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What Krugman and his ilk fail to address is capital misallocation. Placing capital into its most productive use is the definition of a well functioning market

by jhulla 11y ago

What Krugman and his ilk fail to address is capital misallocation. Placing capital into its most productive use is the definition of a well functioning market. We tolerate market distortion for greater social good: safety regulations, environmental regulation, labor laws, etc. Unfortunately, with QE1,2,twist,3 and ZIRP, we are now well past properly functioning capital markets. At a gross scale, every single investment in the world now is actually a bet on central bankers keeping interest rates suppressed, liquidity flowing, and money printers running. The trillions of dollars of distortion that capital markets have experienced since 2008 has fundamentally altered the investment landscape. And not for the better. Krugman crowing about austerity is laughable. Of course, government spending is just another form of capital distortion. Sure, try some more. It'll be another drop in the bucket. It will not move the needle in a sustainable fashion. Global demand is being vacuumed up by economies through competitive currency devaluation. Deficit spending (Krugman's argument) generates new demand in the hopes of creating jobs and nurturing the economy. Unfortunately, since 2008, our global financial system is so radically distorted that a burst of demand isn't about to lift anybody out of long-term economic doldrums. At the root of the problem is massive capital misallocation that has been baked in the cake. Global supply is so large due to QE and ZIRP that economies worldwide cannot support their investments. Instead of market forces washing out the misallocated capital, we've entered into a global extend-and-pretend scheme. How and when this ends is anyone's guess. Krugman doesn't get it.

Amezarak 11y ago
> Instead of market forces washing out the misallocated capital, we've entered into a global extend-and-pretend scheme. How and when this ends is anyone's guess. So while Krugman offers data and concrete, falsifiable predictions that generally prove correct - for example, that hyperinflation will not be a problem, that QE won't move the economic needle much (but is better than nothing), that interest rates will remain low for the foreseeable future despite claims to the contrary, you offer vague handwaving about capital misallocation and "distortions" and then tell us you can't answer how and when Krugman will actually be wrong. Can you understand why people have difficulty coming to terms with your beliefs? To me it just seems rooted in some cognitive bias about suffering and sacrifice; it sounds like you just can't believe things are this easy, that we have to suffer and be punished for our vile profligacy.
- jhulla 11y ago
  First, the market is made up of all of us seeing similar data and coming to our own conclusions based on our interpretations and self-interest. Second, the market didn't just crash in 2008, it melted down. There were fears of simultaneous runs on global banks with catastrophic consequences. Bernanke/Geithner/Paulson orchestrated government backstops on money market funds, on Fannie/Freddie debt, on shotgun-marriages between banks, on defusing the credit default swap nightmare constructed by AIG and its counter parties. ZIRP and QE were brought in to juice spirits in the hopes of rescuing growth. 2008-2009 was the end of the financial world as we knew it going back to Paul Volcker. It was nightmare. It was a catastrophic end that many and been predicting for some time. Some saw the writing on the wall by 2005 and were positioning their investments accordingly. Read about the thoughts of Ray Dalio, Stan Druckenmiller, or Jeremy Grantham. Since 2008-2009, we're now in a whole new regime. Perpetual QE + ZIRP is not in ur economic textbooks and I do not believe our models can tell us what is coming. We had an opportunity when things were stable in 2010 to find a sustainable path forward. Instead, worldwide, we've just taken regular hits of QE.
  - Amezarak 11y ago
    > Perpetual QE + ZIRP is not in ur economic textbooks and I do not believe our models can tell us what is coming. That very situation is what Krugman did a lot of his academic work on. So far it's played out mostly like what he and other mainstream economists predicted. You can always say "until it doesn't", but that's the nature of life. We have to go with what we know. It's not as if Krugman wants QE + ZIRP; he'd rather get out of it ASAP with his actual policy prescription (fiscal policy), but he's had to settle for QE/ZIRP. > Yet there are many economists, myself included, who regard this view [that QE will be effective and give us a strong recovery] as highly unrealistic, yet support more aggressive Fed action all the same. Why? First, because it might help and is unlikely to do harm. Second, because the alternative — fiscal policy — may be of proven effectiveness, but is also completely blocked by politics. So the Fed’s efforts are all we have. http://krugman.blogs.nytimes.com/2013/07/27/miltons-paradise-still-lost/ http://krugman.blogs.nytimes.com/2013/07/27/miltons-paradise...
