Tag Archives: Krugman

Ebola Outbreak to Help US Economy


Ebola Comes to America: Krugman & Stiglitz Must Be Delighted

By Daniel Oliver

Oh! What a Lovely Pestilence!

Ebola has come to America.  Paul Krugman and Joseph Stiglitz must be delighted.

The core story of Keynesian economists is that government demand, as ideally embodied in war spending, enables economic growth. To illustrate, in a column called “Oh! What A Lovely War!” Krugman asserted: “World War II is the great natural experiment in the effects of large increases in government spending, and as such has always served as an important positive example for those of us who favor an activist approach to a depressed economy.”

It is never quite explained how removing millions of young men from the work force – many of whom never return – to sink ships, destroy factories, and level cities could possibly create wealth; nor how shortages and price controls on the home front could be good for the economy.

But fellow Nobel laureate Joseph Stiglitz agrees with Dr. Krugman’s prescription: “What we need to do instead is embark on a massive investment program-as we did, virtually by accident, 80 years ago. . . . Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not.”

Or maybe so. Last month Lakeland Industries announced the U.S. government had placed an order for 160,000 of its hazmat suits. The stock jumped 30% after the first confirmed case of Ebola on American soil. No Federal Reserve stimulus programs were necessary to create this wealth effect.


If the often-fatal disease spreads, demand for hazmat suits will surge, not to mention hospital clinics, workers to build barricades, security guards to man quarantine checkpoints, probate officers, orphanages, and a host of other government services. It’s a good bet ammunition sales would also rise, along with canned food, firewood, and funeral services, stimulating the private economy. A lovely pestilence could create just as many jobs as a global war.

Former Obama advisor Christina Romer has pointed out: “The lesson [of World War II] is that demand is crucial – and that jobs don’t go unfilled for long. If jobs were widely available today, unemployed workers would quickly find a way to acquire needed skills or move to where the jobs were located.”

And if those jobs were located in the middle of a hot zone, even better. Leftist economists have bemoaned the low price of labor for over a century, advocating various artificial means to raise it, such as boosting the minimum wage and forming unions. But reducing the supply of labor could boost wage rates naturally and permanently.

As Krugman wrote recently about China: “to put it crudely, it’s running out of surplus peasants. That should be a good thing. Wages are rising.” History supports his analysis. The plague in medieval Europe killed between 30% and 60% of the population, which resulted in a sustained increase in wage rates that taught the capitalists a lesson by retarding economic growth for centuries. Ebola similarly offers a chance to solve America’s surplus labor problem and stick it to the capitalists harder than any of Thomas Piketty’s proposals.

As an added bonus, Ebola would save the government trillions. Obamacare Architect Ezekiel Emanuel wrote last month that it is pointless to live past the age of 75. The mind slows, senses weakness, productivity crashes, creatively vanishes: I have liv’d long enough: my way of life / Is fall’n into the sear, the yellow leaf.

And it’s expensive. Most healthcare spending is at the end of life, not surprisingly, when people are the least healthy. If people die young, Obamacare and Medicare will be saved. And, like aborted fetuses in the U.K., the bodies could be used as fuel to heat hospitals, reducing their carbon footprints.

The trillions saved could be spent on more stimulus. In fact, the more people die, the more savings there would be, and the more stimulus would be available to boost the economy for whoever is left. Imagine how rich the survivors would be!

Sadly, Ebola-stricken Liberia is unfamiliar with progressive economics. News outlets report that people are abandoning the fields and factories, leading to shortages, especially of food and fuel. Activity in the services sector has fallen by over 50%. Inflation has doubled. Civil war threatens.

Perhaps what West Africa needs is not more doctors, but a few Keynesian economists. Let us hope Krugman and Stiglitz volunteer.

Daniel Oliver Jr. is the founder of Myrmikan Capital, LLC, and is President of the Committee for Monetary Research and Education.

Have a Great Weekend!

