Paul Krugman Boosts LMR Circulation
Wow, just when Carlos and I interview Peter Schiff in the November Lara-Murphy Report, Krugman rips into him here:
Some readers may recall the “Peter Schiff was right” campaign of 2009, a sort of public-relations blitz claiming that Schiff, an Austrian-oriented commentator, had foreseen everything correctly. It wasn’t really true even then…
What the heck?! I understand the stuff about inflation since 2008. But how could Krugman say “It wasn’t really true even then”?! If you’ve never seen this, watch:
It’s over-the-top stuff like this that makes it hard to take Krugman seriously when he runs victory laps and accepts Academy Awards on behalf of IS-LM analysis. I would never say, “Nouriel Roubini wasn’t right about his predictions during the housing bubble.” Rather, I HAVE been saying things like, “Roubini saw how bad things were going to be, but I think his recommendations would sow the seeds for an even bigger crisis. Therefore I think his underlying model or worldview is inferior to the Austrian one.”
ONE REQUEST: *Don’t* just say, “Schiff was wrong about the dollar post-2008.” I am admitting that’s a serious charge, and we asked Schiff about that in the newsletter interview. I’m talking about Krugman denying that the “Schiff was right” campaign ever made sense in the first place.
When Krugman says that Schiff wasn’t right about everything even pre-2009, I think he has in mind stuff like this.
There’s a big difference between saying “Schiff was right” and “Schiff was right about everything.”
Krugman says the former above, describing the so-called ‘campaign’ and you are saying the latter.
The criticism of Schiff being wrong about the dollar post-2008 would also make sense if you’re criticizing the latter statement. But if Murphy doesn’t find that argument valid, why would he find Shedlock’s argument valid?
Scratch this. I have reading difficulties. Although now I don’t see why Murphy doesn’t think Schiff’s dollar predictions don’t apply. Was it because he only started talking about hyperinflation after 2008?
“Some readers may recall the “Peter Schiff was right” campaign of 2009, a sort of public-relations blitz claiming that Schiff, an Austrian-oriented commentator, had foreseen everything correctly.”
“When Krugman says that Schiff wasn’t right about everything even pre-2009, I think he has in mind stuff like this”
Isn’t that a straw man argument? Who ever said Schiff was right about everything? The general claim of the Schiff fan boys was that he was right about the coming economic implosion and the collapse of the housing bubble and the financial industry. The above video shows he was right about the general state of the U.S. economy when most analysts were wrong. Schiff himself admits he blew it in 2008 with his investment strategy so Mish’s criticism is valid as far as it goes. But that doesn’t validate Krugmans typically duplicitous claim that Schiff supporters said he was right about everything. They didn’t say that.
Hopefully I won’t pit brother against brother, here; But Tom Woods has said of Peter Schiff that he is not completely Austrian.
I think Schiff’s position on foreign currencies is one of those areas. He is right to want to escape the USD, but it’s not Austrian to want to escape TO another fiat currency.
When other countries see their economies crash and rush to the USD, it’s because they (like the US) see the crash as a loss of liquidity rather than a correction of malinvestments; They don’t realize that the same thing will happen to the reserve fiat currency, eventually.
The money printing tail really can wag six printed-money-accepting dogs.
Of course, Schiff doesn’t ONLY recommend investing in foreign fiat currencies:
Peter Schiff was Right: Goldline – The Peter Schiff Show
http://www.youtube.com/watch?v=5gkq9hfjql4
Bob thinks Krugman is playing a game, relying on ‘everything’, and thinks Schiff got a vast amount bang on. Krugman thinks getting inflation wrong is a big error.
I think Schiff’s predictions here are damned impressive. Schiff wasn’t just guessing, he explained the mechanism. He wasn’t just lucky. I also think getting inflation wrong suggests an error in his underlying theory. But Krugman wants to use it to dismiss everything Schiff said and all his reasoning. Overreach!
