Krugman Claims No Inflation

[raja]

Krugman has been saying that the stimulus didn't work because it wasn't big enough. In a recent blog, he answers his critics who charge that a bigger stimulus will result in high inflation.

The data back up Krugman, in that commodity prices haven't risen significantly (see post copied below).

There are 2 opposing forces . . . debasement of the dollar by "printing" and demand destruction by unemployment and general economic slowdown. The latter is why commodity prices have not risen. But if there is a shift in the ratio of these opposing forces, things will change.

But even if input (commodity) costs haven't risen, there are businessmen who raise prices in order to maintain their own standard of living in the face of lower sales . . . so we can have both a rise in consumer prices and no rise in commodities. But there is a limit of how high prices can go in face of declining demand. (Note: demand can go down even with essentials like food and energy, as people drive less and eat cheaper foods.)

Also interesting . . . .

Krugman says, " . . . very old dictionaries defined inflation as a rise in money and/or credit, but the modern usage is, of course, a rise in prices." It seems like Mish's definition of inflation is more "classic".

Krugman's post:

October 7, 2011, 3:15 pm

Way Off Base

I see some commenters reacting to the failure of major inflation to break out by insisting that inflation is defined as an increase in the monetary base — that is, the bank reserves plus currency that are what increases when the Fed “prints money”. As it happens, that’s wrong: very old dictionaries defined inflation as a rise in money and/or credit, but the modern usage is, of course, a rise in prices.
But that’s really a side issue. Nobody would care about the size of the monetary base except for the belief that increasing the base leads to a rise in prices. That’s not a question of definitions, it’s a question of your model of the economy. The underlying belief of all the people accusing Ben Bernanke of doing something dastardly is that “printing money” has caused or will cause high inflation in the ordinary sense.
The thing is, of course, that the past three years — the post-Lehman era during which the Fed presided over a tripling of the monetary base — have been an excellent test of that model, which has failed with flying colors. Here are the data — I’ve included commodity prices (IMF index) as well as consumer prices for the people who believe that the BLS is hiding true inflation (which it isn’t):

A couple of notes: for the commodity prices it matters which month you start, because they dropped sharply between August and September 2008. I use the IMF index for convenience– easy to download. (Thomson Reuters I use when I just want to snatch a picture from Bloomberg). But none of this should matter: when you triple the monetary base, the resulting inflation shouldn’t be something that depends on the fine details — unless the model is completely wrong.
And the model is completely wrong. You don’t get more conclusive tests than this in economics. By contrast, the model of an economy in a liquidity trap, in which big increases in the monetary base don’t matter, comes through just fine.
And this in turn tells you something about the people pushing this stuff. They had a model; it made predictions; the predictions were utterly, totally wrong; and they have just dug in further.

[GRG55]

Re: Krugman Claims No Inflation

Krugman has been saying that the stimulus didn't work because it wasn't big enough. In a recent blog, he answers his critics who charge that a bigger stimulus will result in high inflation...

I am still wondering when Dr. Krugman is going to share with us the answer to the question "How much would have been enough?"

Quite frankly, I think there's a good argument to be made that the unprecedented size of the stimulus might have been sufficient, or certainly closer to "sufficient", if it had been more directed to appropriate ends. Very little infrastructure investment seems to have come from the "infrastructure" stimulus packages. Instead, as EJ argues, we got consumption stimulus programs such as cash for clunkers that subsidized those that could already afford to purchase an automobile and brought forward future demand.

The data back up Krugman, in that commodity prices haven't risen significantly (see post copied below).

There are 2 opposing forces . . . debasement of the dollar by "printing" and demand destruction by unemployment and general economic slowdown. The latter is why commodity prices have not risen. But if there is a shift in the ratio of these opposing forces, things will change.

But even if input (commodity) costs haven't risen, there are businessmen who raise prices in order to maintain their own standard of living in the face of lower sales . . . so we can have both a rise in consumer prices and no rise in commodities. But there is a limit of how high prices can go in face of declining demand. (Note: demand can go down even with essentials like food and energy, as people drive less and eat cheaper foods.)
...

The dream of most business shareholders and management is to have monopolist or oligopolist pricing power. Few, outside of government protected businesses such as TBTF financial institutions, ever achieve that. Fewer still achieve that on a sustained basis. Intellectual property patents [some tech sector companies], high barriers to entry for new competitors [Boeing], long established consumer preferences [Kellogg and Post cereals] might allow a company to raise prices with impunity and without losing customers...but I completely disagree with Dr. Krugman's implication that the current global economic environment allows any material number of commodity input consumer product or consumer service companies to raise prices on a whim without suffering a negative consequence in their sales, revenues and earnings.

