that have be laid against the Fed over the last 5+ years.  For example, when Krugman, on
September 1, compared the recent performance of the U.S. stock market to that of Italy and Germany to explain why austerity has failed, what he didn’t do is explain that stock market booms are not always a positive development.  Put another way, while contrarians fret that the $2.4 trillion average increase in household assets over the last 6-quarters is cause for serious alarm, Krugman and others cut from the same Keynesian’ cloth pretend to be blissfully unaware of any brewing asset bubble (apparently, since Krugman is unaware of monetary limitations, he doesn’t dare delve in the art of speculating about asset price limitations).

The problem with only focusing on the positives of rising asset prices is that negatives can and do arrive quickly and without much warning.  For example, during the last economic boom it took 26-quarters for $32 trillion to be added to household assets, but only 6-quarters for more than 40% (or $13.3 trillion) of these paper gains to disappear. Should a similar trend be replicated going forward, can the Fed (unlikely to have reversed measures used to save the day yesterday) really be expected to save the day again?

         Households and Nonprofit Organizations (source: FED)

Boom Period

Increase in Assets (B$)

Total Quarters

Av. Per Quarter (B$)

3Q90 - 1Q00




4Q01 - 3Q07




1Q09 - 1Q14




* Estimated pace of quarterly asset creation since QE3 = $2.4 trillion (2Q14 estimated)

Which leads us to two very basic questions for someone like Krugman:

1) Is the current pace of asset inflation in the U.S. sustainable?

2) Is it possible for monetary policy to be effectively calibrated so that today’s historic asset boom returns to a more sustainable pace without igniting any major bust?

If so compelled, Krugman would likely answer the first question by pointing at low interest rates (i.e. low interest rates mean equities are great, low interest rates mean there is no bond bubble, no threat of inflation, inflation doesn’t exist, and anyone who doesn’t see these facts is crazy).  In other words, Krugman would avoid directly answering what is essentially a yes or no question because to contend that the pace of asset inflation has limitations would be to suggest the Fed has limitations.

As for question number 2, given the Fed’s deplorable/non-existent record of recognizing asset bubbles (much less doing anything to curtail them), the very idea of magical monetary policies engineering a soft asset price landing is absurd.

In summary, whether or not the traditional inflation statistics rise or fall going forward, the current pace of asset price appreciation in the U.S. is entirely unsustainable, and this boom will, in time, lead to a devastating bust. Suddenly, the open letter to the Fed back in late 2010 – the letter that Krugman habitually attacks – is threatening to become a prophetic warning of tomorrow’s monetary quandary:

We “worry that another round of asset purchases…will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.” Open Letter to Ben Bernanke

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