I can’t resist. Schiff is like the Modern Synthesis in evolution, and Krugman is like some IDer noting that the shape of the third leg of the Autralaisan flatworm has not been fully explained yet, so Darwinism is suspect.
Bob wins this one on points.
“Krugman is like some IDer noting that the shape of the third leg of the Autralaisan flatworm has not been fully explained yet”
Nah, the IDers are on to questioning why plants seemed to have more matching gene segments the further they have diverged in the supposed evolutionary tree. You are way behind the times.
” I also think getting inflation wrong suggests an error in his underlying theory.”
It was more an error in expecting the banks to lend based on the reserves granted them as they had in previous cycles. Schiff didn’t expect this (http://research.stlouisfed.org/fred2/series/EXCRESNS), and now is predicting that when those excess reserves are turned into loans by a large amount, then you will see the inflation. And I can’t see why pumping around $10+ trillion into the economy could result in no inflation. That would be a doubling of M2….
http://research.stlouisfed.org/fred2/series/EXCRESNS
Parenthesis broke the link for some reason.
I can’t resist. Schiff is like the Modern Synthesis in evolution, and Krugman is like some IDer noting that the shape of the third leg of the Autralaisan flatworm has not been fully explained yet, so Darwinism is suspect.
Dean Baker wrote all about the housing bubble in 2002 and explained how it result in a loss in wealth just like Peter Schiff, but with actual data and arithmetic.
But unlike Peter Schiff he didn’t predict runaway inflation, but a need for government stimulus to counter the lost demand.
(Baker also talks about the trade deficit in his 2002 paper, which I believe Schiff has talked about too. But Schiff also thinks a lower dollar is bad. How is wanting a higher dollar and a lower trade deficit not contradictory?)
So I don’t think your analogy makes much sense.
Oh, interesting. Would you post the link, please?
Here you go, guest:
http://www.cepr.net/index.php/publications/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble/
Thank you.
“This paper shows that there is no obvious explanation for a sudden increase in the relative demand for housing which could explain the price rise. There is also no obvious explanation for the increase in home purchase prices relative to rental prices. In the absence of any other credible theory, the only plausible explanation for the sudden surge in home prices is the existence of a housing bubble. This means that a major factor driving housing sales is the expectation that housing prices will be higher in the future. While this process can sustain rising prices for a period of time, it must eventually come to an end.”
Austrians explain bubbles without using statistics. Baker uses statistics without explaining bubbles.
Yin and Yang?
MF, isn’t the Austrian explanation that interest rates were too low?
Baker talks about this in the paper.
He says if low interest rates are causing the run up in housing prices this supports the idea of it being a bubble.
By the way, here is Ron Paul predicting the housing crash in 2001:
Ron Paul: “This real-estate bubble will burst, as all bubbles do” (part 3)
http://www.youtube.com/watch?v=KONpt9a6HrI
Baker may have foreseen the housing bubble, but he is completely missing the even larger bubble currently in U.S. Treasuries. If you read his November article, you’ll notice that he thinks huge defecits and the ever increasing debt that results therefrom are no big deal.
I have Schiff’s book, Crash Proof. He was prescient about some things, but his investment advice was terrible. He recommended European stocks as a safe haven. Ha, ha. And of course not treasury bonds, which are the one thing that gained in 2008.
There has been a lot of talk about how Peter Schiff and other Austrians that called the collapse have been wrong about the timing of higher inflation the past couple years. While I do believe the inflation rates are actually higher than the government numbers, we obviously haven’t had hyperinflation.
My question for Dr. Murphy or another expert is shouldn’t we have had a lot more deflation of prices? There are significantly more people unemployed now than in 2006/2007. Many that are working are working for fewer hours and for less money. The money supply has been tripled. GDP (not a great measure I know) is higher now than it was pre-collapse. Shouldn’t prices be significantly lower than they were in 2007? If deflationary pressures are being completely over-powered and we are still seeing positive price increases, isn’t this a sign of exactly how much inflationary pressure the economy is really under? Or am I way off base?
