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Paul Craig Roberts
December 1, 2013

Former Treasury Secretary Timothy Geithner, a protege of Treasury Secretaries Rubin and Summers, has received his reward for continuing the Rubin-Summers-Paulson policy of supporting the “banks too big to fail” at the expense of the economy and American people. For his service to the handful of gigantic banks, whose existence attests to the fact that the Anti-Trust Act is a dead-letter law, Geithner has been appointed president and managing director of the private equity firm, Warburg Pincus and is on his way to his fortune.

A Warburg in-law financed Woodrow Wilson’s presidential campaign. Part of the reward was Wilson’s appointment of Paul Warburg to the first Federal Reserve Board. The symbiotic relationship between presidents and bankers has continued ever since. The same small clique continues to wield financial power.

Geithner’s career is illustrative. In the 1980s, Geithner worked for Kissinger Associates. In the mid to late 1990s, Geithner served as a deputy assistant Treasury secretary. Under Rubin and Summers he moved up to undersecretary of the Treasury.

From the Treasury he went to the Council on Foreign Relations and from there to the International Monetary Fund (IMF). From there he was appointed president of the Federal Reserve Bank of New York, where he worked to make banks more profitable by allowing higher ratios of debt to capital, thus contributing to the financial crisis.

Geithner arranged the sale of the failed Wall Street firm of Bear Stearns, helped with the taxpayer bailout of AIG, and rejected saving Lehman Brothers from bankruptcy in order to create the crisis atmosphere needed to more fully subordinate US economic policy to the needs of the few large banks.

Rubin, a 26-year veteran of Goldman Sachs, was rewarded by Citibank for his service to the banks while Treasury Secretary with a $50 million compensation package in 2008 and $126,000,000 between 1999 and 2009.

When a person becomes a Treasury official it is made clear that the choice is between serving the banks and becoming rich or trying to serve the public and becoming poor. Few make the latter choice.

As MIchael Hudson has informed us, the goal of the financial sector has always been to convert all income, from corporate profits to government tax revenues, to the service of debt. From the bankers standpoint, the more debt the richer the bankers. Rubin, Summers, Paulson, Geithner, and now banker Treasury Secretary Jack Lew faithfully serve this goal.

The Federal Reserve describes its policy of Quantitative Easing — the creation of new money with which the Fed purchases Treasury debt and mortgage backed securities — as a low interest rate policy in order to stimulate employment and economic growth. Economists and the financial media have parroted this cover story.

In contrast, I have exposed QE as a scheme for pumping profits into the banks and boosting their balance sheets. The real purpose of QE is to drive up the prices of the debt-related derivatives on the banks’ books, thus keeping the banks with solvent balance sheets.

Writing in the Wall Street Journal (“Confessions of a Quantitative Easer,” November 11, 2013), Andrew Huszar confirms my explanation to be the correct one. Huszar is the Federal Reserve official who implemented the policy of QE. He resigned when he realized that the real purposes of QE was to drive up the prices of the banks’ holdings of debt instruments, to provide the banks with trillions of dollars at zero cost with which to lend and speculate, and to provide the banks with “fat commissions from brokering most of the Fed’s QE transactions.” (See: http://www.paulcraigroberts.org )

This vast con game remains unrecognized by Congress and the public. At the IMF Research Conference on November 8, 2013, former Treasury Secretary Larry Summers presented a plan to expand the con game.

Summers says that it is not enough merely to give the banks interest free money. More should be done for the banks. Instead of being paid interest on their bank deposits, people should be penalized for keeping their money in banks instead of spending it.

To sell this new rip-off scheme, Summers has conjured up an explanation based on the crude and discredited Keynesianism of the 1940s that explained the Great Depression as a problem caused by too much savings. Instead of spending their money, people hoarded it, thus causing aggregate demand and employment to fall.

Summers says that today the problem of too much saving has reappeared. The centerpiece of his argument is “the natural interest rate,” defined as the interest rate at which full employment is established by the equality of saving with investment. If people save more than investors invest, the saved money will not find its way back into the economy, and output and employment will fall.

