Saturday, May 30, 2009

Krugman the Politico

Paul Krugman has embarrassed himself with his opinion piece this past Thursday in the New York Times. His political bias seems, on this occasion as on other occasions, to have overwhelmed his economic analysis.

Krugman is out to prove that inflation (and indirectly interest rate increases) are not something to fear in the future. According to Krugman the Fed is not (yes that is what he said!!) increasing the money supply. He says that the "claim that the Federal Reserve is printing lots of just wrong." As often is the case, Krugman is "just wrong." The Fed has, in the last three months, purchased $ 300 billion worth of treasury notes and bonds which is precisely equivalent to the US government printing money. Krugman seems to think that because excess reserves are temporarily high that no monetary creation is taking place.

The error in Krugman's analysis is the the level of excess reserves (reserves above and beyond what commercial banks are required by regulators to hold) will fall quickly as the economy begins to show life. The money supply is dramatically up already since September of 2008 and should be, by year end, double what it was in the Fall of 2008.

Guess what happens when you double the money supply? Contrary to the misleading op-ed of Krugman, there has never in history been an example of monetary expansion of this magnitude in such a short space of time that did not lead to dramatically higher level of inflation. That the inflation may not show up until 2010 or 2011 does not make it not a problem, as Krugman suggests.

Krugman seems to think that anyone who disagrees with him does so out of perverse motives. His is the only purely objective voice out there, according to Krugman. He argues that anyone who worries about inflation and a spike in interest rates must be a Republican. If Krugman is right about this, it won't be long before everyone is a Republican, including Paul Krugman. Make a note, Paul Krugman....inflation is coming and it is coming in a big way.