These will help:
No, Rick Santorum, We Don’t Need a Little Inflation
http://www.youtube.com/watch?v=J6a10UuQFOM
Neoconservative David Frum Hearts the Fed
http://www.youtube.com/watch?v=1d1rcaX-lzU
Remember TARP, and that the housing market has yet to clear. (Which it’s having a difficult time doing because of the continuing interventions, and because people need to lower housing prices further.)
As an aside, here’s a great audio book chapter by Walter Block about how government intervention increases the price of housing, and gives rise to slumlords:
Defending the Undefendable (Chapter 20: The Slumlord) by Walter Block
http://www.youtube.com/watch?v=RhURIycWHRI
Chris, the one thing the current Fed will try to prevent at all costs is deflation. They’re basically doing to things.
1. Preventing deflation at all costs with zero interest rates and quantitative easing.
2. Signaling to congress and the president that they will “accommodate” fiscal policy to lower employment in accordance with the dual mandate.
Krugman criticized Bernanke for not doing more in his book based on what Bernanke recommended for Japan. Bernanke responded that the difference between Japan then and America now is Japan was facing deflation and the US isn’t. He said he will act to prevent deflation. (Krugman disputes this is really what he wrote about Japan, but whatever.)
I meant lowering unemployment, not employment. So please no snarky comments about Freudian slips or how the policy does lower employment.
“My question for Dr. Murphy or another expert is shouldn’t we have had a lot more deflation of prices?”
In short, yes. The bust should cause deflation and lower prices as the market adjusts to meet the lower-than-expected demand. This could be masked by the Fed’s inflation of the money supply.
Chris H.
You see through all the BS, you must be a God fearing truth seeker.
Prices should be lower; instead most everything is more expensive.
I digress; inflation is an unwarranted expansion of the money base, which we have. Increasing prices are a symptom of inflation.
Austrian economics can predict absolutely nothing quantitatively, i.e., price, rates, timings, etc… in scientific precision, but only qualitatively, i.e., what WOULD happen if this or that occurred (not what will happen!).
When Schiff (or anybody) makes a prediction about future inflation rates he is not doing so as an economist, but as an investor, expert, speculator, or whatever. He is speculating on how much new money will be created, what will banks do with this money, what will people do with this money, how will the Fed then react, etc…… Economics is useless in predicting any of this, despite Krugman insisting it should, and many Austrians unfortunately taking the bate and insisting their “predictions” are correct after all.
I’m guessing that Krugman didn’t see Schiff’s ‘Mortgage Bankers Speech’ in 2006. That speech not only laid out all of the problems, he also predicted what the response would be.
I remember people predicting imminent hyper-inflation back in 1983. Why isn’t the failure of asset prices to collapse more than they have an example of extreme price inflation? What if times remain bad and banks determine that there is no one out there to whom it is safe to lend?
Anyway, lunatic MMTer Mike Norman recently posted under the title “MMT and my videos getting under Peter Schiff’s skin!” the video from Dec 2006 of Peter Schiff predicting the housing crash as Mike Norman mocked Schiff [around the 5:00 mark]. I fail to see how that reflects badly on Schiff. But I admit to not understanding the “thought process” of MMTers.
http://mikenormaneconomics.blogspot.com/2012/11/me-mmt-and-my-videos-getting-under.html
Why isn’t the failure of asset prices to collapse more than they have an example of extreme price inflation?
The wisdom of Bob Roddis.
To be fair, the correct standard in economics is counter-factuals, not past values.
It is not necessary for prices to rise over time before price inflation exists. Prices can just be higher than they otherwise would have been.
Krugman says
“Now, the thing about Schiff and all the other Austrians predicting runaway inflation is that they were right to make this prediction given their model. If you believe that a recession is caused by a failure on the production side of the economy, the result of past malinvestment or something, you should also believe that any attempt to correct this decline by expanding credit will simply result in too much money chasing too few goods, and hence a lot of inflation.”
Can any Austrian explain what is wrong with this statement , because to me I think it warrants a more serious answer than what Bob has supplied here.
