"Krugman is completely wrong" Peter Schiff.


Why Paul Krugman Should Lose His Nobel Prize
In his latest weekly New York Times column, Nobel Prize-winning economist Paul Krugman put forward arguments that were so nonsensical that the award committee should ask for its medal back.

Recent rhetoric from Washington has put the economic relationship between the U.S. and China squarely on the front burner, and Krugman is demanding that we crank up the flame. This week 130 members of Congress sent a letter to Treasury Secretary Timothy Geithner demanding that the Obama administration designate China as a “currency manipulator”. Following that, a bipartisan group of senators introduced a bill that looks to force the Obama administration’s hand. For its own part, Beijing invites criticism by continuing to deny its utterly obvious currency agenda.

As these tensions escalate, most economists urge Washington to tread lightly because of the negative fallout for America if China were to begin selling its enormous cache of U.S. Treasury bonds. Krugman pushes back, asserting that the U.S. risks little by playing hardball, and that China has more to lose. He asserts that a Chinese decision to end its purchases of U.S. Treasury debt would make only a marginal impact on long-term interest rates. Did you hear that Stockholm?

According to Krugman, our secret weapon of economic invincibility is the Fed’s ability to print dollars endlessly. If China were to foolishly decide to attack us by selling our debt, the Fed could simply step in and buy the excess with newly printed greenbacks. (In other words, Krugman sees no difference between funding the debt and monetizing it. See my latest video blog on the subject.). For Krugman, China would gain little from such an attack, but would lose the ability to export to its best customer and suffer severe losses in the value of its dollar holdings. Krugman’s worldview is reassuring - but it has absolutely nothing to do with reality.

There is a huge difference between selling your debt to another and “selling” it to yourself. When China buys our debt, it uses its own savings. In order to purchase a trillion dollars of U.S. Treasuries, the Fed would have to expand our money supply by a corresponding amount. Even Krugman acknowledges that this would cause the dollar to lose value; however, he feels that a weaker dollar is good for America and bad for China.

Krugman does not believe that a tanking dollar will translate into higher interest rates or higher consumer prices at home. No matter how many dollars the Fed creates, or how much value those dollars lose relative to other currencies, he is confident that as long as unemployment remains high, rates will stay low and inflation will remain under control. This is absurd.

If the dollar were to nosedive, the Fed would normally look to protect the currency by raising interest rates, thereby increasing foreign demand for the currency. But with an economy currently on crutches, the Fed will ignore a weakening dollar and continue to try to boost employment with near-zero rates.

But keeping the Fed Funds rate low only holds rates down for U.S. government debt. If the dollar weakens substantially, other rates offered to other borrowers will rise as investors demand greater returns to compensate for inflation. To keep rates low for homeowners, credit card borrowers, corporations, municipalities, and state governments, the Fed would be forced to buy, or guarantee, all forms of dollar-denominated debt. The Fed would become the lender of only resort.

Once the Fed shows that its commitment to low rates is limitless (the value of the dollar be damned), private creditors will quit the game. Even average Americans would hit the Fed’s bid. It would be a race for the exits, with no one wanting to be left holding a bag of worthless paper dollars.

Most economists, Krugman included, see cheap money as a panacea for all ills. And while it’s true that a falling dollar, by lowering the real value of U.S. wages, would help make U.S. goods more competitive, it would also lead to skyrocketing consumer prices, rapidly rising interest rates, and a collapse in American living standards. Make no mistake: this is the end game of Krugman’s “get tough on China” policy.

This apocalyptic scenario can only be avoided if Washington jealously guards the status quo, avoiding confrontation with China at all costs. Yet, even that is an outcome that no one can rationally expect. Given exploding U.S. government deficits and the inability of U.S. citizens and corporations to repair their balance sheets, the United States faces financing needs that even China’s gargantuan savings stockpile will be unable to cover.

Krugman is right about one thing - China’s currency peg is destabilizing the global economy and must end. But he fails utterly to understand the implications for the U.S. and China. If China were to reverse its role in the U.S. Treasury market, both economies would be destabilized in the short-term. But in the medium- and long-term, China would clearly emerge as the winner.

Absent Treasury-bond purchases, the value of the Chinese currency would rise sharply, causing goods prices to tumble in China. This long-delayed increase in purchasing power for everyday Chinese will unleash pent-up demand in what is already the largest middle class in the world. Chinese factories would retool in order to produce goods for their own citizens to consume. In RMB terms, commodity prices would plunge, making it easier for China to produce all kinds of stuff, such as automobiles, while also making it cheaper for the Chinese to buy gas. Millions will trade in bikes for cars, and Chinese oil imports will swell.