Summers notes that despite a zero real rate of interest, there is still substantial unemployment. In other words, not even a zero rate of interest can reduce saving to the level of investment, thus frustrating a full employment recovery. Summers concludes that the natural rate of interest has become negative and is stuck below zero.

How to fix this? The way to fix it, Summers says, is to charge people for saving money. To avoid the charges, people would spend the money, thus reducing savings to the level of investment and restoring full employment.

Summers acknowledges that the problem with his solution is that people would take their money out of banks and hoard it in cash holdings. In other words, the cash form of money provides consumers with a freedom to save that holds down consumption and prevents full employment.

Summers has a fix for this: eliminate the freedom by imposing a cashless society where the only money is electronic. As electronic money cannot be hoarded except in bank deposits, penalties can be imposed that force unproductive savings into consumption.

Summers’ scheme, of course, is a harebrained one. With governments running huge deficits, who would purchase bonds at negative interest rates? How would pension and retirement funds operate? Would they also be subject to an annual percentage confiscation?

We know that the response of consumers to the long term decline in real median family income, to the loss of jobs from labor arbitrage across national borders (jobs offshoring), to rising homelessness, to cuts in the social safety net, to the transformation of their full time jobs to part time jobs (employers’ response to Obamacare), has been to reduce their savings rate. Indeed, few have any savings at all. The US personal saving rate is currently 2 percentage points, about 30%, below the long term average. Retired people, unable to earn any interest on their savings from the Fed’s zero interest rate policy, are being forced to draw down their savings in order to pay their bills.

Moreover, it is unclear whether the savings rate is an accurate measure or merely a residual of other calculations. With so many people having to draw down their savings, I wouldn’t be surprised if an accurate measure showed the personal savings rate to be negative.

But for Summers the plight of the consumer is not the problem. The problem is the profits of the banks. Summers has the solution, and the establishment, including Paul Krugman, is applauding it. Once the economy officially turns down again, watch out.

This column first appeared as a Trend Alert, Trends Research Institute

Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following. His latest book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is now available.


End this Depression? Never | Business Spectator

End this Depression? Never | Business Spectator.

Larry Summers’ speech at the IMF has provoked a flurry of responses from New Keynesian economists that imply that Summers has located the “Holy Grail of Macroeconomics” – and that it was a poisoned chalice.

“Secular stagnation”, Summers suggested, was the real explanation for the continuing slump, and it had been with us for long before this crisis began. Its visibility was obscured by the subprime bubble, but once that burst, it was evident.

So the crisis itself was a sideshow. The real story is about inadequate private sector demand, which may have existed for decades. Generating adequate demand in the future may require a permanent stimulus from the government – meaning both the Congress and the Fed.

What could be causing the secular stagnation – if it exists? Krugman noted a couple of factors: a slowdown in population growth (which is obviously happening: see Figure 1); and “a Bob Gordon-esque decline in innovation” (which is more conjectural).

Figure 1: Population growth rates are slowing


Graph for End this Depression? Never

So is a secular trend to lower growth the reason for the continuing stagnation, six years after the crisis began? And is Summers now the Messiah?

Reading Krugman or Miles Kimball, you’d think so on both counts. Kimball headlines his coverage with “Larry Summers just confirmed that he is still a heavyweight on economic policy”, while Krugman states that while he’s been thinking on the same lines, “Larry’s formulation is much clearer and more forceful, and altogether better, than anything I’ve done. Curse you, Red Baron Larry Summers!”

On the issue itself, you’d also think that suddenly the lightbulb has switched on as well, after years in the darkness before and after the crisis. Though Summers’ thesis has its critics (such asStephen Williamson),  there’s a chorus of New Keynesian support for the “secular stagnation” argument, which implies it will soon become the conventional explanation for the persistence of this slump long after the initial financial crisis has passed.

Krugman’s change of tune here is representative. His most recent book-length foray into what caused the crisis – and what policy would get us out of it – was entitled End This Depression Now!. The title screamed that this crisis could be ended “in the blink of an eye”, while the text argued that all it would take is a sufficiently large fiscal stimulus to help us escape the “zero lower bound”. Krugman wrote:

“The sources of our suffering are relatively trivial in the scheme of things, and could be fixed quickly and fairly easily if enough people in positions of power understood the realities.

