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Krugmans Dopey Diatribe Deifying The Public Debt


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2015 Oct 4, 9:11pm   35,411 views  65 comments

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by David Stockman • August 24, 2015

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Actually, dopey does not even begin to describe Paul Krugman’s latest spot of tommyrot. So here are his own words—–least it appear that the good professor is being unfairly caricaturized. In a world drowning in government debt what we desperately need, by golly, is more of the same:

That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.

Yes, indeed. There is currently about $60 trillion of public debt outstanding on a worldwide basis compared to less than $20 trillion at the turn of the century. But somehow this isn’t enough, even though the gain in public debt——-from the US to Europe, Japan, China, Brazil and the rest of the debt-saturated EM world—–actually exceeds the $35 billion growth of global GDP during the last 15 years.

But rather than explain why economic growth in most of the world is slowing to a crawl despite this unprecedented eruption of public debt, Krugman chose to smack down one of his patented strawmen. Noting that Rand Paul had lamented that 1835 was the last time the US was “debt free”, the Nobel prize winner offered up a big fat non sequitir:

Wags quickly noted that the U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.

Neither Rand Paul nor any other fiscal conservative ever said that public debt per se would freeze economic growth or technological progress hard in the horse and buggy age. The question is one of degree and of whether at today’s unprecedented public debt levels we get economic growth—–even at a tepid rate—–in spite of rather than because of soaring government debt.

A brief recounting of US fiscal history leaves little doubt about Krugman’s strawman argument. During the eighty years after President Andrew Jackson paid off the public debt through the eve of WWI, the US economy grew like gangbusters. Yet the nation essentially had no debt, as shown in the chart below, except for temporary modest amounts owing to wars that were quickly paid down.

In fact, between 1870 and 1914, the US economy grew at an average rate of 4% per year——the highest and longest sustained growth of real output and living standards ever achieved in America either before or since. But during that entire 45 year golden age of prosperity, the ratio of US public debt relative to national income was falling like a stone.

In fact, on the eve of World War I, the US had only $1.4 billion of debt. That is the same figure that had been reached before the Battle of Gettysburg in 1863.

That’s right. During the course of four decades, the nominal level of peak Civil War debt was steadily whittled down; the Federal budget was in balance or surplus most of the time; and at the end of the period a booming US economy had debt of less than 5% of GDP or about $11 per capita!

In short, nearly a century of robust economic growth after 1835 was accompanied by hardly any public debt at all. The facts are nearly the opposite of Krugman’s smart-alecky insinuation that today’s giant, technologically advanced economy would not have happed without all of today’s massive public debt.

Indeed, on a net basis every dime that was added to the national debt between Jackson’s mortgage burning ceremony in 1835 and 1914 was 100% war debt that never contributed to domestic economic growth and was mostly repaid during peacetime. In effect, Rand Paul was right: In a modern Keynesian sense, the US was “debt free” during the 80 years when it emerged as a great industrial powerhouse with the highest living standard in the world.

Thereafter, there were two huge surges of wartime debt, but those eruptions had nothing to do with peacetime domestic prosperity; and they were quickly rolled back after the war-time emergencies ended. Its plain to see in the graph below.

During WWI, for example, the national debt soared from $1.4 billion to $27 billion, but the great Andrew Mellon, as Secretary of the Treasury during three Republican administrations, paid that down to less than $17 billion, even as the national income nearly doubled during the Roaring Twenties. That meant the public debt was back under 20% by the end of the 1920s.

To be sure, for the last 70 years the Keynesian professoriate has been falsely blaming the severity and duration of the Great Depression on Herbert Hoover’s balanced budget policies during 1930-1932. But none has ever charged that paying down the WWI debt had actually caused the Great Depression. Nor have the Keynesian economic doctors ever claimed that had Mellon not paid down the peak WWI debt ratio of about 45% of GDP that the Roaring Twenties would have roared even more mightily!

Likewise, the national debt did soar from less than 50% of GDP in 1939, notwithstanding the chronic New Deal deficits, to nearly 120% at the 1945 WWII peak. But this was not your Krugman’s beneficent debt ratio, either. Nor is it proof, as per his current diatribe, that the recent surge to $18 trillion of national debt has been done before and has proven helpful to economic growth.