The opposite would occur in America, where an artificial, consumer-based economy, supported by Chinese lending, will come tumbling down. Without the ability to import cheap goods from overseas, Americans will pay more and get less. While gas and food become cheaper for the Chinese, they will simultaneously become much more expensive for Americans - so too will automobiles, consumer electronics, furniture, and just about every other product we want or need (even those few we still make ourselves).

Washington’s best option is to recognize that the current relationship is unsustainable and to plan, as best as possible, for a more viable future. We Americans also must be honest with ourselves and recognize that we have been living beyond our means and that our lifestyle has been largely financed by austerity in China. We must conceive of a plan that weans us from this dependence without provoking China to pull the rug out from under us before we have a firm footing. To construct a policy around Krugman’s ridiculous assumption that we benefit China more than they benefit us is to invite catastrophe on an unimaginable scale.

More on the Krugman is wrong bandwagon (I’m telling you, build them and they will sell).
ritholtz.com/blog/2010/03/ro … -currency/
ftalphaville.ft.com/blog/2010/03 … n-edition/

This time he got Roached…

I am so sick to death of economists! Do we really need to hear more about this rubbish.

All they do is get into personal bitch fights with each other. I’m wright and he’s wrong! - No, says the other guy, I’m right and he doesn’t know what he’s talking about… This is all we hear out of them. It just demonstrates that the level of intellectual debate among the entire economist profession.

Most economists, neither saw the current situation coming, nor now give any way to end the situation. And worse, most of them said it was not possible to have a deep recession/depression again in the first place. There were some who did predict the current situation, like the two in these articles - Krugman and Shiff. But even among those that did predict what was about to happen, all they do is bitch at each other - I’m right and you’re wrong!!!.

The best that they can come up with are fluffy hand waving arguments saying why they are correct.

Isn’t it about time to accept that economists are little more than astrologers who haven’t a clue what they are talking about, and just ignore them.

no disrespect but thats boloney, who would u listen to in ireland morgan kelly/ DMCW or the asshole brigade led by keenan, desperate dan, austin, that idiot power?

You don’t get debate when the road ahead is clear and obvious… you get it when there is uncertainty. So here we are, bogged down in uncertainty and the debate will rage until we resume a particular path. Some economists are better than others.

Also they both come from different schools of economic theory.

And another one, this time John Mauldin who writes what I consider to be thoughtful analysis:
ritholtz.com/blog/2010/03/th … e-through/

And much more stuff that, to me anyway, makes sense. Is it right, though?

In previous episodes of the debate on the 'pin we had sort of come to the conclusion that for individual countries some form of protectionism while they restructured their economies might be their only escape. Is this the case for the US? Is there any point in trying to do it against just one country, or would they have to do it against everyone?

China expected to declare record trade deficit in March:
nakedcapitalism.com/2010/03/ … march.html

Albert ‘the most ursine of them all’ Edwards has also been suggesting this as a possibility.

As zero hedge point out, if China no making dollars, China no buyee US treasuries…

It’s open season now,
We should use a baseball bat on Paul Krugman.

Have a happy retirement, Schiff.

Economics is a perfectly reasonable and rational discipline, in the hands of reasonable and rational people. It’s a science of sorts although nobody can predict the future, and the main subjects are people who don’t always behave in a predictable manner.

It’s when it’s turned into religion by the so-called ‘Chicago’ and ‘Austrian’ schools, who aren’t really economists so much as paid shills for the big banks, advocating for anything that makes it easier for wealthy people to pay less taxes and make more money, generally at the expense of the ordinary citizen.

It’s difficult to regard it as a science because it’s founded on assumptions that don’t always hold up, or they hold up for companies but not individuals. EG, the idea that rational actor will always act in their own self interest and that that always includes maximising profits. That’s a very basic assumption of everything that follows classical economics, yet it is patently not true. Groups do not cleanly break down into individuals and people intuitively behave in terms of the interests of groups as well as themselves as individuals. Those actions often can’t be interpreted as the individuals best interests in economistic terms but they are in the best interests of the individual in non economistic terms. It’s like the flip side of economic theories difficulty with externalities. Behavioural economics goes some way towards correcting this but again it is hobbled by the theoretical attachment to individuals as the primary unit of economic activity. Economics is a useful discipline for modelling and for understanding data but as a science it does not have a framework as much as it has ideology.