“One main theme of this book has been that in a deeply depressed economy, in which the interest rates that the monetary authorities can control are near zero, we need more, not less, government spending. A burst of federal spending is what ended the Great Depression, and we desperately need something similar today.”

Post-Summers, Krugman is suggesting that a short, sharp burst of government spending will not be enough to restore “the old normal”. Instead, to achieve pre-crisis rates of growth in future – and pre-crisis levels of unemployment – we may need permanent government deficits, and permanent Federal Reserve spiking of the asset market punch via QE and the like. Not only that, but past apparent growth successes – such as The Period Previously Known as The Great Moderation – may simply have been above-stagnation rates of growth motivated by bubbles:

Krugman asks: “So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’ answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.”

This argument elevates the “zero lower bound” from being merely an explanation for the Great Recession to a General Theory of macroeconomics: if the zero lower bound is a permanent state of affairs given secular stagnation, then permanent government stimulus and permanent bubbles may be needed to overcome it.

Or, as Krugman puts it: “One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom – whether it’s a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go the Krugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.”

So is secular stagnation the answer to the puzzle of why the economy hasn’t recovered post the crisis? And is permanently blowing bubbles (as well as permanent fiscal deficits) the solution?

Figure 2:  A secular slowdown in growth caused by a secular trend to stagnation
Graph for End this Depression? Never

Firstly, there is evidence for a slowdown in the rate of economic growth over time, as well as its precipitous fall during and after the crisis. The growth rate was as high as 4.4 per cent per annum on average from 1950-1970, but fell to about 3.2 per cent per annum from 1970-2000 and was only 2.7 per cent in the noughties prior to the crisis, after which it has plunged to an average of just 0.9 per cent per annum (see Table 1).

Table 1: US Real growth rates per annum by decade
Graph for End this Depression? Never

The sustained growth rate of the US economy is lower now than it was in the 1950s-1970s, and the causes go well beyond the undoubted demographic trend that Krugman nominates and the rather more dubious suggestion of a decline in innovation.

Firstly, the corporate transfer of production from the US (and Europe) to the third world over the last 40 years has substituted low-wage, low-consumption third world workers for high-wage, high-consumption Americans and Europeans. This benefited Western and third-world capitalists, but at the expense of reducing global demand. The free trade that conventional economists champion has in fact help replace the ‘beggar the neighbour’ politics of the protectionist past with ‘beggar thy working class’ politics today.

Secondly, there’s the impact of rising inequality on consumption. Inequality is at unprecedented levels today, possibly the highest it has ever been in human history, according to James K Galbraith, the global authority on this topic. That inequality leads to huge demand for luxury yachts, but diminished demand for almost everything else. Demand in the aggregate could fall.

And there’s a third factor that Krugman alludes to in his post, which I suspect might start to turn up in future in his explanation of the crisis: the rise in household debt during 1980-2010. With the notable exception of Robert Shiller, this wasn’t foreseen by mainstream economists in neither thefreshwater nor saltwater sects.

Figure 3, sourced from the St Louis Fed’s excellent FRED database, and taken from Krugman’s post, outlines this trend.

Figure 3: Ratio of household debt to GDP
Graph for End this Depression? Never

Now, as any well-trained economist knows, it’s a matter of simple logic that what happens to private debt is irrelevant to macroeconomics most of the time because “debt is one person’s liability, but another person’s asset”.

However, private debt does matter during a liquidity trap, because then lenders might get worried about the capacity of borrowers to repay and impose a limit on debt that borrowers have already exceeded, forcing borrowers to repay their debt and spend less. To maintain the full-employment equilibrium, people who were once lenders have to spend more to compensate for the fall in spending by now debt-constrained borrowers.

But lenders are patient people, who by definition have a lower rate-of-time preference than borrowers, who are impatient people.

In the New York Times, Krugman wrote: “Now, if people are borrowing, other people must be lending. What induced the necessary lending? Higher real interest rates, which encouraged “patient” economic agents to spend less than their incomes while the impatient spent more.”