Instead, the 1945 ratio was a temporary and complete artifact of a command and control war economy. Indeed, the total mobilization of economic life by agencies of the state during WWII was so complete that Washington had essentially banished civilian goods including new cars, houses and most consumer durables, and had also tightly rationed everything else including sugar, butter, meat, tires, shoes, shirts, bicycles, peanut brittle and candied yams.

With retail shelves empty the household savings rate soared from 4% of disposable income in 1938-1939 to an astounding 35% by the end of the war.

Consequently, the Keynesians have never acknowledged the single most salient statistic about the war debt: namely, that the debt burden actually fell during the war, with the ratio of total credit market debt to GDP declining from 210 percent in 1938 to 190 percent at the 1945 peak!

This obviously happened because household and business debt was virtually eliminated by the wartime savings spree, dropping from 150 percent of GDP in 1938 to barely 60 percent by 1945, and thereby making vast headroom for the temporary surge of public debt.

In short, the nation did not borrow its way to victory via a Keynesian miracle. Measured GDP did rise smartly because half of it was non-recurring war expenditure. But even then, the truth is that the American economy “regimented” and “saved” its way through the war.

Once the war mobilization was over Washington quickly reduced it massive wartime borrowing, and set upon a 35 year path of drastically reducing the government debt burden relative to national output. Looking at the chart’s veritable ski-slope from 120% of GDP in 1945 to barely 30% of GDP when Reagan took office in 1980 you would think that the US economy should have been buried in depression during that period if Professor Krugman silly syllogisms are to be given any credit.

Of course, just the opposite is true. The greatest sustained period of post-war real GDP growth occurred between 1955 and 1973, with real output growth averaging nearly 3.8% per annum. But after that, as shown by the relative growth rates of real final sales in the chart below, the trend rate of growth steadily eroded. Thus, economic prosperity actually reached its highest level precisely when the national debt ratio was speeding down that ski-slope.

Indeed, during the very period when the fiscal deficit got out of control during the early 1980’s owing to the Reagan Administration’s impossible budget equation of soaring defense, deep tax cuts and tepid restraint on domestic spending, young professor Krugman was toiling away in the White House as a staff member of the Council of Economic Advisors.

During the dark days of the 1981-1982 recession when the economy was collapsing and the deficit was soaring I heard some pretty whacky ideas from the White House economists on how to reverse the tide. But never once did I hear professor Krugman argue that with the GDP at about $3.5 trillion while the public debt stood at less than $1.5 trillion or about 40% of GDP that it was time to turn on the deficit spending after-burners and get the national debt up to 100% of GDP forthwith.

No, this whole case for mega-public debt has emerged since 2008. For crying out loud, before the great financial crisis Krugman was one of the noisiest voices in the chorus denouncing George Bush’s massive tax cuts on the grounds that they would add to the national debt, which was then $6 trillion, not $18 trillion.

The fact is, the financial crisis was caused by the massive money printing campaigns of the Fed in the years after Greenspan assumed the helm in 1987. The resulting falsification of money market interest rates and distortion of prices and yields in the capital markets gave rise to serial booms and busts on Wall Street. But these financial market deformations had virtually nothing to do with fiscal policy and most certainly did not reflect an insufficiency of public debt.

These destructive busts——the dotcom crash, the 2008 mortgage bust and Wall Street meltdown and the stock market plunge just now getting underway——-are owing to the fact that Wall Street has been turned into a gambling casino by the Federal Reserve and the other major central banks.

But rather than acknowledge that obvious reality, Krugman actually manages to turn it upside-down. To wit, he argues that repairing the nation’s busted financial markets after September 2008 required the creation of “safe assets” in the form of government debt so that investors would presumably have a place to hide from Wall Street’s toxic waste:

Beyond that, those very low interest rates are telling us something about what markets want. I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so? The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.

Now that puts you squarely in mind of the young boy who killed his parents and then threw himself on the mercy of the courts on the grounds that he was an orphan. That is, having experienced a runaway financial bubble owing to excessive monetization of the public debt during the Greenspan era, the nation’s economy now needed even more public debt in order to subdue the very Wall Street gamblers that the Fed’s printing presses had unleashed.