A Reader’s Book Suggestion; Opposing Views of the Manipulated Boom; Lonely Bear


Everyone holds his fortune in his own hands, like a sculptor the raw material he will fashion into a figure. But it’s the same with that type of artistic activity as with all others: We are merely born with the capability to do it. The skill to mold the material into what we want must be learned and attentively cultivated–Johann Wolfgang von Goethe

A Lonely “Bear” on the Market:

As a side note, the Federal Reserve presently has a balance  sheet of about $3 trillion, on total capital of about $54.7 billion, meaning  that the Fed is leveraged about 55-to-1. At an average maturity of over  10-years, the duration of the Fed’s portfolio is about 8 years, meaning that a  100 basis point move in interest rates impacts the value of the Fed’s holdings  by about 8% (about $240 billion). Since July, interest rates have increased by  about 60 basis points, which has undoubtedly wiped out the Fed’s capital,  making it technically insolvent (fortunately for Ben Bernanke, the Fed doesn’t  mark its capital to market). As a practical matter, the only effect is that the  interest that the public pays on Treasury debt cannot actually be remitted by  the Fed back to the Treasury as usual, but must instead be retained by the Fed  in order to recapitalize itself due to losses on the bonds it holds. The losses  therefore effectively represent an unlegislated fiscal expenditure. Moreover,  assuming an average interest rate of about 2.5% on Fed holdings, each further  increase of 30 basis points in interest rates would wipe out a full year of  additional interest payments. Needless to say, nobody cares. These observations  aren’t central to our current concerns, but it’s worth understanding how  reckless Fed policy has already become.

On the subject of Fed policy and market behavior, Bill Hester wrote an outstanding research piece this week – Fed Leaves Punchbowl, Takes Away Free Lunch (of International Diversification). It provides good perspective on the link between economic performance and international market returns, also highlights the growing importance of country selection in international investing. I’ve included a second link to that article at the end of the Fund Notes section.



A reader makes a book suggestion


A new title that arrived yesterday via Amazon (AMZN) that you’ll also enjoy is Ravee Mehta’s The Emotionally Intelligent Investor. Mehta, the eldest son of immigrant parents, graduated summa cum laude from the University of Pennsylvania with degrees from the Wharton School of Business and also School of Engineering, and later worked for George Soros and Karsch Capital before retiring at a young age to travel the world, teach, and study philosophy at Oxford. Now Mehta manages his own funds and enjoys the freedom of working for himself.

While not having a boss is liberating, I suspect Mehta realizes that he needs a certain amount of structure (as we all do), so he can stay independent and not have to get a job with another financial services firm. In this paperback, whose title is a nod to Ben Graham’s landmark The Intelligent Investor, Mehta tells us what he learned from his search for an investing framework, including the behavioral errors that separate us from our money.

“After writing this book, I have developed daily and weekly routines to understand myself and others better, deal with my particular vulnerabilities, prioritize my to-do list, evaluate investment opportunities, empathize with other market participants, monitor my portfolio, learn from prior decisions, leverage the intuition of others and anticipate danger with individual investments and more overall portfolio’s construction. I also make sure that my investment approach fits with my personality and motivations.

Mehta’s The Emotionally Intelligent Investor, like Train’s The Money Masters, is loaded with useful tips. Despite just 200 pages in length, this is a “big” book.

The companion website: http://theemotionallyintelligentinvestor.com/

Another link: http://www.amazon.com/The-Emotionally-Intelligent-Investor-self-awareness/dp/0615688322/ref=lh_ni_t?ie=UTF8&psc=1

Manipulated Boom: 

James Grant: http://www.economicpolicyjournal.com/2013/02/lauren-lyster-talks-to-james-grant.html

Contrast that video with Krugman calling the artificial boom a “virtuous circle.”


Enroll in a Critical Thinking Course


FPA Crescent Fund Annual Letter: crescent-2012-q4-1-24-138663BD8AD6C2 . This letter is an excellent read for understanding the current quandary that investors face today. The PM even quotes Von Mises. BRAVO!


Austrian Economist Savagely Devastates Paul Krugman in a Debate

Thanks PB for the heads up.

If you had any waivers about Keynesian (establishment/conventional) economics vs. the Austrian perspective then view the video in the link below.

Professor Pedro Schwartz uses facts, theory and irrefutable cause and effect evidence to destroy Krugman’s advice to get out of crisis.  The introductions are in Spanish but the debate is in English.  I do believe Krugman is ignorant about time in the structure of production, thus he esposes an endless injection of stimulus to increase aggregate demand.

I remember driving through a subdivision in 2010 twnety-five miless outside of Las Vegas wondering who would build four hundred homes for nobody? Tumbleweeds and rattlesnakes…..Had a neutron bomb struck the development? Try stimulating that.


