Responding to “Misguided Monetary Mentalities”

by Eric on October 12, 2009

A few quick objections to Paul Krugman’s 10.12.2009 NYT column, “Misguided Monetary Mentalities”:

Falling Dollars and Apples

Krugman states, “The truth is that the falling dollar is good news.” I object. A falling dollar is an effect of a natural law – the law of supply and demand. From July 2008 to July 2009, the world’s supply of US dollars (as measured by M1) increased over 17%. http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt Of course the purchasing power of the dollar is falling. The dollar supply has increased by 17% in 12 months!

Saying this is good is like saying a falling apple is good. Both are natural phenomena obeying natural laws. For the apple, the law is gravity. For the dollar, the law is supply and demand. A falling apple could be good. It could make a tasty dessert for a family on a picnic. It could also be bad. It could break the silence and spook away a hunter’s prey.

Likewise, a falling dollar could be very good for borrowers as they repay their debt with inflated dollars. For lenders, owners of dollars, or anyone with a stream of fixed future cash flows, a falling dollar is decidedly bad.

Krugman saying that a falling dollar is good is like Newton saying that a falling apple is good.

Created Jobs

Krugman objects to the contention that government should not seek to ‘create’ jobs. I object to his objection.

Any job the government must create is one that the free market would not create on its own. That is, the free market does not value the product of the created job highly enough to pay for it. When the government creates it coercively, they are effectively saying, “We bureaucrats are smarter than the dumb old free market. The free market doesn’t know what’s good for it anyway. This job should exist, so we’ll confiscate some of your money to pay for it.”

For the government, creating jobs is easy. They can just pay people to dig holes and fill them in. Obviously, hole digging and filling is a misallocation of resources. The artificial work created by the government is also a misallocation, only not so obvious.

The Fed’s Inflation Target

Krugman wants the Fed to hold interest rates artificially low because, “the unemployment rate is a horrifying 9.8 percent and still rising, while inflation is running well below the Fed’s long-term target.” I object.

Why does the Fed even have a long term inflation target? Why is it ok for them to reduce our dollar’s purchasing power a little (via inflation), as long as it doesn’t exceed their long term target? Why does the Fed even exist?

My Fundamental Objection

Krugman is quite an accomplished economist. That means he’s a good scientist – good at sorting out cause and effect. But when he interjects his values by advocating for certain effects, he’s no longer speaking as a scientist. He’s just another academic who thinks he knows better than the rest of us how to spend our money.

A few quick objections to Paul Krugman’s 10.12.2009 NYT column, “Misguided Monetary Mentalities”:

Falling Dollars and Apples

Krugman states, “The truth is that the falling dollar is good news.” I object. A falling dollar is an effect of a natural law – the law of supply and demand. From October 2008 to October 2009, the US monetary base increased about 80%. Of course the purchasing power of the dollar is falling. The dollar supply has increased by 80% in 12 months!

Saying this is good is like saying a falling apple is good. Both are natural phenomena obeying natural laws. For the apple, the law is gravity. For the dollar, the law is supply and demand. A falling apple could be good. It could make a tasty dessert for a family on a picnic. It could also be bad. For example, it could break the silence and spook away a hunter’s prey.

Likewise, a falling dollar could be very good for borrowers as they repay their debt with inflated dollars. For lenders, or owners of dollars, or anyone with a stream of fixed future cash flows, a falling dollar is decidedly bad.

Krugman saying that a falling dollar is good is like Newton saying that a falling apple is good.

Created Jobs

Krugman objects to free market advocates’ contention that government should not seek to ‘create’ jobs. I object to his objection.

Any job the government must create is one that the free market would not create on its own. That is, the free market does not value the product of the created job highly enough to pay for it. When the government creates it coercively, they are effectively saying, “We bureaucrats are smarter than the dumb old free market. The free market doesn’t know what’s good for it anyway. This job should exist, so we’ll confiscate some of your money to pay for it.”

For the government, creating jobs is easy. They can just pay people to dig holes and fill them in. Hole digging and filling is an obvious misallocation of resources and no one advocates for it. The artificial work created by the government is not so blatant a misallocation, but it is a misallocation nonetheless.

The Fed’s Inflation Target

Krugman wants the Fed to hold interest rates artificially low because, “the unemployment rate is a horrifying 9.8 percent and still rising, while inflation is running well below the Fed’s long-term target.” I object.