Read what Rothbard said about the 1920s:
http://www.economicpolicyjournal.com/2012/11/paul-krugman-displaying-basic-ignorance.html
Silly Roddis, Krugman has his mind made up of what Austrian theory says. It’s Schiff’s prediction of hyperinflation. Period. End of story.
Thanks.
In the quotes from that post Rothbard is saying that during a time of productivity gains there would have been falling prices if the money supply had not been increased . I assume he means that changes in the money supply caused nominal spending to increase at the same rate as productivity was increasing and resulted in the stable price level.
However, since 2008 it seems unlikely that productivity has increased by much and during the time of the highest money-supply increase GDP was actually falling, so its not clear to me how this explains things since 2008 from within the Austrian model.
Recessions caused by monetary inflation as a policy would result in monetary deflation as part of the liquidation – the banks would go bankrupt, folding their fractionally reserved assets, fractionally reserved loans are defaulted on, and so forth. The Fed’s printing would counteract this, causing prices to change relatively, but not forcing them all up at once in the statistic measure of price inflation. Housing prices might go down, while food prices go up (just as an example – no set rules for Cantillon effects).
Another issue, as I pointed out elsewhere, is that the printing has done this without being loaned out (huge spike in excess reserves). If, as expected, all that gets loaned out once the economy looks to recover and the uncertainty clears up a bit, then watch out!
Another issue, as I pointed out elsewhere, is that the printing has done this without being loaned out (huge spike in excess reserves). If, as expected, all that gets loaned out once the economy looks to recover and the uncertainty clears up a bit, then watch out!
Can’t the Fed just raise the reserve requirement or interest on reserves if they become too inflationary?
Anon, if you’re the same guy posting all over, it would help if you adopted a different pseudonym. I don’t care if you don’t use your real name, but it’s harder to keep people straight.
Okay, I changed to this at Daniel’s blog when I noticed a sign saying he deletes anonymous comments.
Sorry for posting so much, though. Appreciate the open discussion here.
Fed policy results in a well-known lag before it affects things significantly. Also, they could raise the reserve requirement or interest rates, or try selling assets to the banks in a “reverse QE”, but do you think that (A) Bernanke is really going to do this and (B) he is going to be aware of the need to do so before the SHTF, as it were.
“I held interest rates too low too long” is a phrase that applies to nearly all of Fed history…
I agree that within the Austrian model an ABCt-type bust would lead to deflation and as the 2008 bust was clearly huge the deflation would have been pretty spectacular.had the fed not pumped money like it did – but apparently just enough to stop deflation.
Is it not though a weakness in the Rothbardian Austrian model that prevented many of its leading economists from seeing that huge amounts of money pumping if used to counter a deflation would not necessarily lead to inflation ?
Also, one can make a strong case that without this post-2008 money pumping (even without the bank-bailouts) this recession would have been way worse. I understand the Austrian view that a period of liquidation is needed to fix mal-investments but would not allowing a deflation like we may have seen in 2008 have gone way beyond liquidating the mal-investments and sent the economy into a very deep debt/deflation spiral ?
I
First, not all sectors would suffer as deep a deflation as those which had previously been artificially stimulated.
Low interest rates are more beneficial to longer term projects than to shorter, so these are the sectors that will suffer the most in a correction after having been artificially stimulated.
Second, people are losing wealth now, just in the form of higher prices. Rather than just those businesses which were misled going under, the costs are passed on to the rest of us (government socialized the costs of their artificial stimulus, which is cronyism).
Tom Woods addresses a number of the “deflationary spiral” arguments in this video:
Answering the Same Old Arguments Against Sound Money | Thomas E. Woods, Jr.
http://www.youtube.com/watch?v=h-PxMzSyujw#t=18m59s
“Is it not though a weakness in the Rothbardian Austrian model that prevented many of its leading economists from seeing that huge amounts of money pumping if used to counter a deflation would not necessarily lead to inflation?”
