In a recent post Krugman wrote:
Antonio Fatas is annoyed at Gillian Tett, who talks to the I-see-bubbles crowd and assumes that they have The Truth — namely, that those crazy central banks are flooding the world with liquidity, driving asset prices to crazy levels, and it will all end in terrible grief. Pretty much the same discussion we’ve been having about the armageddon hedgies.
As Fatas says, it’s hard to see what exactly in the data supports this view. Short-term interest rates are near zero because the economy is so depressed, and will stay that way for a long time. Long-term rates are low because people, rightly, expect short-term rates to stay low for a long time. What about stocks? Here’s profits versus the S&P 500…
[Here Krugman inserts a chart showing a decent fit between the chart of after-tax corporate profits and the S&P500 from 2004 to the present.]
Then he admits:
Now, there are some real puzzles here. Why have profits been so strong in a weak economy? Why, with profits so high, don’t businesses find reason to invest more (equipment investment is actually fairly strong, but construction remains weak). (For the seriously wonkish, why do average and marginal q seem to be so different?)
But these seem to be real-side puzzles, not monetary/financial puzzles. I don’t see anything in the data that has the “signature” of what you’d expect if the big problem was that Ben Bernanke is flooding the market with artificial liquidity that has nowhere to go. [Bold added.]
Put aside the laugh line for a minute. What I want to focus on is this: Krugman is here admitting that he is puzzled at why businesses aren’t investing more, and he says this is a “real-side” problem.
Hasn’t he spent the last few years shouting down people who suggested that? I distinctly remember on TV Krugman mocking George Will for blaming “regime uncertainty” (not Will’s term), and Krugman said matter-of-factly businesses weren’t investing because of weak demand.
Did Arnold Kling get control of Krugman’s account for an hour and sneak this one in?
Anyway, this looks like a bubble’s John Hancock to me:
Krugman asks (of his own chart), “Does that scream ‘bubble’ to you?”