Krugman Destroyed In Debate By Jeff Harding, on July 9th, 2012

This comes from Luis Martin of TrugmanFactor, a blog located in Spain that translates and publishes Daily Capitalist articles. You can skip the intro in Spanish and get to Krugman’s lecture (0:09:19). But the real stuff starts at 0:35:25 where Professor Pedro Schwartz responds to Krugman’s comments in excellent English. Professor Schwartz is a distinguished and well known Austrian theory economist. And in Luis’s words, “completely destroys Krugman.” In fact Schwartz tweeted later that Krugman refused to shake his hand afterward. Enjoy.

Another Krugman Debate

Robert Murphy, an Austrian Economist, explains the Austrian Business Cycle to Krugman using a Sushi Capital Theory analogy: http://mises.org/daily/4993


PS: a reader apologized for disagreeing with me. Don’t. I like disagreements or hearing another point of view or discovering that I am just plain wrong. As a fallible human, I hope to always be aware of my fallibility. We are all trying to learn.

Paul vs. Paul Debate


www.valuewalk.com is a recommended blog. Several readers kindly sent me links to the Ron Paul vs. Paul Krugman debate.  I am biased toward Ron Paul, but for the life of me I could not understand what Krugman was saying. Perhaps using reason will not convince a religious fanatic.

I stopped reading half way through the discussion, because I knew Ron Paul’s positions but couldn’t understand the logic behind Krugman’s contrary position.  Do you? A few examples:

Krugman’s response to Ron Paul:

You can’t leave the government out of monetary policy. If you think we’re going to let it set itself, it doesn’t happen. If you think you can avoid the government from setting monetary policy, you’re living in the world that was 150 years ago. We have an economy in which money is not just green pieces of paper with faces of dead presidents on them. Money is a part of the financial system that includes a variety of assets – we’re not quite sure where the line between money and non-money is. It’s a continuum.”

What is he saying. Getting the government out of monetary policy would be like regressing? A fall into a primitive state?  Krugman makes an “Elephants can fly” assertion.

Has a monetary system worked without government control? Yes, in the brief period of a classical gold standard pre-WWI.  However, fractional reserve banking (ponzi finance) operated so, of course, booms and busts would not be eliminated. Another assertion without facts. Fiduciary media existed during the gold standard era.

“History tells us that in fact a completely unmanaged economy is subject to extreme volatility, subject to extreme downturns. I know this legend that some people like that the Great Depression was somehow caused by the government or the Federal Reserve, but that’s not true. The reality is it was a market economy run amok, which happens repeatedly…I’m a believer in capitalism. I want the market economy to be left as free as it can be, but there are limits. You do need the government to step in to stabilize. Depressions are a bad thing for capitalism and it’s the role of the government to make sure they don’t happen, or if they do happen, they don’t last too long.”

So let me try to understand……an unmanaged economy is subject to extreme volatility. But with the Fed operating since 1913, we have had the Great Depression, Inflation of the 1970s, Ultra high interest rates of the 1980s, credit crisis of 2007-2009, a managed economy (the FED cartelizing the fractional reserve banking system and suppressing interest rates) is LESS volatile? What amount of failed economic policies due to intervention would you need to say–this is a failure?

The Federal Reserve helped inflate the boom: http://library.mises.org/books/Murray%20N%20Rothbard/Americas%20Great%20Depression.pdf

Since the inception of the Federal Reserve System in 1913, the supply of money and bank credit in America has been totally in the control of the federal government, a control that has been further strengthened by the U.S. repudiating the domestic gold standard in 1933, as well as the gold standard behind the dollar in foreign transactions in 1968 and finally in 1971. With the gold standard abandoned, there is no necessity for the Federal Reserve or its controlled banks to redeem dollars in gold, and so the Fed may expand the supply of paper and bank dollars to its heart’s content. The more it does so, the more prices tend to accelerate upward, dislocating the economy and bringing impoverishment to those people whose incomes fall behind in the inflationary race.

The Austrian theory further shows that inflation is not the only unfortunate consequence of governmental expansion of the supply of money and credit. For this expansion distorts the structure of investment and production, causing excessive investment in unsound projects in the capital goods industries. This distortion is reflected in the well-known fact that, in every boom period, capital goods prices rise further than the prices of consumer goods.