The problem in a liquidity trap is that rates can’t go low enough to encourage patient agents to spend enough to compensate for the decline in spending by now debt-constrained impatient agents.

Krugman elaborates: “You might think that the process would be symmetric: debtors pay down their debt, while creditors are correspondingly induced to spend more by low real interest rates. And it would be symmetric if the shock were small enough. In fact, however, the deleveraging shock has been so large that we’re hard up against the zero lower bound; interest rates can’t go low enough. And so we have a persistent excess of desired saving over desired investment, which is to say persistently inadequate demand, which is to say a depression.

Summers’ thesis now implies that the US economy has in fact been in a liquidity trap for decades, possibly “since the 1980s”, Krugman contends.

This suggests a hypothesis that I wouldn’t at all be surprised to see tested in the pages of theNew York Times. Firstly, America hasn’t always been suffering secular stagnation, nor has it always been in a liquidity trap. Secondly, sound economics tells us that only when the economy is in one does private debt matter macroeconomically. So it should be possible to work out how long the liquidity trap has applied, by working out when the level (or rate of change, or some other measure) of private debt correlated with macroeconomic variables (say the level, or rate of change of unemployment), and when it didn’t.

I await the test of this hypothesis. I might even check it out myself.

Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of the Minsky software program.


Guest Post: Paul Krugman’s Fallacies | Zero Hedge

Guest Post: Paul Krugman’s Fallacies | Zero Hedge.

Submitted by Pater Tenebrarum of Acting-Man blog,

Krugman, Summers and the First Keynesian

Paul Krugman has used the occasion of Larry Summers’ speech at the IMF to lay out his economic views, or let us rather say, his economic fallacies. As we already mentioned, the fact that Krugman liked Summers’ speech proves ipso facto that it was a bunch of arrant nonsense. Krugman has subsequently proved us right beyond a shadow of doubt. A great many long refuted Keynesian shibboleths keep being resurrected in Krugman’s fantasy-land, where economic laws are magically suspended, virtue becomes vice and bubbles and the expropriation of savers the best ways to grow the economy. It is important to keep in mind in this context that most of what Keynes wrote in the General Theory wasn’t original – it was mainly a rehashing of the underconsumption and inflationist fallacies propagated by his less famous predecessors. As Henry Hazlitt remarked in his detailed refutation of Keynes (“The Failure of the New Economics”):

“I have analyzed Keynes’s General Theory in the following pages theorem by theorem, chapter by chapter, and sometimes even sentence by sentence, to what to some readers may appear a tedious length, and I have been unable to find in it a single important doctrine that is both true and original. What is original in the book is not true; and what is true is not original. In fact, as we shall find, even much that is fallacious in the book is not original, but can be found in a score of previous writers.”

If one looks back at the history of economic thought, the earliest proponent of what we know as Keynesian errors today was probably John Law, the infamous Scotsman who almost single-handedly managed to ruin the economy of France (in fact, all of Europe was thrown into a depression lasting decades as a result of Law’s monetary experiment). He was convinced that what the economy lacked was ‘spending’ and so endeavored to provide it with the necessary means – in spades. The result was a giant asset bubble and crack-up boom that left the economy in utter ruins when it ended.

Although Law’s scheme involved speculation in the shares of what turned out to be a company that was worth much less than advertised, at the heart of the operation was a monetary scheme based on his previously developed theories. The plan involved the printing of oodles of unbacked paper money which Law thought would spur a revival of France’s moribund economy and concurrently fix the government’s tattered finances. As is almost always the case with inflationary schemes, it appeared to work initially. In fact, it seemed to work almost too well (if Tonto had been around, he would have noticed that something was wrong). The world’s first ‘millionaires’ were created, for a brief time at least (most of them ended up as paupers, similar to Law himself).

The problem with all such schemes is essentially that scarce resources end up being invested unwisely, as inflation makes it appear as though they were more plentiful than they really are. Once the inevitable collapse comes, these unwise investments are unmasked and it become obvious to all that capital has been squandered.


