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The Pros And Cons Of The Federal Interest Rate Hike

The Pros And Cons Of The Federal Interest Rate Hike

The United States Federal Reserve…

Trump's Trade War Nears Boiling Point

Trump's Trade War Nears Boiling Point

Trump’s trade war appears to…

Krugman's Explicit Endorsement 'Time to Kick the Can' Shows True Colors He Denies in 'Despicable Me'

Angry Bear's column How To Debate Paul Krugman in response to my January 26 column How to Debate Paul Krugman: "Ask Questions Like a Child" was rather humorous for what it did not say.

Three-fourths of the Angry Bear article was a rebuttal of nothing I said, but rather a rebuttal of something stated by Austrian school economist Detlev Schlichter.

"Despicable Me"

Following the cue of Angry Bear, Krugman got into the act with Despicable Me, flattering himself with the notion that he is "History's Greatest Monster".

For the record, I never said, nor implied as Krugman claims in Despicable Me that "liberals must support any and all government interventions."

The irony in that ridiculous assertion is Krugman and Angry Bear both paint a straw man picture that does not exist exist, while hypocritically accusing me of doing just that!

Furthermore, I have never said Paul Krugman is always wrong, nor have I ever said that I am always right.

I happen to agree with Krugman's original stance on free trade as noted in Fair Trade is Unfair; Are Paul Krugman and Mitt Romney On the Same Page? It just so happens that Krugman was right then, and he is wrong now.

On the monetary front, I have stated numerous times that the Austrian economists and commentators in general were wrong that Fed printing was going to cause hyperinflation.

In Bizarro World Inflation; About that 2011 Hyperinflation Call ... I specifically mentioned: It pains me to see articles like On the Brink of Inflationary Disaster by Austrian economist Robert Murphy.

Moreover, I have explicitly stated on numerous occasions that Krugman was right on the inflation score (even though I do not agree with fiscal or monetary stimulus efforts for reasons explained below).

Thus, not all Austrians think alike, a point Krugman conveniently (and frequently) seems to forget.

Kick That Can

The story became even more amusing when Krugman flat out promoted Kick That Can on February 7.

In Kick That Can Krugman states "The key point is this: While it's true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we're in, it would be irresponsible and destructive not to kick that can down the road."

I certainly disagree with the last sentence above, but I am in agreement with Krugman's statement that "Republicans often seem to believe in "weaponized Keynesianism," a doctrine under which military spending, and only military spending, creates jobs."

Krugman then dove off the deep end into a pool of Keynesian silliness as follows:

But aren't we facing a fiscal crisis? No, not at all. The federal government can borrow more cheaply than at almost any point in history, and medium-term forecasts, like the 10-year projections released Tuesday by the Congressional Budget Office, are distinctly not alarming. Yes, there's a long-term fiscal problem, but it's not urgent that we resolve that long-term problem right now. The alleged fiscal crisis exists only in the minds of Beltway insiders.

So we should avoid that damage by kicking the can down the road. It's the responsible thing to do.

Reflections on a Fiscal Crisis

Of course we are facing a fiscal crisis (depending on the definition of facing) whether Krugman sees it or not. Similarly, in 2005 we were facing a housing crisis whether or not anyone saw that.

Indeed, the very reason we were facing a housing crisis is because the Greenspan Fed blew the biggest credit bubble in history in a can-kicking exercise to bail out the banks who were in trouble in 2000-2001 from the dot-com bust.

Now Krugman states that it would be irresponsible to not kick the can, ignoring the fact that can kicking is one of the reasons we are in this mess in the first place.

Although the Fed is not going to create hyperinflation (or even strong inflation) any time soon, Fed policies have indeed caused massive distortions. For example, Fed policy clobbers those on fixed income as detailed in Hello Ben Bernanke, Meet "Stephanie".

In addition to clobbering those on fixed income, the Fed has blown yet another bubble in the equity and corporate bond markets.

Thus, there are many costs to kicking the can. And for what?

Take a good look at Japan. Over 20 years of can-kicking via both Keynesian and Monetary stimulus did not buy Japan anything but a mountain of debt.

Japan has not blown up yet, but it will, and sooner than the US in my estimation (a statement I made in 2005 if not before).

Krugman points out that austerity did not work in Spain or Greece. Of course it didn't. Both countries increased taxes and neither country implemented what was really needed, and that is work rule and pension reform.

No respected Austrian on the planet would have raised taxes like the Troika demanded in Spain, Italy, Greece, and Portugal.

Yet that does not stop Krugman from blaming Austrian austerity for the collapse in Europe. Nor does it stop Krugman from ignoring Japan (on the basis Japan has not blown up yet).

In the meantime, we are force-fed the ridiculous Keynesian notion that the cure to a debt-mess is to pile still more debt upon debt as if debt will create a recovery.

More Debt Will Not Create a Recovery

More debt cannot be the answer for the simple reason I mentioned in "Libertarian Turned Keynesian": "Any person with a modicum of common sense, at any education level beyond 7th grade, should understand what happens to demand as soon as free money stopped."

It does not take a brilliant mind to understand that. Indeed, it takes someone living in an ivory tower of academic nonsense to not see it.

There is only an illusion that Keynesian stimulus ever worked, and that illusion is based on ability and willingness of consumers to take on more debt. If we have hit the end of the line on consumer attitudes towards debt (and I believe we have) further stimulus will be as useful as it was in Japan.

So, my original post was indeed correct after all. "It is very important in replies to people like Paul Krugman, that we don't get involved in technical details. Ask some questions almost like a child. ..."

What is the end-game? When does the stimulus stop?

The US has had trillion dollar deficits for years and faces them for years more to come. If's that not "stimulus" what is it?

Krugman wants stimulus measures to continue, with increasing doses until the stimulus works, but of course it never will (and all we will get for it is a massive pile of debt).


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