See what Graham and Buffett had to say about booms and busts:A Study of Market History through Graham Babson Buffett and Others

Krugman seems neither to understand Austrian Business Cycle Theory nor economics (“ABCT”): http://mises.org/daily/4993 and http://mises.org/daily/3579

Krugman is constantly shifting arguments:http://mises.org/daily/5086

Krugman’s response:

“I want to say something about Milton Friedman here because if you actually read what he wrote in his writing for economists, as opposed to some of his loose popular writings, he actually said that the Federal Reserve was responsible for the Great Depression because it didn’t go enough. Friedman’s complaint was that the Federal Reserve did not print enough money. I know this. When Ben Bernanke was talking about the helicopter, he was taking that from Milton Friedman. That was really his idea. The state of the economic debate in America right now Milton Friedman would count on the far left of monetary policy.”

Milton Friedman was advocating for the government to intervene and prevent the market clearing. But why was a non-interventionist policy during the vicious 1920/21 depression so successful:http://www.youtube.com/watch?v=czcUmnsprQI. Both theory, common sense and empirical evidence expose Krugman’s and Friedman’s nonsense.

Here is a seven minute video that explains booms and busts: http://www.youtube.com/watch?v=d0nERTFo-Sk


I don’t understand it. Jack will spend any amount of money to buy votes but he balks at investing a thousand dollars in a beautiful painting.–Jackie Kennedy

Articles on Current Inflation

Bailing out banks is inflationary: http://mises.org/daily/5890/Bailing-Out-Banks-Is-Inflationary

How we can transition to honest money: http://mises.org/daily/5926/The-Transition-to-Monetary-Freedom

Current prices for pancakes around the world: http://www.economicpolicyjournal.com/2012/02/cost-of-making-pancakes-around-world.html

Opposing view: Diapers and Deflation (What is Krugman Smoking?) http://krugman.blogs.nytimes.com/2012/02/06/diapers-and-deflation/

The next worry from the Fed: http://blog.haysadvisory.com/


Items of Interest for Economic Students-Emerging Markets, Fed Failure

VIDEO on Deregulation and Financial Crisis

Did Deregulation Cause the Financial Crisis? No!? See Video: http://www.tomwoods.com/blog/did-deregulation-cause-the-financial-crisis/

Foundering of Indian Infrastructure or How Government Development Creates Mal-Investment*: http://www.thedailybell.com/3439/Foundering-of-the-Indian-Infrastructure

Excerpt: Free-Market Analysis: We learn from this Economist article that the situation in India is even worse than has been portrayed. Like China and Brazil, the enormous floods of money created by central banking have been applied inefficiently and without much attention to the actual necessities of modern life.

See the video of Mal-Investment* (see at end of post) in India: http://www.thedailybell.com/3442/VIDEO-The-Insanity-of-Indias-Gigantic-Gujarat-Special-Investment-Region

You can learn how state intervention in China and India actually destroys wealth–the perils of investing in emerging markets.

Fed Failure

Has the Federal Reserve been a failure? http://www.freebanking.org/2011/12/28/the-new-york-times-versus-ron-paul/  See the links.

Keynes and Krugman

Keynesians Confused. http://www.economicpolicyjournal.com/2012/01/further-improvement-in-unemployment.html

Krugman called for a depression and deflation.

Bottom line, since Krugman doesn’t understand how money impacts an economy, at major turns he tends to be way out of whack on his forecasts. Only Austrian business cycle theorists understand the manner in which central bank money manipulation can impact an economy. Bernanke money printing has been super-aggressive. This is behind the manipulated turnaround in the economy that was spotted first here at EPJ. The price inflation is coming.

*The Malinvestment of Capital http://mises.org/epofe/c8sec3.asp

The malinvestment of capital goods can have come about in several ways.

1. The construction of the plant was economically justified at the time it was established. It is not so any longer because since then new methods of production have become known or because today other locations are more favorable.

2. Though originally a sound investment, the plant has become uneconomic because of changes that have occurred in the data of the market, such as, for example, a decrease in demand.

3. The plant was uneconomic from the very first. It was able to be constructed only by virtue of interventionist measures that have now been abandoned.

4. The plant was uneconomic from the very first. Its construction was an incorrect speculation.

5. The incorrect speculation (case 4) that led to the malinvestment has been brought about by the falsification of monetary calculation consequent upon changes in the value of money. The conditions of this case are described by the monetary theory of the trade cycle (the circulation-credit theory of cyclical fluctuations).

