Hi Donnie

Krugman’s piece was obviously written as a reaction to the mid-term election result. It 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, to be fundamentally flawed, and hence that the economics preached by neo-Keynesians like Krugman is 100% off the track of what is needed.

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. “Making” money (as opposed to making anything useful) through the device of QE must, logically, inflate the money supply (and, its inescapable corollary, debase the dollar’s purchasing power – two sides of the same coin). That process 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.

Krugman has often written of QE as a panacea, and complains that there should be more of it. But it is in fact the most undemocratic process imaginable. The reason for this is that the new ‘fiat’ money conjured up by QE is distributed inequitably through the economy, creating distortion and malinvestment. It always reaches the Wall Street casino banking boys first, and they know full well that money-printing is inherently inflationary. 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, with a consequent rise in prices. (Why else is it that at every whiff of prospective tapering the stock market plunges?) Anyway, 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.

(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, of course – this has been happening for much longer 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, where the same fractional reserve trick is played, creating still more fiat money out of the original deposit. 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.

Let’s come back to the central difference between us. Paying people to dig holes, and then paying them to fill them up again – the essence of Keynesian 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. Tackling one favourite myth, all that Roosevelt’s stimulus achieved was to delay the recovery from 1933, via an even bigger slump in 1937, 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 further proof is that the post-2008 money-creation frenzy 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 far too parsimonious with the laxative!

Now for Krugman’s “spot on” article:

It 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 asserted 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, when socialist notions of equity 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. Regulation? That provides a brilliant illustration of the destructive power of misplaced liberal thinking when given power.

Krugman then refers to 2009 “when an ailing economy desperately needed aid”. Think it out for yourself: “Aid” in what form? At whose expense? With whose money? Democratically provided? He’s talking about money-printing. Good rhetoric, but dangerous nonsense. He then decries Boehner’s statement that “It’s time for government to tighten their belts.” Well? If this means it’s time for government to stop the profligate waste of taxpayers’ money in the public sector, why is that to be denigrated?

He cites derisively the prediction that the money-creation madness would lead to inflation and debase the dollar, saying that such claims “have been wrong again and again”. Take a look. This officially published table of absolutely basic staple domestic food items is, of course, over a 40-year period, but what a story it tells about debasement in particular.

Year Flour
(5 lbs) Bread
(lb) Round
(lb) Bacon
(lb) Butter
(lb) Eggs
(doz.) Milk
(1/2 gal.) Oranges
(doz.) Potatoes
(10 lbs) Coffee
(lb) Sugar
(5 lbs)
2011 $2.75 $1.48 $4.69 $4.82 $3.67 $1.95 $1.86 $6.00 $7.35 $5.65 $3.51

1970 58.9¢ 24.3¢ $1.30 94.9¢ 86.6¢ 61.4¢ 65.9¢ 86.4¢ 89.7¢ 91.1¢ 64.8¢

And a few random items closer to the present day but, in all cases, since QE began:

*The price of gasoline went from $1.61 per gallon at the end of 2008 to today’s $3.62, a 125% increase in five years.

*A box of Kellogg’s Corn Flakes went from $2.99 at the end of 2008 to $3.79 today, a 27% increase in five years.

*A 1.55 oz. Hershey’s candy bar cost 59 cents at the end of 2008 and 99 cents today, a 68% increase in five years.

*A box of Kellogg’s Corn Flakes went from $2.99 at the end of 2008 to $3.79 today, a 27% increase in five years.

*A 2 litre bottle of Coke went from $1.09 at the end of 2005 to $1.99 today, an 83% increase in eight years.

No inflation? Perhaps Krugman actually believes the government statistics. Perhaps he should find time to do some shopping.

I know that ecology is a subject close to your heart, but Krugman’s paragraph that includes reference to “climate denialists” seems out of place. It is more political than economic. Why pin that pejorative appellation on anyone who might harbour reservations about predictions that global warming will cause quite the catastrophic circumstances feared by the eco-warriors?

Reverting to his economics, the best I can say is that Krugman reminds me of my father. It was in the interests of familial harmony that my father and I came to an agreement that he and I would never discuss politics or economics. After that we got on brilliantly. My father would have loved Krugman and placed him on a pedestal alongside Tony Benn, Michael Foot, Harold Wilson and all the others in the pantheon of failed, misguided Marxists.

I am grateful to you for your email, which has enabled me to sharpen my own thinking on these matters., and to save us having to discuss them again. Like my father and I, we can agree to leave it alone now.