Also interesting . . . .

Krugman says, " . . . very old dictionaries defined inflation as a rise in money and/or credit, but the modern usage is, of course, a rise in prices." It seems like Mish's definition of inflation is more "classic".

Krugman's post:

October 7, 2011, 3:15 pm

Way Off Base

I see some commenters reacting to the failure of major inflation to break out by insisting that inflation is defined as an increase in the monetary base — that is, the bank reserves plus currency that are what increases when the Fed “prints money”. As it happens, that’s wrong: very old dictionaries defined inflation as a rise in money and/or credit, but the modern usage is, of course, a rise in prices.
But that’s really a side issue. Nobody would care about the size of the monetary base except for the belief that increasing the base leads to a rise in prices. That’s not a question of definitions, it’s a question of your model of the economy. The underlying belief of all the people accusing Ben Bernanke of doing something dastardly is that “printing money” has caused or will cause high inflation in the ordinary sense.
The thing is, of course, that the past three years — the post-Lehman era during which the Fed presided over a tripling of the monetary base — have been an excellent test of that model, which has failed with flying colors. Here are the data — I’ve included commodity prices (IMF index) as well as consumer prices for the people who believe that the BLS is hiding true inflation (which it isn’t):

A couple of notes: for the commodity prices it matters which month you start, because they dropped sharply between August and September 2008. I use the IMF index for convenience– easy to download. (Thomson Reuters I use when I just want to snatch a picture from Bloomberg). But none of this should matter: when you triple the monetary base, the resulting inflation shouldn’t be something that depends on the fine details — unless the model is completely wrong.
And the model is completely wrong. You don’t get more conclusive tests than this in economics. By contrast, the model of an economy in a liquidity trap, in which big increases in the monetary base don’t matter, comes through just fine.
And this in turn tells you something about the people pushing this stuff. They had a model; it made predictions; the predictions were utterly, totally wrong; and they have just dug in further.

There's an old anedote about President George Bush Sr. during his failed campaign for a second term. The cameras caught him making a campaign stop shaking hands in a grocery supermarket and marvelling at the bar code scanner technology that was in use at the checkout. Even though it was not something new, he had never seen it before...because hired help had always done his grocery shopping for him going back long before he arrived at the White House.

I have a certain degree of respect for Dr. Krugman, but I sometimes wonder if the good Dr., who persists in the belief that commodity prices haven't risen and therefore there is no inflation, ever shops for his own groceries or fills the fuel tank in his car.

Here's a longer term chart of the CRB index. Tell me again that commodity prices haven't risen???

When I look at a chart like this I have no doubt whatsoever that Ben Bernanke is doing everything he is able to do to make sure "It" doesn't happen here...

[we_are_toast]

Re: Krugman Claims No Inflation

GRG55,

Because Dr. Krugman has very limited space for his blog and his columns, it's sometimes difficult to follow and catch everything he is trying to say. I believe you may have missed a few of his columns.

I am still wondering when Dr. Krugman is going to share with us the answer to the question "How much would have been enough?"

Quite frankly, I think there's a good argument to be made that the unprecedented size of the stimulus might have been sufficient, or certainly closer to "sufficient", if it had been more directed to appropriate ends. Very little infrastructure investment seems to have come from the "infrastructure" stimulus packages. Instead, as EJ argues, we got consumption stimulus programs such as cash for clunkers that subsidized those that could already afford to purchase an automobile and brought forward future demand.

Krugman suggested we needed around $2trillion in stimulus to fill the output gap that was created by the crash. He suggested this as early as Jan. 2009. He emphasizes the importance of filling the output gap as quickly as possible. He also talks about how misdirected much of Obama's stimulus proposal was.

http://www.nytimes.com/2009/01/09/op...rssnyt&emc=rss

The dream of most business shareholders and management is to have monopolist or oligopolist pricing power. Few, outside of government protected businesses such as TBTF financial institutions, ever achieve that. Fewer still achieve that on a sustained basis. Intellectual property patents [some tech sector companies], high barriers to entry for new competitors [Boeing], long established consumer preferences [Kellogg and Post cereals] might allow a company to raise prices with impunity and without losing customers...but I completely disagree with Dr. Krugman's implication that the current global economic environment allows any material number of commodity input consumer product or consumer service companies to raise prices on a whim without suffering a negative consequence in their sales, revenues and earnings.

