This week I’m going to talk in-depth about this with Tom Woods–and you really should be listening to all of his shows, they’re great–but let me give just a quick taste.
For people who have been following the blogosphere wonk econ debate since 2008, I think you will agree that the following is an accurate summary of part of the exchange:
KRUGMAN, DELONG, et al.: Sure the Fed’s asset purchases are a move in the right direction, but it’s not enough.
SCHIFF, MURPHY, et al.: This is insane. This is the same thing that caused the current crisis. Get ready for big price inflation. The dollar itself is at risk.
KRUGMAN, DELONG et al.: You guys are nutjobs. Deflation is the threat, not inflation. Japan here we come.
SCHIFF, MURPHY, et al.: Prices are indeed rising, just not at the grocery store (yet, and as much as we have been warning). Look at asset prices, there is a huge bubble in Treasuries and the dollar. This is setting the economy up for a huge fall, just like Greenspan did with the housing bubble.
KRUGMAN, DELONG et al.: Way to move the goalposts, liars. Monetary policy can’t be too loose, because otherwise we’d see rising consumer prices. We would actually be seeing core deflation right now, except for the fact that empirically we are not seeing it–just as our models predicted.
Long-time readers of this blog know exactly what I am talking about. Clearly when Austrians and other hard-money types argued that Bernanke was going to cause a bubble with his loose monetary policy, Krugman et al. came back and said no, this was crazy, because core CPI was modest.
Well, in that context, here’s the latest from Krugman regarding Larry Summers’ talk at the IMF meetings:
How do you know that monetary policy is too loose? The textbook answer is that excessively expansionary monetary policy shows up in rising inflation; stable inflation means money is neither too loose nor too tight. This answer has, however, come under challenge from both sides. One side — the side I’m on…says that at low inflation rates this rule breaks down: the Phillips curve isn’t vertical, even in the long run, at low inflation (perhaps thanks to downward nominal wage rigidity), so stable inflation at a low level is consistent with an economy operating well below potential.
But there’s a critique from the other side…namely, the notion that if asset prices are rising, and that this might signal a bubble, it’s time to tighten, even if inflation is low or falling.
As Simon Wren-Lewis points out, the Swedish Riksbank has gone all in on this doctrine…
The Riksbank raised rates sharply even though inflation was below target and falling, and has only partially reversed the move even though the country is now flirting with Japanese-style deflation. Why? Because it fears a housing bubble.
This kind of fits the H.L. Mencken definition of Puritanism: “The haunting fear that someone, somewhere, may be happy.” But here’s the thing: if we really are in the Summers/Krugman/Hansen world of secular stagnation, things like this are going to happen all the time. The underlying deficiency of demand will call for pedal-to-the-medal monetary policy as a norm. But bubbles will happen — and central bankers, always looking for reasons to snatch away punch bowls, will use them as excuses to tighten. [Bold added.]
I’m being dead serious: Hasn’t Krugman just confirmed what the Austrians and other “goldbugs” have been saying for the last five years? We now all agree that if we continue to use “textbook” monetary policy to fight recessions, we will simply give the US a string of never-ending bubbles.
The only disagreement we now have, is the best way to get out of this cycle. Krugman and Summers think it’s a combination of raising the average (price) inflation rate, boosting government spending, and lowering the national savings rate, whereas Austrians and other hard-money types think it involves smaller government and in particular a return of money and banking back to the private sector.
But make no mistake: Krugman’s admission above is a humongous concession, even though he doesn’t realize it. This is even more monumental than when he accidentally threw in the towel on the “potential GDP” discussion. I wonder if Christina Romer will pull him aside on this “secular stagnation” stuff too?