No. The huge amounts of money printing would have still caused general price rises if the excess reserves hadn’t piled up. Additionally, it is well known that inflationary money printing could cause a masking of deflation, with the concordant Cantillon effects causing all sorts of problems. It was a problem of attempting to analyze based on uncertainties in what people – including at the Fed – would do, not the theory itself, which is only saying “if X, Y, and Z, then A, B, and C will happen”. If you miss Y happening, for instance, then you might leave off B, or expect A to be greater than it eventually was.
“No. The huge amounts of money printing would have still caused general price rises if the excess reserves hadn’t piled up.”
Krugman would claim that the reserves piling up are a symptom of the liquidity trap which is the cause of the recession. He would say this is part of the Keynesian model.
Do Austrian’s recognize the possibility of a liquidity trap in their model ? If not it seems they are forced to say things like “if the banks had lent the money out there would have been inflation but for unknown reasons they didn’t”. This means they may be lacking a true theory to explain what happens in the bust (as opposed to being able to explain why there is a bust in the first place.)
Schiff clearly predicts the bust very well – but weren’t the arguments he used as much Post-Keynesian as Austrian?
Transformer,
Isn’t there quite a bit of overlap between Austrians and Post-Keynesians?
Austrians explain the liquidity trap by saying that people are trying to save.
Printing money doesn’t create wealth, but rather distorts the means by which people measure profit and loss.
It’s not the money, per se, that people want, but the things that the money will buy; So, if you’ve just had a crash, people are trying to restore their savings – they’re not as interested in going into debt at that moment.
But you have to have savings to sustain you until your investments mature.
While ABCT starts out with low interest rates causing an artificial lengthening of the structure of production if you read the small-print then it turns out that its actually illussionary profits and illussionary wealth caused by the new money that does most of the damage to the economy.
Minsky and the post-Keynesian focus directly on the illussionary wealth and unsustainable debt part of the boom and see the bust as causing the ensuing debt/deflation cycles that lead to recession.
It seems that Austrians when looking at the bust and the recession focus more on “liquidating mal-invetsments” and less on debt/deflation. This, IMO takes ABCT out of line with empirical reality where all the evidence points to financial issues (consistent with debt/deflation) rather than structural issues being the leading cause of the current recession.
That sounds like a “yes”, at least until the bust.
We’ve been exporting our inflation to the rest of the world:
“What About Money Causes Economic Crises?” with Peter Schiff – Ron Paul Money Lecture Series, Pt 3/3
http://www.youtube.com/watch?v=npJ0CUT8d_Y#t=1h03m20s
Now THAT is how America is ripping off other countries, as the Marxists are claiming for the wrong reasons; But this ripping off is not due to the free market, but rather due to the Marxists’ own tool: central planning of the money supply (See Communist plank 5). 😀
Will they nuke us when they realize there is nothing there?
The brilliant Dean Baker from the commie version of the book “Meltdown”, pages 129-130:
“Tax cuts directed at low and moderate-income families are a good way to jump-start the economy, as would be government investment aimed at neglected infrastructure needs, such as re-building New Orleans and preventing the collapse of more bridges. Pushing down the value of the dollar should also be a top priority. There is no way to correct our trade imbalance with an overvalued dollar providing a massive subsidy for imports and imposing a tariff on U.S. exports. A lower dollar will make U.S. manufactured goods far more competitive in the [p.130] world economy, and will thus create a large number of relatively high-paying jobs. One benefit of the housing meltdown is that it should be much easier to get our trading partners to go along with a lower dollar now that we can show them how much money they lost by investing in U.S. financial assets that have gone had.
Finally, we must get people on the Federal Reserve Board who take financial bubbles seriously. Greenspan recently asserted that “the human race has never found a way to confront bubbles.” But it is possible for the Fed to do so, most obviously by repeatedly and publicly warning against stock, housing or other market bubbles as they arise. This would educate even the stupidest hedge fund managers, or at the very least make them fear personal liability for mismanaging billions of dollars. Clearly, Greenspan was not up to the job. We will need more qualified people running the Fed in the future.”