John Law – the world’s first Keynesian

(Image via Wikimedia Commons)

John Law 50 Livres Tournois_500x345

One of the ultimately worthless paper promises issued by Law’s Banque Générale

(Image via Wikimedia Commons)

The ‘Logic’ of Nonsense

What we noted above regarding ‘wise’ and ‘unwise’ investment is an important point to keep in mind when considering Krugman’s rehashing of Keynesian fallacies. Krugman writes:

“Larry’s formulation of our current economic situation is the same as my own. Although he doesn’t use the words “liquidity trap”, he works from the understanding that we are an economy in which monetary policy is de facto constrained by the zero lower bound (even if you think central banks could be doing more), and that this corresponds to a situation in which the “natural” rate of interest – the rate at which desired savings and desired investment would be equal at full employment – is negative.

And as he also notes, in this situation the normal rules of economic policy don’t apply. As I like to put it, virtue becomes vice and prudence becomes folly. Saving hurts the economy – it even hurts investment, thanks to the paradox of thrift. Fixating on debt and deficits deepens the depression. And so on down the line.”

(emphasis added)

We already discussed that the idea that the natural interest rate can become negative is a fallacy (see “Meet Larry Summers, Social Engineer” for more color on this). To briefly summarize, for the natural rate to go negative, time preferences would have to go negative too, as interest rates are merely the ratio between present and future goods. However, a situation in which human beings value attaining the same satisfaction in a more remote future more highly than attaining it in a nearer future is simply unthinkable (capitalistic saving, i.e., abstaining from present consumption, always aims at obtaining more goods and/or services in the future).

All this ‘liquidity trap’ and ‘paradox of thrift’ stuff makes no sense whatsoever. Savings are not ‘lost’ to the economy, they are thesine qua non without which capital accumulation and production are not possible. Virtue doesn’t become vice in an economic downturn and economic laws don’t change. As William Andersonpoints out in a recent article, the problem with this thinking is that it ignores capital theory. Attempts to revive the economy with deficit spending and inflation will never stimulate all factors of production simultaneously and to the same extent. The moment one considers the heterogeneity of capital it becomes clear that such interventions must lead to distortions which result in the boom-bust cycle (the housing bubble that expired in 2007/8 provides us with an excellent recent example for this).

Krugman elaborates further, once again invoking space aliens in the process:

“This is the kind of environment in which Keynes’s hypothetical policy of burying currency in coalmines and letting the private sector dig it up – or my version, which involves faking a threat from nonexistent space aliens – becomes a good thing; spending is good, and while productive spending is best, unproductive spending is still better than nothing.”

It is simply incorrect that ‘unproductive spending is better than nothing’. Recall what we said above about ‘wise and unwise investment’. Deploying scarce resources in unproductive fashion is not ‘better than nothing’, it will simply consume capital and destroy wealth. Krugman continues along these lines, seemingly eager to enlist everyone in his plan to waste as much capital as possible:

“Larry also indirectly states an important corollary: this isn’t just true of public spending. Private spending that is wholly or partially wasteful is also a good thing, unless it somehow stores up trouble for the future. That last bit is an important qualification. But suppose that U.S. corporations, which are currently sitting on a huge hoard of cash, were somehow to become convinced that it would be a great idea to fit out all their employees as cyborgs, with Google Glass and smart wristwatches everywhere. And suppose that three years later they realized that there wasn’t really much payoff to all that spending. Nonetheless, the resulting investment boom would have given us several years of much higher employment, with no real waste, since the resources employed would otherwise have been idle.

OK, this is still mostly standard, although a lot of people hate, just hate, this kind of logic – they want economics to be a morality play, and they don’t care how many people have to suffer in the process.”

(emphasis added)

So ‘wasteful spending is a good thing unless it stores up trouble for the future’ – Krugman says that this is an ‘important qualification’, only to proceed to show us in the next breath that he actually does not feel constrained by any such ‘qualification’ at all. Presumably he put that filler sentence in there so that when people in the future take a look at what he recommended in the past, he can claim to have ‘qualified’ his demand for wasteful spending (recall his vocal demand for a housing bubble before housing bubbles turned out to be uncool, which continues to cause him well-deserved embarrassment). When the latest scheme to ‘rescue’ the economy by inflation and deficit spending fails, he will be able to dig up this ‘important qualification’ (as if there could be anywasteful spending that doesn’t store up trouble for the future).

