My dear cousin Emile,

You’ve made it clear that you have no use for the thinking of Paul Krugman; in fact your views are the polar opposite. I believe the opinions and writings he expresses could not be more spot-on. Yesterday’s column is a great example.


Krugman’s piece was written as a reaction to the mid-term election victory of the Republicans, and was not a sober or objective economic analysis. It is true that I consider Keynesian economics, in particular its belief in demand-management as a cure for stagnation, is fundamentally flawed, and hence that the economics preached by neo-Keynesians like Krugman is 100% off the track of what is needed.

since the formation of the Fed in 1913 the dollar has lost 99% of its purchasing power

My own position is neither pro-Republican nor pro-Democrat. I would support any government that aims to achieve a sustainable economic recovery – for which there is no long-term alternative other than a return to sound money (as incidentally explained by the exponents of Austrian economics). Printing money through QE must, logically, inflate the money supply (and, its inescapable corollary, debase the dollar’s purchasing power – two sides of the same coin). That is the very antithesis of sound money. In fact, since the formation of the Fed in 1913 the dollar has lost 99% of its purchasing power, most of that since 1971, when Nixon finally abandoned the Bretton Woods notional link between the dollar and gold at $35 per ounce.

Coming back to QE, because the new ‘fiat’ money is distributed inequitably through the economy, always reaching the Wall Street casino banking boys first, it creates distortion and malinvestment. Those in receipt of new money know full well that money-printing is inherently inflationary, and so after every month’s $85 billion injection there is always a rush to buy assets – real estate, stocks and bonds, boats, automobiles, planes, commodities, etc. By the time any ‘trickle-down’ is felt in the wider economy prices have gone up and the result is the familiar widening of the gulf between rich and poor. Conversely, at every whiff of prospective tapering the stock market plunges!

(Quite incidentally, that is the key to the mid-term election result – not so much a Republican victory as wholesale frustration with Washington’s deep ignorance of how masses of low-salaried American families struggle, precariously, to keep food on the dinner-table and fuel in the tank. Millions of voters are utterly fed-up with government’s inability to control its spending, tackle the deficits, root out the waste, fraud and abuse of government programmes, and reduce the crippling red tape and regulations that strangle small businesses.)

The QE method (purchase of Treasury Bonds by the Fed) inflates the national debt by many trillions and, although debt is currently cheap, the time MUST come when interest rates rise, and China, Russia, India, Brazil, Saudi-Arabia and the others with massive holdings of dollars, will question the Fed’s ability to service those debts, let alone honour their repayment, and a painful currency devaluation will be the inescapable correction. You can delay the operation of markets, but you can’t escape it.

QE is not the sole means by which currency is debased – this has been happening for many decades through the mechanism of fractional reserve banking, whereby banks, knowing that customers rarely act in concert to seek withdrawal of deposits all at once, retain only a fraction ‘in-house’, and lend the balance to other customers who. in turn, deposit the money in their own bank accounts. QE is simply a method of showering even more of the stuff on a banking sector that has completely forgotten the principles that underlie their raison d’être.

Paying people to dig holes, and then paying them to fill them up again – the essence of demand-stimulation – creates money in the form of debt, but creates no tradable goods or services. The idea that this charade can somehow dig the economy out of slump underlies much current economic thinking, from the US to Europe to Japan, and it has never worked, and never can. All that Roosevelt’s stimulus achieved was to delay the recovery from 1933 until the economy was revived by America’s entry into World War II. It is that simple. Money-creation and wealth creation are not the same.

The proof is that the money-creation frenzy since 2008 has not worked

The proof is that the money-creation frenzy since 2008 has not worked – Krugman, of course, has written abundantly about his own belief that the policy’s failure is due to the fact that MORE stimulus was required! The Fed is obviously too parsimonious with the laxative!

His latest piece begins with ample rhetorical assertion but no real analysis – his allegation that Ryan Paul’s (not Paul Ryan’s, as he writes it) budget proposals are merely ‘exercises in deception and double-talk’ is uttered without any reasoned support. In fact without any support at all. He bases his entire ‘argument’ on the Republicans’ past errors. He is clearly a supporter of regulation as an obstacle to the creation of profit, but says nothing about the strangling effect of over-regulation. He says nothing about the Democrats’ key role in initiating the sub-prime lending crisis under the Clinton regime. His beloved regulations forced banks throughout the US to disclose the proportion of their loan-books allocated to poorer, often ethnic, minorities, and compelled them to achieve a pre-set arbitrary proportion as a condition of renewing their banking licences – regardless of borrowers’ financial status.


Emile Woolf