Doesn’t this sound just like Hayek explaining to Buckley the essence of Keynesianism – a ruse to forcibly lower wages and prices without the victims knowing what hit them?
Baker has argued that the trade deficit is not only “bad” but unsustainable. For example here: http://www.cepr.net/index.php/blogs/beat-the-press/the-end-of-china-bashing-toward-a-serious-discussion-of-the-trade-deficit
And here:
http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory
Believe it or not Baker actually seems to want higher wages not lower. (He thinks full employment allows wages to rise. And doesn’t think we’ve been at full-employment very often the past thirty years as the only time wages have risen was the late nineties.)
With sound money, the trade deficit doesn’t matter:
Classic Ron Paul – 1988 Campaign Interview (part 2)
http://www.youtube.com/watch?v=Tpp5XOJPGlM
Defending the Undefendable (Chapter 23: The Importer) by Walter Block
http://www.youtube.com/watch?v=PTT_WHyzZ54
The trade deficit doesn’t exist when you factor in foreign investment in the US. The problem is that the investment that makes up for it is mostly investment in Treasuries and not always US companies/branches/factories.
Krugman can say “It wasn’t really true even then” because using the word really as a modifier robs the claim of any concrete meaning. It remains pliable enough to accomodate many different readings.
Maybe the statement is the exact kind of thing he’s talking about when he uses the odd phrase “really true”. Schiff tends to say things which only have one obvious interpretation meaning that they can, at a maximum, only be true in one way. Krugman tends to say things which have multiple potential interpretations and therfore they can be potentially true in multiple ways. They can be really true where schiff’s can only be true.
The mythology surrounding Schiff partly stems from the claim some Austrians make that Schiff predicted the housing bubble in an interview in May 2002.
However, as I have shown here, it is a complete myth:
http://socialdemocracy21stcentury.blogspot.com/2011/12/austrians-predicted-housing-bubble-but.html
Peter Schiff never predicted or identified any housing bubble in the 2002 interview.
Instead, Schiff predicts a bear market in US stocks from 2002 onwards (a false prediction).
On the myth of other Austrians predicting the bubble/crisis, see here too:
http://socialdemocracy21stcentury.blogspot.com/2011/12/austrians-predicted-housing-bubble-but.html
The section on Ron Paul’s 2001 prediction says:
The dumping of treasuries hasn’t happened, YET.
Why is Krugman talking about “bond vigilantes”?
This is similar to the accusation that Peter Schiff was wrong about high- or hyper-inflation. It hasn’t happened, YET.
China has been making moves away from the Federal Reserve Note, no? Foreigners are rightly losing trust in it.
The more that happens, the more the Fed will have to print to buy them up.
THIS crazy guy predicted the housing bubble way back in 1940!
“The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.[1]”
[1] Mises, L. v. (1940), Critique of Interventionism, p. 40.
Bob I ask you this with all due respect-honestly. I mean you know a lot more about macro than I do.-I’m must an interested layman. So I don’t mean to be rude as I like your blog and respect what you do.
However, what is you’r obsession with going after Krugman? It’s not just you, there are all the people who will grasp on something-anything-to somehow prove what? That he’s unworthy? Maybe you think that kill Krugman and you kill Keynesianism-though they are Keynesians of the Left who want to nail him as they think he’s a basterized Keynesain if at all.
Krugman’s stature is underscored by how many want to knock him down. I don’t see how Krugman’s opinon aboutr Schiff can make or break him any more than your opinon about Krugman can.
Actually if you buy into Rational Expectations- a la Scott Sumner-you could argue that preidictions of the kind of Schiff are just dumb luck anway-or even if they aren’t, so what? They can’t be repeated. In the long run you can’t beat the market.
I don’t necessairly agree with this but I’m just giving a different perspective.
I don’t see how Krugman’s opinon aboutr Schiff can make or break him any more than your opinon about Krugman can.
I’m glad you think I am as influential as a Nobel laureate with arguably the most popular economics blog on Earth.