The idea that ‘idle resources’ need to be pressed into service is also due to Krugman having no inkling of capital theory. In the Keynesian view of the world, capital is a self-replicating homogeneous blob, some portions of which are currently accidentally ‘idled’ and only need to be prodded back into action with the help of  government spending. This is not so. Capital is not only heterogeneous, much of it is highly specific and inconvertible. What appears to be unnecessarily ‘idle’ are simply the remnants of previous malinvestments. It may no longer make economic sense to employ the capital concerned. Workers who used to be employed in lines of production the products of which are no longer in demand may be holding out, hoping for the sector to ‘come back’ rather than accepting a lower wage in a different occupation.

As an example, consider the housing sector that was at the center of the previous boom. If building companies have invested in enough machinery to erect two million houses per year, but I has turned out that there is only demand for 400,000 houses, it wouldn’t make sense to employ the superfluous machinery and construct two million houses per year anyway. People that were employed in construction may need to retrain or move and be willing to accept less remunerative work. It is certain that e.g. far fewer roofers are needed today than during the building boom. Renewed credit expansion is likely to affect different sectors of the economy, but if it leads to another artificial boom in the same sector, it will merely prolong the life of malinvested capital and delay the necessary adjustments. Krugman argues along Keynesian lines that  ‘stuff the government has dropped into coal mines should be dug up’, but neglects that this activity doesn’t come without costs (or rather, erroneously argues that the costs don’t matter).

Krugman avers that this ‘logic’ is hated because people are informed by a warped sense of morality. The problem has nothing to do with morals though, the problem is that there is simply no ‘logic’ discernible. Krugman offers the most illogical ideas and then proceeds to call them ‘logic’ as if that could somehow dignify them and mitigate the fact that they are offending common sense.

More Bubbles Please

Believe it or not, it gets still more absurd. Not only does Krugman conclude that it is supposedly advisable to engage in unproductive spending because it is ‘better than nothing’, he also believes that Summers’ speech contains an unspoken demand for more bubbles. And why not? After all, he has already concluded that ‘prudence is folly’, so why not throw prudence overboard, lock, stock and barrel? Never mind that this is what policy makers are already doing, so there hardly seems a great need to egg them on. According to Krugman:

“We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate.

So you might be tempted to say that monetary policy has consistently been too loose. After all, haven’t low interest rates been encouraging repeated bubbles? But as Larry emphasizes, there’s a big problem with the claim that monetary policy has been too loose: where’s the inflation? Where has the overheated economy been visible?

So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures?Summers’ answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest.”

(emphasis added)

The seemingly insoluble questions Krugman grapples with are not as difficult as he makes them out to be. The problem is that what he calls ‘inflation’ is only one of its many possible effects. Wherethe effects of inflation on prices first appear is a matter of the specific historical circumstances. Given strongly rising economic productivity, a huge expansion in international trade (and let us not forget, the transformation of the former communist command economies into market economies), it should be no great surprise that the effects of the huge credit expansion and money supply inflation of recent decades showed up in asset prices rather than consumer prices (incidentally, a very similar thing happened during the boom of he 1920s, during which economists also ignored a major credit and money supply expansion because consumer prices were tame due to strong increases in productivity).

This does not mean that other negative effects of these inflationary credit bubbles didn’t put in an appearance. They all caused a distortion of relative prices and were thus all marked by massive capital malinvestment. Successive credit expansions ledtemporarily to higher employment even as capital was misallocted, but a steadily worsening underlying structural situation has become evident as these booms have inevitably turned into busts. So what solution does Krugman have to offer? He evidently thinks coercion and theft are the best way forward:

“Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they’re negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.

One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom – whether it’s a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go theKrugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.”

