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Krugman: Fear of inflation baseless

Friday, May 29, 2009

Nobel laureate and New York Times columnist Paul Krugman laments all the wasted energy spent worrying over a potential rise in consumer prices somewhere down the road.

It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.
Here's where it gets kind of interesting.

It is as if, after the worst economic contraction since the Great Depression, once banks get the "all clear" from who knows where that the system has righted itself and it's back to business as usual, all those excess reserves will just vanish.
Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Still, don’t such actions have to be inflationary sooner or later?
Apparently not.

And don't worry too much about the large and growing U.S. debt and the potential for foreign creditors to eventually tire of being our sugar daddy.

It's all gonna be OK. In fact, "the only thing we have to fear is inflation fear itself".


fish said...

First off, "Nobel laureate" should be dropped. His bank prize gets way to much publicity. When he does something noteworthy in physics, chemistry, medicine.....or ahem....what passes for literature these days then he can blather about his Nobel. What about his prize, on trade relations/advantages gives him any legitimate credibility in other areas? What, they couldn't find just one guy other than Krugman who can cogently discuss monetary policy?

Seriously this guy is way passed his "sell by" date!

P.S. Any relation to a Jim Iacono with Maine Aviation?

News said...

I agree with Krugman more or less. Deflationary forces are still very strong. California is cutting state employee wages by 5%. Oil at 65 again is in a long term very deflationary. Here is why. It's definitely not a demand/supply issue. OPEC cut 4 Million per day in capacity from last year and we still have huge inventories. Now that people can't pay for gas with cheap credit as they did in the prior years (all over the world), it will cause them to spend less on other things bringing the aggregate demand down.

Budget deficits are still being financed at very low nominal interest rates because the real interest rates are high.

De leveraging is not done. The world is still very levered up, and the next leg down will come in the second half of this year.

dearieme said...

Of course inflation will follow. But how soon and how bad? Krugman is being a bit like a child with candy - it's nice now and there's no sign of tooth rot yet.

Dan said...

Nobel spelled backward is Lebon. There is a Nobel/Lebon intersection in La Jolla.

Anonymous said...

It is commonly known that until unemployment maxes out and starts significant recovery you won't see
inflation... we still have one *hell* of a lot
of employees at GM to dish out pink slips to and they are certainly taking their
sweet time and all our tax $ to avoid that.

TheCynicalEconomist said...

Phillips curve doesn't explain the Zimbabwean and many other countries hyperinflation disasters.

By increasing the money supply the monetary authority are able to temporarily decrease unemployment by increasing permanent inflation, and vice versa.

US problem is the oil, food, commodity prices that are going up.They are becoming scarce thus more expensive.
Wait and see how is this not going to affect all other prices and wont result in inflation

Again example with Zimbabwe- there we don't see the massive printing of Zimbabwean dollars as cause for a hyperinflation, but as a result of it. The cause was political instability, high unemployment, economic depression and the final straw - run on the currency,which made, that currency worthless

This is the same scenario I see in the USA future

Chris Nicklaus -

Anonymous said...

The Fed created money out of thin air, and bought debt with it. That is the whole story. The business about crediting banks with reserves is a red herring.

SEO Digital Marketing said...

yes mr chris is very right

US problem is the oil, food, commodity prices that are going up.They are becoming scarce thus more expensive.
Wait and see how is this not going to affect all other prices and wont result in inflation

thanks to see u


Anonymous said...

its going to be inflationary when the dollar gets devalued resulting in price rises for all commodities as they are all produced in other countries.the purchasing power of emerging markets for all commodities will increase tremendously if the dollar gets devalued causing a lot of shortages of goods only in america

Anonymous said...

Krugman may be right in the near term on inflation due to the severe economic downturn but in the long run monetizing the debt could lead to hyperinflation. More can be found on the weekly Mountain Vision e-mail letter, from Zurich, Switzerland.

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MrJimm said...

(1) Inflation depends as much on the Velocity of money (how fast people spend it) as on the Supply of money. (I believe you multiply them together.) That's why these times we're in are so deflationary - people have cut back hard on their spending (for good reasons) and are hoarding their dollars, even though the Fed has expanded the supply of money by so much.

The problem is that the Fed, while it can control the supply of money, cannot possibly control the velocity of money. In hyperinflationary situations, it's the populace desperately spending their money before it loses value that really kicks things off.

Try Googling "Zimbabwe blog" for an inside look at day to day life there.

(2) Krugman could easily pick up a Nobel Peace prize - the only qualification these days is being anti-George Bush.

John S said...

Krugman again misses the point. We don't need hyperiflation to rebalance U.S. debt to GDP to something (sort of) sustainable. Just 100% inflation over Obama's first term will do it. And there will be no wage pressure. Our standard of living (and our savings) will simply drop in half.

staghounds said...

"Such things have happened in the past. For example, France ultimately inflated away much of the debt it incurred while fighting World War I.

But more modern examples are lacking...

And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P. In none of these cases did governments resort to inflation to resolve their problems. "

Which is why everything in the United States has maintained rough price stability since 1945.

NO ONE is that ignorant, this liar has lived his entire life against a backdrop of declining value in every single currency on earth.

I defy anyone to name any currency that has held its general consumer value for any five year period since 1974.

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