None of this is in his posting, and I've never read anywhere where he's implied such a thing.

I have a certain degree of respect for Dr. Krugman, but I sometimes wonder if the good Dr., who persists in the belief that commodity prices haven't risen and therefore there is no inflation, ever shops for his own groceries or fills the fuel tank in his car.

Here's a longer term chart of the CRB index. Tell me again that commodity prices haven't risen???

Dr. Krugman has never claimed that commodity prices were not rising. He has always maintained that the rising commodity prices would NOT translate to big inflation, as many claimed the stimulus would cause. He uses a couple of price indexes, including the CPI as his source. He was indeed correct, although I disagree with why he was correct.

I read Dr. Krugman very closely, and will continue to do so. He can't give the in depth analysis that I wish he could, but the many small bites in his column and blog are extremely helpful in figuring out the macroeconomic picture.

[GRG55]

Re: Krugman Claims No Inflation

GRG55,


...None of this is in his posting, and I've never read anywhere where he's implied such a thing...

Perhaps it was raja that wrote this then, and I incorrectly interpreted it as something he was quoting from Dr. Krugman:

"...But even if input (commodity) costs haven't risen, there are businessmen who raise prices in order to maintain their own standard of living in the face of lower sales . . . so we can have both a rise in consumer prices and no rise in commodities..."

[Starving Steve]

Re: Krugman Claims No Inflation

Starving Steve's feel for these Bernanke times is that no matter how much money is printed-up and injected into the financial system, no bank is going to lend at 3% or 4% and thus take a risk, not to mention that it just isn't worth their time and paperwork. The risk/reward ratio is too large, especially now when asset prices (like home prices) are falling and interest rates are at record lows.

If I am correct--- and I might be?---this is very de-flationary. The lending to finance the real estate market is disappearing.... Easy credit, and sometimes even cheap, abundant, creative, and easy credit, was the fuel to keep the red hot real-estate market going. In fact, heretofore under Alan Greenspan's reign at the Fed, even if a bank was too easy, everything would work-out in the wash because real-estate values kept (and would keep) rising.

But times have changed under the Bernanke experiment of ultra-cheap ( zero-bound ) interest rates. Banks might just sit on their money or invest in government bonds, even state and municipal bonds..... End of story. For banks: less risk, less head-ache, less paperwork, less staff, less advertising, less legal costs, and more money on the way from the Fed.... How lovely!

No wonder why George Bush fell in love with Bernanke and chose him to head the Fed. But what is really amazing is that Obama has kept Bernanke on at the Fed..... In algebra, the incredible equation is: Republicans = Alan Greenspan = cheap money = Ben Bernanke = Democrats.

But the only change now under Bernanke is that the real-estate market is all but completely out-of-fuel. No more credit.

[stealthcat]

Re: Krugman Claims No Inflation

Jesse's comments on this article:

http://jessescrossroadscafe.blogspot...sters-and.html

One point he makes that resonates with what I seem to perceive...that the monetary stimulus has not yet caused widespread price inflation, but that it seems that it should, someday fairly soon:

And I know what the Fed is doing is providing an inflation risk that they believe that they know how to handle when the time is right.

And his recurring theme, which looks a bit more at root cause:

Well, if we only had more stimulus it would have worked. The system is BROKEN. The only thing you are stimulating is more money for the wealthy and more jobs for China, and more debt for the people. Yes I think there is some short term benefit for those in the most distress, and that is a good thing. But pouring stimulus into a broken system is only going to mask the rot, and hasten the final reckoning.

[GRG55]

Re: Krugman Claims No Inflation

GRG55,

Because Dr. Krugman has very limited space for his blog and his columns, it's sometimes difficult to follow and catch everything he is trying to say. I believe you may have missed a few of his columns.

Krugman suggested we needed around $2trillion in stimulus to fill the output gap that was created by the crash. He suggested this as early as Jan. 2009. He emphasizes the importance of filling the output gap as quickly as possible. He also talks about how misdirected much of Obama's stimulus proposal was...

http://www.nytimes.com/2009/01/09/op...rssnyt&emc=rss

...

It's pretty clear from the referenced column that he agrees with the CBO's projection of a $2+ trillion output gap, and also clear that the proposed $775 Billion stimulus program is not enough.