FYI: Krugman is also moving to much greener pastures.

I think it has more than that. First of all it is peer reviewed, by a community of scientists. That is the essential thing. And a scientist is a TYPE of man. He engages in the systematic and disciplined effort to understand phenomena, beyond the range of the mental habits and factual knowledge of everyday life… He takes on the task of improving upon the existing stock of facts and methods and in the process of doing so, acquires a command of both, that differentiates him from the ‘layman’ (or celebrity hedge fund manager for that matter!). In economic science, the current main areas of study are 1. Economic history. 2. Statistics. 3. Economic theory and models. 4. Economic sociology. 5. Political economy. 6. Applied fields… Really, I wouldn’t underestimate Krugman’s achievements. It is no doubt difficult in general to have an appreciation of them as a layman (or a celebrity hedge fund manager!). Sciences like physics are a completely different kettle of fish only because hundreds of years more of the above type of effort has gone into it.

So farming is a science, warfare is a science? Literary criticism is peer reviewed, has a long and scholarly history, has ‘facts’ and methods. You could say the same things about any scholarly discipline, experts in any of those arenas have a far deeper understanding than a lay person. The addition of political economy to the list you cite is only indicative of the distance economics still has to go. The fact that it is more widely cited in sociolgy and in geography than in economics, and that peer reviewed economics only took on political economy as relevant in the last few decades… Economic papers are only peer reviewed by scientists if you accept that economists are scientists, MAN or otherwise.

Your understanding of what the Austrian School advocates seems to be pretty flawed. They were the only people who said to let the banks fail and don’t give them any taxpayer money.

And that workers owe their lives to capitalists, rather than the other way round.

I think most of it is obfuscation. The more detailed the theory the less applicable it will be. Economists are like philosophers they all love a favourite philosopher/economist who sprouts incomprehensible gibberish and try to pass it off as deep insight. Both disciplines are littered with such notables. Gives the professionals something to do all day.

Always seek simplicity and accept the limits of knowledge and prediction. When faced with the formidable limits what you can actually claim with any certainty amounts to very little. Anything else is ego and the display of personal belief systems/biases.

I’d start calling work science when you can show that the scientific method is being rigorously applied. en.wikipedia.org/wiki/Scientific_method

Difficulty for laymen to understand does not in any way indicate science. For example, I have red a little about Kaballah, and found it impenetrable. I do not believe it to be a science. Similarly “peer review” does not indicate science. Writers often affiliate into supportive groups and offer criticism of each other’s work. This is rigorous peer review, but that does not make writing science. Science can benefit from peer-review, but a single individual can do perfectly valid scientific work with the right approach.

The most immediate problem I see with treating economics as a science is the difficulty in setting up experiments. Clearly some economists attempt to characterise the systems they study, they also formulate hypotheses, and may try to make predictions. However, it is almost impossible to set up experiments to test these predictions. Furthermore, even these steps are compromised by the political interfaces to economics thought, and the reflexivity of the system being studies (say an economist discovers that for whatever reason if you have a peak in sunspot activity, the next year you get a recession in the global economy; he can’t set up experiments, but he can watch for it to happen the next time and the time after, and perhaps comes up with some models for the apparent causality behind the correlation; if he publishes this result, it will soon become very widely publicised because it’s so impressive, which means that come the next sunspot peak people will be expecting the subsequent recession which may either deepen the recession (fatalism) or avert the recession (because people take other actions than they might have done), and like a trading strategy that’s been over-exploited, his “phenomenon” gets washed away).

Anyway, it’s not to say there’s no science in economics, but I would say that most economics as presented in the mainstream is very far from science, and even outside of that much of economics is pretty scientifically-rough-edged.
(apologies for using “he” throughout, economists/scientists can of course be men/women/transgender/non-gender/other-species-gender-of-choice; and certainly a scientist is not necessarily “a TYPE of man”)

I don’t have time to address all points, but I will address this one. It may throw light on the others.

The laboratory of an economic scientist is different to the one that might come immediately to mind. Their laboratory is economic history. Once they have worked out their hypothesis and predictions that follow (or mathematical models etc as is the penchant in recent times) it is put to the test in various places and times of the past, differently scoped, to see how it holds up. From that they evaluate their hypotheses and make improvements.

That is why the in-depth study of economic history is at the very heart of the discipline. **That is the laboratory. **