    - 11y ago
vasilipupkin 11y ago
this point is valid, conditional on the assumption that current GDP level is fixed. Then, govt spending is just money that is taken away from private sector. The point though is that, under certain conditions, govt spending can raise the level of GDP. Those conditions, specifically, refers to times when private sector for reasons of essentially, risk aversion, is under investing. I am not saying that Krugman is 100% correct, but he is describing a valid state of the world, and it is you who doesn't get it :) Now, there are other cases when even under normal conditions increase govt spending, for example, to finance basic research, can raise GDP
- jhulla 11y ago
  I actually agree that government spending can boost GDP. Where Krugman doesn't get it is that we've already distorted markets so much since 2008-2009 that a burst of government generated demand will not move the needle in a sustainable fashion. A $1 trillion government program will just get drained into rising asset prices - leaving incomes and the majority of individuals in largely the same spot as they started financially. Krugman is fighting an old war. Our current economy is not encumbered by too little demand - but by too much supply from past capital misallocation. Our addiction to QE has made problem far worse. Asset markets are exploding in price higher due to central bank intervention while incomes are not.
  - linkregister 11y ago
    Our last (and according to Yellen, et. al., our final)[1] QE was in October 2014. Is there a reason why you continue to talk about QE in the United States in the present tense? [1] http://www.cnbc.com/id/102009066 http://www.cnbc.com/id/102009066
    - jhulla 11y ago
      QE is happening globally. As you noted, QE3 ended in the US Oct-14. On the final day of US QE3 ending, the Bank of Japan announced another round of QE in their economy. http://www.reuters.com/article/2014/10/31/us-japan-economy-boj-idUSKBN0IK0B120141031 http://www.reuters.com/article/2014/10/31/us-japan-economy-b... The European Central Bank announced QE in Jan-15. One way to think of QE is global competitive devaluation to capture global demand. QE + ZIRP or even negative interests are the primary tool of central banks now. Capital misallocation continues on a global scale.
mytoaster 11y ago
Here are some numbers: the core of the massive distortion is in govt debt. This was in Fall of 2014 where half of govt debt yields less than 1%, it's actually gotten worse since. http://www.bloomberg.com/news/articles/2014-09-04/almost-half-of-government-bonds-yield-less-than-1-bofa-says http://www.bloomberg.com/news/articles/2014-09-04/almost-hal... Negative(?!) yield 10-years. http://www.reuters.com/article/2015/04/08/swiss-treasury-idUSL5N0X52TR20150408 http://www.reuters.com/article/2015/04/08/swiss-treasury-idU... Anyone would be hard-pressed to say that this is a well functioning market.
AJ007 11y ago
Or is he just a good liar? There are big negative consequences irregardless of what path is taken, voluntarily or otherwise -- but certain choices allow others time to run for cover. Perhaps he believes what he is saying, but absolutely individuals with self-serving intentions benefit by repeating it: corporations, government, and ultra-wealthy. If the problem is a shortage of money, then the future is full of things that are built with borrowed money: roads, cars, bridges, power plants, factories, chain retail stores, restaurants, suburban sprawl, hotels, and high rise apartment/condo/office buildings. These guys imagine taking the last 50 years and plotting financed growth indefinitely in to the future. There is not much imagination in a nation plastered from one border to another with McDonalds and cookie cutter communities, but what is financed must have past blueprints to provide mathematical models behind the loan. If an economy must have continuously increasing prices to succeed, then Krugman is right. In tech, I think we would be fucked if we had to pay more money for less every year. That is what Krugman wants. (What I've observed tends to happen is prices of what is financed speed up vs what is not financed, like wages.) The thing that stuck out to me in 2007 was how low yields were for very unattractive debt. It has happened again. Watch out.