"...Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.

To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.

But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending..."

After that it gets a bit murkier. Should the fiscal stimulus be $2 Trillion which is equal to the expected output gap? [which prompts the question, what role does monetary stimulus play in this?]. Should the fiscal stimulus be more than $2 Trillion because of the political reality that not all of it [perhaps only 60%] will be in the form of effective public spending? Or should it be some other figure, because of the multiplier effect? Damned if I can figure it out... :-)



If I understand Dr. Krugman correctly he believes:

1. Private sector de-leveraging will offset any and all immediate inflationary effects from much more aggressive monetary and fiscal stimulus [I agree it will offset some of the stimulus, but the cheap and abundant credit promotes speculation and there appears little the authorities can or will do to prevent that];
2. More of the stimulus needs to be in the form of direct public spending and maintaining adequate low-price credit availability [I agree with the former, but have difficulty with more of the latter];
3. The Central Bankers and other authorities have the knowledge, tools and capability to deal with the future inflation problem when that inevitably becomes necessary [that is where I disagree, as history and human nature suggests otherwise].

Private sector de-leveraging won't last forever, and there is already a serious danger that the second half of this decade is going to see significant global inflationary pressures at a time when a still slow and fragile economic recovery will bind the hands of policy makers to deal with it...

[c1ue]

Re: Krugman Claims No Inflation

Krugman has been saying that the stimulus didn't work because it wasn't big enough. In a recent blog, he answers his critics who charge that a bigger stimulus will result in high inflation.

You keep trying to put up Krugman, and each example is worse than the last.

Look at the graph you posted: it uses 8/2008 as the starting point for "measuring inflation"

The price of oil in August 2008? $108.46

What happened in late 2008? GFC

A fine example of cherry picking.

Krugman = useful idiot

[lektrode]

Re: Krugman Claims No Inflation

again, his partisan hypocracy is my ultimate objection to his BS propaganda.

when the prev occupant ran deficits of several hundred billion, it was outrageous, unsupportable, UNCONSCIONABLE?

and if deficits _were_ The Problem in slugmans mind, then how did we get to TRILLION DOLLAR DEFICITS essentially to bailout his pals in manhattan (and washington)

and now, its NOT ENOUGH?

dunno whats worse, him trying to convince us there NO INFLATION or the rest of the lamestream media trying to convince us that trillions of dollars to bailout the 'system' was somehow worth it, since the dow went up, 'the recession is over' and The Plan was 'successful' now we just need another 447billion to 'create jobs'

right - and slugman & co will be ensconced in some villa in the caymans while we all stand in line for foodstamps, another program brought to us by our saviours inside the beltway...

[Slimprofits]

Re: Krugman Claims No Inflation

Does Dr. Krugman celebrate Thanksgiving?

http://www.usatoday.com/money/econom...sts/51152650/1

A meal with turkey and all the trimmings will cost about 13% more this holiday compared to last year, the American Farm Bureau Federation reported Thursday.

The AFBF estimates the average cost to make a meal for 10 people is $49.20. That's $5.73 more than last year's average of $43.47.

The costs for nearly everything from cranberries to pumpkin pie are up. But the biggest price hike is for the main course: a 16-pound turkey costs 4% more this year at $21.57.

[raja]

Re: Krugman Claims No Inflation

Does Dr. Krugman celebrate Thanksgiving?

http://www.usatoday.com/money/econom...sts/51152650/1

How to measure inflation?

Housing prices are way down.
Which is a larger part of the US economy, real estate or food?

[aaron]

Re: Krugman Claims No Inflation

typical "economics" reporter

4% should be $4 dollars (I assume)

a 16-pound turkey costs 4% more this year at $21.57

[lektrode]

Re: Krugman Claims No Inflation

How to measure inflation?

Housing prices are way down.
Which is a larger part of the US economy, real estate or food?

not a fair comparison, as one doesnt buy a house every week, meanwhile RENTS are going up.

[Slimprofits]

Re: Krugman Claims No Inflation

typical "economics" reporter

4% should be $4 dollars (I assume)

To report corrections and clarifications, contact Standards Editor Brent Jones.

[Slimprofits]

Re: Krugman Claims No Inflation

How to measure inflation?

Housing prices are way down.
Which is a larger part of the US economy, real estate or food?

That's a purely political response. The public hears 'inflation' and they think 'cost of living'. And this linguistic trick is taken advantage of up and down the line by media talking heads and politicians.