Paul
Krugman’s article in the December 15 issue of
The New York Times under the title G.O.P.
Monetary Madness takes G.O.P. presidential candidate Dr. Ron Paul to task
for his ‘ideological’ stand on money. For excellent reasons, not
all of which had to do with fear of a Zimbabwe-style hyperinflation, the
Constitution explicitly prohibited manipulation of the dollar such as
Bernanke’s threefold increase of the monetary base in three years. Krugman ruefully reports that the ‘hard money
doctrine and the paranoia about inflation’ took over the G.O.P. that
has, up until now, meekly followed Keynesian precepts about pump priming and
turning the stone into bread through pushing interest rates all the way down
to zero.
According
to Krugman, in spite of the ‘false
alarm’ sounded by the Austrian economists over the debasement of the
dollar, inflation is still only 1.5 percent. ‘Who could have predicted
that so much money printing would cause so little inflation?’ he asks rethorically. ‘Well, I could, and I did’, he
boasts, ‘because I understand Keynesian economics that Mr. Paul
reviles.’
In
the event, unknown to Krugman, I also predicted the
same thing. Unlike Krugman I did more than simply
predicting that inflation was not the danger. I warned that Keynesianism
would lead to deflation and depression. Money-printing has
become counterproductive. Krugman doesn’t
understand that it will boomerang. I stated that, unwittingly, Bernanke is
the Quartermaster General of the Great Depression II (see: Front-Running the Fed, www.professorfekete.com, February 9,
2010). He doesn’t understand the monstrous mistakes prophet Keynes made
concerning the role of speculation in the money-creation magic. The fact is
that central bank buying makes speculation risk free in the bond market. In comparison, speculative risks in
the commodity market appear forbidding. All the speculator has to do in order
to reap risk-free profits is to preempt the Fed. He buys the bonds before the
Fed has a chance. Then he turns around and dumps them into the lap of the Fed
at a profit. The Fed is helpless: it must buy at the higher price. Keynes
completely misrepresented the ability of the central bank to stay in charge,
given its compulsive drive to suppress interest rates when confronted with a
profit-hungry pack of bond speculators.
Friedman’s
analysis of the Great Depression couldn't be more wrong. In 1933 deflation
was brought about not by the gold standard but, au contraire, by abolishing it. Here is what actually happened.
Roosevelt has removed the only competition government bonds have, gold. The
most conservative investors saw their gold confiscated and, willy-nilly, they
were forced into the next most conservative instrument, Treasury bonds.
Speculators became emboldened and bid bond prices sky high for risk free
profits. Had gold been still available, bondholders would have severely
punished the speculators for their daredevilry. They would have sold the
overpriced bond and stayed invested in gold until bond prices came back to
earth from outer space. Then they would have bought their bonds back at a
profit.
In
the absence of gold, speculators made interest rates go into a tailspin. That
caused dominoes in the commodity market fall. Prices collapsed one after
another. Pieces on the chessboard started falling as well, symbolizing serial
bankruptcies of productive enterprises. Breadwinners of families lost their
jobs in droves as money flowed from the commodity market to the bond market
in the wake of speculators selling commodities short while buying bonds hand
over fist. All the while Keynes was rubbing his hands together behind the
scenes exactly like Mephistopheles had in the famous paper money scene of Göthe’s Faust
(Part Two).
The
same thing is happening all over again. When a central bank increases the
monetary base three-fold in three years, this is a clear invitation for bond
speculators to move in and make a killing. But what the central bank utterly
fails to understand is that, contrary to its hopes, new money is not going to
the commodity market. Speculative risks there are far too great. Instead, new
money is going to the bond market where the fun is. Bond speculation is
risk-free. Speculators know which side the bread is buttered. Krugman doesn’t.
Dr.
Paul is the conscience not just of the G.O.P., but of the entire nation.
Through inflation or through deflation, the mad orgy of money creation that
makes mockery of the Constitution will finish the Keynesian agenda of ruining
the nation and the world economy.
Krugman’s joy over the
supposed defeat of Austrian economics is premature. Bernanke’s Fed in
blissful ignorance is still putting money in the hands of speculators which
they use to place bets on the further fall of interest rates and commodity
prices. The day of reckoning comes when falling interest rates destroy
capital and, together with it, destroy budding job opportunities. The
lethargy of businessmen will continue. They will not start hiring as long as
the interest-rate structure is in falling mode.
Welcome to the world of Keynes-inspired Great Depression.
http://www.professorfekete.com/
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