by jhulla 11y ago

Amezarak 11y ago

> Instead of market forces washing out the misallocated capital, we've entered into a global extend-and-pretend scheme. How and when this ends is anyone's guess. So while Krugman offers data and concrete, falsifiable predictions that generally prove correct - for example, that hyperinflation will not be a problem, that QE won't move the economic needle much (but is better than nothing), that interest rates will remain low for the foreseeable future despite claims to the contrary, you offer vague handwaving about capital misallocation and "distortions" and then tell us you can't answer how and when Krugman will actually be wrong. Can you understand why people have difficulty coming to terms with your beliefs? To me it just seems rooted in some cognitive bias about suffering and sacrifice; it sounds like you just can't believe things are this easy, that we have to suffer and be punished for our vile profligacy.

jhulla 11y ago
First, the market is made up of all of us seeing similar data and coming to our own conclusions based on our interpretations and self-interest. Second, the market didn't just crash in 2008, it melted down. There were fears of simultaneous runs on global banks with catastrophic consequences. Bernanke/Geithner/Paulson orchestrated government backstops on money market funds, on Fannie/Freddie debt, on shotgun-marriages between banks, on defusing the credit default swap nightmare constructed by AIG and its counter parties. ZIRP and QE were brought in to juice spirits in the hopes of rescuing growth. 2008-2009 was the end of the financial world as we knew it going back to Paul Volcker. It was nightmare. It was a catastrophic end that many and been predicting for some time. Some saw the writing on the wall by 2005 and were positioning their investments accordingly. Read about the thoughts of Ray Dalio, Stan Druckenmiller, or Jeremy Grantham. Since 2008-2009, we're now in a whole new regime. Perpetual QE + ZIRP is not in ur economic textbooks and I do not believe our models can tell us what is coming. We had an opportunity when things were stable in 2010 to find a sustainable path forward. Instead, worldwide, we've just taken regular hits of QE.
- Amezarak 11y ago
  > Perpetual QE + ZIRP is not in ur economic textbooks and I do not believe our models can tell us what is coming. That very situation is what Krugman did a lot of his academic work on. So far it's played out mostly like what he and other mainstream economists predicted. You can always say "until it doesn't", but that's the nature of life. We have to go with what we know. It's not as if Krugman wants QE + ZIRP; he'd rather get out of it ASAP with his actual policy prescription (fiscal policy), but he's had to settle for QE/ZIRP. > Yet there are many economists, myself included, who regard this view [that QE will be effective and give us a strong recovery] as highly unrealistic, yet support more aggressive Fed action all the same. Why? First, because it might help and is unlikely to do harm. Second, because the alternative — fiscal policy — may be of proven effectiveness, but is also completely blocked by politics. So the Fed’s efforts are all we have. http://krugman.blogs.nytimes.com/2013/07/27/miltons-paradise-still-lost/ http://krugman.blogs.nytimes.com/2013/07/27/miltons-paradise...
  - 11y ago

vasilipupkin 11y ago

this point is valid, conditional on the assumption that current GDP level is fixed. Then, govt spending is just money that is taken away from private sector. The point though is that, under certain conditions, govt spending can raise the level of GDP. Those conditions, specifically, refers to times when private sector for reasons of essentially, risk aversion, is under investing. I am not saying that Krugman is 100% correct, but he is describing a valid state of the world, and it is you who doesn't get it :) Now, there are other cases when even under normal conditions increase govt spending, for example, to finance basic research, can raise GDP

jhulla 11y ago
I actually agree that government spending can boost GDP. Where Krugman doesn't get it is that we've already distorted markets so much since 2008-2009 that a burst of government generated demand will not move the needle in a sustainable fashion. A $1 trillion government program will just get drained into rising asset prices - leaving incomes and the majority of individuals in largely the same spot as they started financially. Krugman is fighting an old war. Our current economy is not encumbered by too little demand - but by too much supply from past capital misallocation. Our addiction to QE has made problem far worse. Asset markets are exploding in price higher due to central bank intervention while incomes are not.
- linkregister 11y ago
  Our last (and according to Yellen, et. al., our final)[1] QE was in October 2014. Is there a reason why you continue to talk about QE in the United States in the present tense? [1] http://www.cnbc.com/id/102009066 http://www.cnbc.com/id/102009066
  - jhulla 11y ago
    QE is happening globally. As you noted, QE3 ended in the US Oct-14. On the final day of US QE3 ending, the Bank of Japan announced another round of QE in their economy. http://www.reuters.com/article/2014/10/31/us-japan-economy-boj-idUSKBN0IK0B120141031 http://www.reuters.com/article/2014/10/31/us-japan-economy-b... The European Central Bank announced QE in Jan-15. One way to think of QE is global competitive devaluation to capture global demand. QE + ZIRP or even negative interests are the primary tool of central banks now. Capital misallocation continues on a global scale.

mytoaster 11y ago

Here are some numbers: the core of the massive distortion is in govt debt. This was in Fall of 2014 where half of govt debt yields less than 1%, it's actually gotten worse since. http://www.bloomberg.com/news/articles/2014-09-04/almost-half-of-government-bonds-yield-less-than-1-bofa-says http://www.bloomberg.com/news/articles/2014-09-04/almost-hal... Negative(?!) yield 10-years. http://www.reuters.com/article/2015/04/08/swiss-treasury-idUSL5N0X52TR20150408 http://www.reuters.com/article/2015/04/08/swiss-treasury-idU... Anyone would be hard-pressed to say that this is a well functioning market.

AJ007 11y ago

Or is he just a good liar? There are big negative consequences irregardless of what path is taken, voluntarily or otherwise -- but certain choices allow others time to run for cover. Perhaps he believes what he is saying, but absolutely individuals with self-serving intentions benefit by repeating it: corporations, government, and ultra-wealthy. If the problem is a shortage of money, then the future is full of things that are built with borrowed money: roads, cars, bridges, power plants, factories, chain retail stores, restaurants, suburban sprawl, hotels, and high rise apartment/condo/office buildings. These guys imagine taking the last 50 years and plotting financed growth indefinitely in to the future. There is not much imagination in a nation plastered from one border to another with McDonalds and cookie cutter communities, but what is financed must have past blueprints to provide mathematical models behind the loan. If an economy must have continuously increasing prices to succeed, then Krugman is right. In tech, I think we would be fucked if we had to pay more money for less every year. That is what Krugman wants. (What I've observed tends to happen is prices of what is financed speed up vs what is not financed, like wages.) The thing that stuck out to me in 2007 was how low yields were for very unattractive debt. It has happened again. Watch out.