Yesterday, the DOW managed a slight increase, but that belies a broader trend of declining stocks, oil prices, and gold. This situation might be music to the Fed’s ears, as it enables them to justify further monetary expansion.
The drop in oil prices obscures the impact of the Fed’s monetary inflation, while falling gold prices provide a convenient rebuttal to those who bought gold as a safeguard against inflation. Meanwhile, falling stock prices amplify calls from Wall Street for the Fed to take action.
Why the Fed Will Keep Printing Money
The Fed’s continuous push for more money is driven by their inherent love for it—essentially, creating an endless supply of cheap currency. Moreover, their adherence to Keynesian economic theory leads them to believe that increasing the money supply will stimulate spending, ultimately resolving all economic woes. Their logic is that more spending will trigger an economic boom, which would create jobs and promote shared prosperity.
Notably, past initiatives like QE, QE2, and Operation Twist have failed to yield any beneficial impact on the economy. Yet the Fed remains unwavering, determined to double down on their approach until it potentially leads to disastrous consequences.
Paul Krugman, a Nobel Prize-winning economist and notable Keynesian, appears to encourage this trend.
Theory vs. Reality
In a recent interview with Reuters TV, Krugman stated, “It’s not true we’re going over a cliff on fiscal problems. We are already over a cliff on the unemployment problem, and that is the thing to worry about.”
Strangely enough, Krugman’s answer to rising unemployment is to embrace the same failed strategies from the past—namely, massive stimulus and inflation.
“Raising the Fed’s inflation target to 4 percent from its current 2 percent, a taboo for many policymakers, would encourage households to spend and businesses to invest, generating more hiring and economic activity,” Krugman proposed.
While this concept sounds appealing in theory, the reality has been far less promising. Since 2008, the Fed has expanded its balance sheet by over $2 trillion, and the Treasury has consistently run deficits of at least $1 trillion annually. Despite these efforts, the unemployment rate remains stagnant, and national debt has surged to $15 trillion.
Furthermore, the potential monetary inflation on the horizon could far exceed 4 percent, causing the dollar to lose approximately 40 percent of its value over the next decade. In fact, actual inflation might already be exceeding 10 percent.
Yet, the Fed is resolute in its mission to dilute your money supply, all in the name of what they believe benefits you—regardless of public sentiment.
Paul Krugman and T-Shirt Economics
Paul Krugman seems to have become disconnected from practical economics, stuck in a cycle of theoretical considerations that has perhaps dulled his critical thinking skills. Through his extensive time at Princeton, he has seemingly lost sight of foundational principles in favor of abstract models that do not always align with real-world dynamics.
A more fruitful learning experience could take place outside the confines of academia—like visiting a bustling marketplace. For instance, The Alley in Downtown Los Angeles exemplifies a hub of diverse entrepreneurs and sellers, each navigating the ebb and flow of market demand.
Take championship T-shirts as an example. When the Lakers clinched the NBA title, a resourceful vendor who anticipated this event could initially set high prices for official merchandise. However, within hours, other vendors would flood the market, leading to price adjustments as competition increased. While a temporary surplus might exist, ultimately, prices will fall to levels where supply meets demand, ensuring only informed merchants thrive.
In contrast, Krugman seems to believe that such price fluctuations shouldn’t occur, and that businesses should be insulated from failure. He advocates for government intervention through borrowing and spending to boost the T-shirt market, alongside increases in the money supply to sustain inflated prices. According to his economic perspective, this approach is the remedy for struggling enterprises and a means to address perceived imbalances in supply and demand.
The irony is that there are countless charts and graphs to support this flawed reasoning.
Sincerely,
MN Gordon
for Economic Prism
Return from Paul Krugman Doesn’t Know T-Shirt Economics to Economic Prism