If the malinvestment is recognized and it nevertheless proves profitable to continue in business because the gross revenue exceeds the current costs of operation, the book value of the plant is generally lowered to the point where it corresponds to the now realizable return. If the necessary writing off is considerable in relation to the total capital invested, it will not take place in the case of a corporation without a reduction in the original capital. When this happens the loss of capital occasioned by the malinvestment becomes visible and can be reported by statistics. Its detection is still easier if the firm collapses completely. The statistics of failures, bankruptcies, and balance sheets can also provide much information on this point. However, a not inconsiderable number of investments that have failed elude statistical treatment. Corporations that have sufficient hidden reserves available can sometimes leave even the stockholders, who are, after all, the most interested parties, completely in the dark about the fact that an investment has failed. Governments and local administrative bodies decide to inform the public of their mistakes only when losses have become disproportionately great. Enterprises that are not under the necessity of giving a public accounting of their activities seek to conceal losses for the sake of their credit. This may explain why there is a tendency to underestimate the extent of losses that have been brought about by the malinvestment of fixed capital.

One must call special attention to this fact in view of the prevailing disposition to overrate the importance of “forced saving” in the formation of capital. It has led many to see in inflation in general, and in particular in credit expansion brought about by the policy of the banks of granting loans below the rate that would otherwise have been established on the market, the power responsible for the increasing capital accumulation that is the cause of economic progress. In this connection we may disregard the fact that inflation, though it can, of course, induce “forced saving,” need not necessarily do so, since it depends on the particular data of the individual case whether dislocations of wealth and income that lead to increased savings and capital accumulation really do occur.[7] In any case, however, credit expansion must initiate the process that passes through the upswing and the boom and finally ends in the crisis and the depression. The essence of this process consists in rendering the appraisement of capital misleading. Therefore, even if more capital is accumulated to begin with than would have been the case in the absence of the banks’ policy of credit expansion, capital is lost on the other hand by incorrect appraisement, which leads it to be used in the Wrong place and in the wrong way.

Whether or not the increase in capital is equalled or even exceeded by these losses is a quaestio facti. The advocates of credit expansion declare that there is always an increase in capital in such cases, but this certainly cannot be so unhesitatingly asserted. It may be true that many of these plants were erected only prematurely and are not by nature malinvestments, and that if there had been no trade cycle they would certainly have been constructed later, but not otherwise. It may even be true that in the last sixty to eighty years, especially during the upswing of the trade cycle, plants were built that surely would have been constructed later?railroads and power plants in particular?and that therefore the errors that bad been committed were made good by the passage of time. However, owing to the rapid progress of technology in the capitalist system, we cannot reject the supposition that the later construction of a plant would have influenced its technical character, since the technological innovations that appeared in the meanwhile would have had to be taken into account. The loss that results from the premature construction of a plant is then certainly greater than the above optimistic opinion assumes. Very many of the plants whose establishment was due to the falsification of the bases of economic calculation, which constitutes the essence of the boom artificially inaugurated by the banks’ policy of credit expansion, would never have been built at all.

The sum total of available capital consists of three parts: circulating capital, newly formed capital, and that part of fixed capital which is set aside for reinvestment. A shift in the ratio of circulating capital to fixed capital would, if not warranted by market conditions, itself represent a misdirection of capital. Consequently, the circulating capital in general must not only be maintained, but also increased by the allocation of a part of the newly formed capital. Thus only an amount that is quite modest in comparison with total capital is left over for new fixed investment. One must take this into consideration if one wishes to estimate the quantitative importance of the malinvestment of capital. It is not to be measured by comparison with the total amount of capital, but by comparison with the amount of capital available for new fixed investments.

Without doubt, in the years that have elapsed since the outbreak of the World War, very considerable amounts of fixed capital have been malinvested. The stoppage of international trade during the war and the high-tariff policy that has since prevailed have promoted the construction of factories in places that certainly do not offer the most favorable conditions for production. Inflation has operated to produce the same result. Now these new factories are in competition with those constructed earlier and mostly in more favorable locations?a competition that they can sustain only under the protection of tariffs and other interventionist measures. These extensive malinvestments took place precisely in a period in which war, revolution, inflation, and various interferences of the political authorities in economic life were consuming capital in very great volume.

One may not neglect all these factors if one wishes to investigate the causes of the disturbances in the economic life of the present day.

The fact that capital has been malinvested is visibly evident in the great number of factories that either have been shut down completely or operate at less than their total capacity.


[7] Cf. my Geldwertstabilisierung und Konjuncturpolitik, p. 45 et seq.