It is one or the other—there are no other alternatives. This wasn’t a casual blog where Krugman “misspoke”—this was a full-on editorial in the Sunday edition of the Times on Labor Day weekend. So what Krugman said was thought out, and dead serious—and so foolish or ridiculous (depending on your point of view) that he can no longer be taken seriously:
In Krugman’s analysis, 1938 was different from 2010: “Luckily” (most definitely in quotation marks), World War II came to Europe in 1939, and to the U.S. in very late 1941. In Krugman’s analysis, the War saved the U.S. economy. It allowed the Federal government to go into monstrous fiscal debt, in order to fight the war with Nazi Germany and Imperial Japan. This isn’t novel or controversial.
(Gross Public Debt, 1930–1950. The blue band is Federal government debt, the red band is state debt, the green band is local debt. Source is here, for both charts and raw data.)
(Gross Public Debt, 1970–2010. Color scheme is same as above. Source is here, for both charts and raw data.)
Tyler Durden, editor extraordinaire of Zero Hedge, kindly pointed out the following quote by Krugman from August, 2002:
[T]he recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
(Underline emphasis added.)
Again, it’s a shifty line: Krugman seems to be egging on the Fed to do as PIMCO suggests—id est, blow a housing bubble. There’s enough plausible deniability in the line—“. . . as Paul McCulley of Pimco put it . . .”—to make it so that Krugman could potentially weasel his way out of this policy prescription.
But then again, he said it: Blow a housing bubble, then let it loose on aggregate demand. As I've argued previously, Krugman and the “saltwater” economists see increases of aggregate demand levels as the only good—in other words, spend!-spend!-spend!
They don’t seem to realize that, eventually, that spending’s got to be paid. That’s why, they fail.
Krugman is now changing his tune—he’s toned down his spend!-spend!-spend! rhetoric, and is coming to realize that the U.S. fiscal debt is a bigger problem than he had previously admitted.
So now, Krugman is proposing default-by-inflation. This by way of Business Insider:
So what will happen? In the end, I'd argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that's how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies.I swear to God, his lying is like some sort of tic—Krugman once again distorts facts in order to buttress his opinion. But as everyone knows, inflation in World War II had absolutely nothing to do with “reducing the real burden of debt” brought on by the Depression.
On top of that, as I showed above, the Federal government went into serious debt during WWII—not before, as Krugman is implying. And the Federal debt of 1942–45 was not inflated away, as Krugman is stating: It was worked off in the Post-War Boom—which is what ultimately cured the Great Depression.
Krugman reminds me of that famous crack about FDR: He’s a man who’ll never tell the truth, when a lie will serve him just as well.
But getting to the meat of Krugman’s change of opinion, he is now following the Fed’s strategy: Default by inflation.
(I’ll leave it to the peanut gallery to catcall the obvious question: Whether or not this is Krugman’s new stance because he believes it, or because he’s angling for a job in the Obama administration, now that Summers is out and Tiny Tim is being handed his hat.)
Personally, I have no truck with default-by-inflation per se. The problem is, just like you can’t be “a little bit pregnant”, in the Global Depression we are experiencing, you can’t have “a period of moderate inflation”—not when Treasuries are in a bubble. Not when the dollar is weakening severely against commodities even as we speak. Not when the very currency and debt mechanism of the United States is skating on some very thin ice.
Krugman ignores these facts rather olympically—which only reinforces my original question: Is the man an imbecile, or a fraud?