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Thursday, June 24, 2010 6:16 AM

Krugman Suffers Foot-In-Mouth Disease; Lessons on Price Stability

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Paul Krugman has been on a nonstop rant in favor of fiscal insanity in the past few weeks. Thankfully, Europe is listening and doing the opposite of what Krugman suggests.

Please consider the Wall Street Journal article Krugman Criticism Bolsters Weber in Germany

Princeton University Prof. Krugman caused a stir in Germany this week with a stinging critique of Bundesbank President Axel Weber, who is considered a frontrunner to succeed Jean-Claude Trichet as head of the European Central Bank when Trichet’s term expires in October 2011.

“If you are looking for someone who is aiming for zero inflation while unemployment is rising to 13%, then Weber is definitely the right guy,” Krugman said in an interview published in German with the business daily Handelsblatt.

“Weber is concerned about inflation, when there is no inflation. I would rather see an ECB President who gives more weight to deflation risks and the risk of a protracted stagnation,” Krugman said, adding that he doesn’t know Weber personally. Before joining the Bundesbank Weber was an economics professor in Germany and fairly well known in U.S. academic circles.

Krugman didn’t stop with Weber. He has taken on Germany’s plans to rein in its budget deficit, which is already considerably smaller than the U.S.’s as a share of GDP. “German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover,” he wrote in his New York Times column.

Wolfgang Franz, who heads the German government’s economic advisory panel known as the Wise Men, tore into Krugman — and the US — in an op-ed in the German business daily Wednesday, titled “How about some facts, Mr. Krugman?”

“Where did the financial crisis begin? Which central bank conducted monetary policy that was too loose? Which country went down the wrong path of social policy by encouraging low income households to take on mortgage loans that they can never pay back? Who in the year 2000 weakened regulations limiting investment bank leverage ratios, let Lehman Brothers collapse in 2008 and thereby tipped world financial markets into chaos?” he wrote.

So if Krugman really wants to keep Weber from the ECB presidency, or at least cool some of his support in Germany, he might want to consider damning the Bundesbank chief with praise instead.
Ridiculed Everywhere, Krugman Gives Unsolicited Advice To Germany

ZeroHedge had a humorous set of comments regarding Krugman in his post Ridiculed By Americans Everywhere, Krugman Now Threatens, Gives Unsolicited Advice To Germany, Pisses Entire Nation Off

Here are a few choice comments.
These days it's hard being a religious fanatic, also known as a Keynesian. It is even harder when you are Paul Krugman and everyone in your own country is already sick and tired of, and openly ignores your constant appeals to drown the world in new and record amounts of debt, thus ignoring your appeals with impunity.

When unsolicited advice is rightfully ignored, what next but to jump the shark and threaten your way in having someone to listen to your blabbering.

Something tells us the Germans are done with P.K. And since we, unfortunately, are not, perhaps he should adopt the same reverse psychology in the US - just like a Goldman downgrade of something means buy buy buy, should Krugman become rational for a change and espouse a prudent approach of deficit cuts, every normal thinker in the US will be immediately forced to burn their copy of The Road To Serfdom.
Krugman Irony

Krugman mockingly says “If you are looking for someone who is aiming for zero inflation while unemployment is rising to 13%, then Weber is definitely the right guy.”

Ironically, while Krugman mocks Weber over zero inflation, the only sane economic policy over the long haul is zero percent inflation.

The best way to achieve zero percent inflation is to get rid of central bankers, opt for nationwide balanced budgets, and ideally return to a gold standard.

A Little Deflation Is Recipe for Price Stability

Bloomberg columnist Caroline Baum rightfully points out A Little Deflation Is Recipe for Price Stability
What’s so bad about a little deflation?

If the Fed wants to make good on its pledge of price stability, one of its dual mandates, it will have to do better than its 1.5 percent to 2 percent unofficial target. A 2 percent annual rate of inflation equates to a 48.6 percent increase in the price level over 20 years.

In 35 years, the price level would double. ... The bad news is that a 1967 dollar buys 15 cents today.
Simple Math Lesson

Doubling or tripling of prices in 20 years (as Bernanke wants) is precisely the problem. In a world of global wage arbitrage, wages cannot possibly keep up. As a result, people could (and did) partake in insane amounts of borrowing to keep their standard of living at unsustainable levels.

Bernanke is so dense he could not see the approaching debt tsunami two feet from the shore.

He did not see a housing bubble, he did not see a recession, he did not see unemployment at 10% and he cannot find his ass with both hands and a roadmap. Nor can Krugman.

Amazingly, Bernanke has been praised for his handling of the recession. Yet, all he did was throw money at various problems, and that is exactly what Greenspan did in 2000-2001 fueling the housing bubble.

Bernanke will not be as "lucky" as Greenspan. There is no dot-com bubble waiting in the wings nor is there another housing bubble around the corner.

The best course of action now is the same as it was in 2000: Take the short-term punishment regardless of political cost and out the country back on a fiscally sane tract.

Keynesian clowns want to spend our way out of the problem when the problem is debt. Mathematically it cannot and will not work.

Mike "Mish" Shedlock
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