(emphasis added)

Or putting it differently: do what John Law did and destroy what’s left of the economy. The elimination of paper money (i.e., cash), would force people  (whether they like it or not) to keep their money in what are essentially insolvent fractionally reserved banks that have proved beyond a shadow of doubt that they cannot be trusted. This poses no problem for Krugman, because it would make it easier to steal people’s savings via the imposition of ‘negative interest rates’ (i.e., a regular penalty to be deducted from their hard earned money).

Krugman then expresses his advance surprise at why anyone would be outraged by this combination of abject economic nonsense and outright theft. After all, it would amount to nothing but the good old ‘euthanasia of the rentier’ once recommended by Keynes:

Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It’s tyranny!

But in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.

(emphasis added)

What Krugman proposes here is indeed tyranny. The ‘liquidity trap’ is a figment of the Keynesian imagination anyway – no such thing exists. A positive rate of return on savings doesn’t need to be ‘promised’ by anyone, it would be the natural state of affairs in a free market economy. Krugman then jumps to yet another conclusion, namely that in light of the above, the size and growth rate of the public debt would of course no longer matter at all:

“Oh, and one last point. If we’re going to have persistently negative real interest rates along with at least somewhat positive overall economic growth, the panic over public debt looks even more foolish than people like me have been saying: servicing the debt in the sense of stabilizing the ratio of debt to GDP has no cost, in fact negative cost.

I could go on, but by now I hope you’ve gotten the point.”

(emphasis added)

Well, we can at least be grateful that he didn’t ‘go on’.

Federal Debt

Too much debt? No problem, just impose negative interest rates! – click to enlarge.

Summary and Conclusion:

According to Paul Krugman, saving is evil and savers should therefore be forcibly deprived of positive interest returns.This echoes the ‘euthanasia of the rentier’ demanded by Keynes, who is the most prominent source of the erroneous underconsumption theory Krugman is propagating. Similar to John Law and scores of inflationists since then, he believes that economic growth is driven by ‘spending’ and consumption. This is putting the cart before the horse. We don’t deny that inflation and deficit spending can create a temporary illusory sense of prosperity by diverting scarce resources from wealth-generating toward wealth-consuming activities. It should however be obvious that this can only lead to severe long term economic problems.

In fact, the last credit boom, in which policy makers fully implemented what Krugman and other Keynesians proposed, has done enormous structural damage. Not even the biggest spending spree and money supply expansion of the entire post WW2 era has been able to divert enough wealth into bubble activities to create a full-blown pseudo-‘recovery’ so far. Krugman’s conclusion seems to be that more of the same is needed. In other words, we are supposed to repeat what clearly hasn’t worked before, only on a much greater scale.

Finally it should be pointed out that the idea that economic laws are somehow ‘different’ in periods of economic contraction is a cop-out mainly designed to prevent people from asking an obvious question: if deficit spending and inflation are so great, why not always pursue them?

Draghi On Gold “I Never Thought It Wise To Sell” | Zero Hedge

Draghi On Gold “I Never Thought It Wise To Sell” | Zero Hedge. (FULL ARTICLE)

While Ben Bernanke would prefer not to discuss the barbarous relic, having noted in the past that “nobody really understands gold prices,” it would seem his European brother-in-arms has a different opinion. When asked this week, by the ironically named Tekoa Da Silva, his thoughts on precious metals as reserve assets (and central banks around the world increasing their allocations), none other than the ECB head himself Mario Draghi explained “I never thought it wise to sell [gold], because for Central Banks this is a reserve of safety.” But Draghi did not stop there, and perhaps enlightened by the farce in Washington this week, the unusually truthful central banker explained, “in the case of non-USD countries, it gives you good protection against fluctuations of the USD.” Perhaps that is why China continues to import gold at a record pace? Oh, and don’t fight the ECB…


Nowhere to Run, Nowhere to Hide | KUNSTLER

Nowhere to Run, Nowhere to Hide | KUNSTLER.


Good Luck Unwinding That | Zero Hedge

Good Luck Unwinding That | Zero Hedge.


The Dreadful Summer Wind | KUNSTLER

The Dreadful Summer Wind | KUNSTLER.


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