Why does the Fed even have a long term inflation target? Why is it ok for them to reduce our dollar’s purchasing power a little (via inflation), as long as it doesn’t exceed their long term target? Why can’t the free market set its own natural inflation target?

Something We Agree On

I agree with Krugman that a return to the gold standard is a bad idea. Linking our currency to a precious metal artificially restricts the money supply. I’m against that, just as I’m against artificially inflating it. (Sometime when I have more time I’ll write about what I would do instead. It involves repealing legal tender laws and ‘collectable’ taxes. I know you’re on pins and needles.)

My Fundamental Objection

Krugman is quite an accomplished economist. That means he’s a good scientist – good at sorting out cause and effect. But when he interjects his values by advocating for certain effects, he’s no longer speaking as a scientist. He’s just another academic who thinks he knows better than the rest of us how to spend our money.

Why Goldman is golden

by Eric on March 19, 2009

I believe this week’s drama over the AIG bonuses is a diversion. It’s meant to distract from the unveiling of AIG’s counterparties. The media and some Washington demagogues got Americans all fired up over $165 million in executive bonuses. This sum is a little less than 1/1000th of the bailout money AIG has received so far. But it makes for good television.

Far more distressing is the question of how AIG has used the rest of the bailout money. I don’t feel like spending a lot of time on this. You can see the links below for elaboration. The short version is that Americans had to cough up to pay off AIG’s debts to foreign banks and Wall Street firms.

Exhibit A: AIG Counterparties

So why did Americans have to pay for this? Weren’t we told that the whole world economy would implode if we didn’t save AIG? Why couldn’t AIG just file for bankruptcy like any other insolvent firm?

I believe it’s because they owed the wrong folks – namely well-connected Goldman Sachs.

Exhibit B: http://abcnews.go.com/Blotter/Blotter/story?id=5891663

If AIG were allowed to go bankrupt, Goldman and others likely wouldn’t get all their money. By saving AIG, the government effectively made it a conduit to transfer hundreds of billions of dollars from taxpayers to foreign banks and Wall Street firms.

For more elaboration, see these:

http://www.slate.com/id/2213942/

http://www.slate.com/id/2214076/

One more thing: why was bankruptcy ok for Lehman brothers, but all the other big boys required rescue? The line you hear from the media and from Washington is that there was no political will to save Lehman. Everyone was bailout weary and someone had to be made an example. I’m not so sure that’s the real story.

Exhibit C: http://www.thedeal.com/dealscape/images/Lehman_show_case_doc-3776.pdf

This lists Lehman’s top 30 creditors. Goldman is nowhere to be found.

I’d like to see a study on price movement of stocks of the largest corporate contributors to winning Presidential campaigns. My hypothesis is that they outperform. Let’s watch GS stock for the next 5 years.

Someone please comment and explain why this is all nonsense conspiracy talk. Please point out what I’m overlooking.

Full disclosure: I own an AIG life insurance policy. Thanks for the bailout.

Update:

Looks like Paulson and Blankfein had a lot to talk about prior to AIG’s rescue. http://www.nytimes.com/2009/08/09/business/09paulson.html

What is the world’s largest ponzi scheme?

by Eric on December 17, 2008

Why does everyone keep calling the Madoff hedge fund the world’s largest ponzi scheme? Have they never heard of social security?

Krugman on baby-sitting economics

by Eric on October 14, 2008

I found this very instructive for understanding the motivation behind monetary inflation/contraction. The sidebar especially enlightens the Keynesian notion that savers are the cause of unemployment – thus the incentive to save must be eliminated by inflation.

I believe the Austrian school would point out the flaw in this reasoning. In this self contained babysitting example, there is no mechanism to invest saved coupons. (You can loan them, but that’s just shuffling paper around. Investing actually results in created value – like building a home.) The Austrians hold that progress is the result of investing, and investing is possible because of saving. If there was some mechanism for investing the coupons, the system would see progress (in this case, increased babysitting capacity). Thus, saving is a good thing – not to be penalized.

This is a gross oversimplification. Furthermore, I’m certainly no economist. So somebody please tell me what I’m missing. Have I misunderstood the Keynesians or the Austrians – or both?

Walter Williams on Economic Liberty

by Eric on September 30, 2008