Every phrase in the above quoted passage is nuts, even if it is attributable to an MIT rocket scientist, who is apparently handsomely paid for publishing pure drivel. After all, investors on the free market have known how to manage genuine financial risk from time immemorial; they didn’t need today’s vast emissions of public debt to help them.

In fact, treasury notes and bonds have no logical relationship to honest hedging in the first place. The most salient case of treasury based hedging was the spectacular blow-up of Long Term Capital in 1998. In that particular instance, the gamblers who ran a trillion dollar book of speculative assets including tens of billions of high yield Russian debt blew themselves up shorting the treasuring market to hedge their interest rate risk. Then, during the panicked investor flight to safety in August 1998, their giant losses on risky assets were compounded by even larger losses on their short treasury hedge.

In fact, the real point about the government debt market in today’s central bank rigged financial system is that it has become a venue for state sponsored thievery. That is to say, when the Fed pegs the front end of the curve at zero for 80 months running and then pours $3.5 trillion of fiat purchasing power into buying the rest of the treasury curve, including mortgage-backed agency securities, in order to boost bond prices and lower yields, it is creating a virtually risk free arbitrage for Wall Street gamblers. And that serves no public purpose whatsoever, except to transfer massive windfall profits to the most adept gamblers among the 1%.

Professors Krugman and Caballero actually think this helps?

The problem is that like all Keynesians they do not know the difference between fiat credit, which is manufactured out of thin air by fractional reserve commercial banks or money-printing central banks, and honest debt that is funded out of genuine savings from current income by households and business.

Allocating genuine savings to public versus private capital investment almost always results in a diminution of productivity and efficiency, thereby reducing society’s wealth and living standards, not raising them. That’s because governments are invariably controlled by squeaky wheel special interest groups and lobbies which succeed in gaining in the halls of Congress what they cannot justify in the private market. Amtrak, subsidized mass transit and bus services, corps of engineers water projects and export subsidies to Boeing and GE are obvious cases in point.

But our Keynesian professors have no sense of allocative efficiency. They think that any spending—-including having the unemployed dig holes with tablespoons and fill them up with teaspoons—– adds to GDP:

One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future……..

You can’t make this stuff up. And here’s the rest of it for the purpose of any remaining doubt.

#Keynesians are stupid

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1   indigenous   2015 Oct 5, 7:06am  

Some Austrians. And some of them said they were wrong. Which is a damn site better than Krudman.

He is saying the country needs more debt. Stockman indicates:

"There is currently about $60 trillion of public debt outstanding on a worldwide basis compared to less than $20 trillion at the turn of the century. But somehow this isn’t enough, even though the gain in public debt——-from the US to Europe, Japan, China, Brazil and the rest of the debt-saturated EM world—–actually exceeds the $35 billion growth of global GDP during the last 15 years."

The point is that the debt has gone up more than the growth of the GDP in the world. IOW his theory is crap and dangerous.

The Austrians that predicted inflation did not take into account size of the credit market and the fact that 4 trillion is only 6% of the credit market and money supply. The other factor I don't think they took into account was the fact that the dollar is the reserve currency of the world, consequently what ever dollars are printed are absorbed into the world money supply.

To say Ks 33 As 0 is imbecilic because you are not looking at the macro picture.

IMO we are looking at the endgame of fraction banking and will enter into a secular deflationary period. At this point we will see the specious nature of Keynesians and their horseshit ideas.

2   tatupu70   2015 Oct 5, 7:14am  

indigenous says

To say Ks 33 As 0 is imbecilic because you are not looking at the macro picture.

Oh, I see. If you look at the "macro picture", I'm assuming there is hyperinflation everywhere?

indigenous says

IMO we are looking at the endgame of fraction banking and will enter into a secular deflationary period. At this point we will see the specious nature of Keynesians and their horseshit ideas.

Hmmm.. When have I heard this before. Oh yeah, every year since the early 80s.

3   indigenous   2015 Oct 5, 7:19am  

tatupu70 says

Oh, I see. If you look at the "macro picture", I'm assuming there is hyperinflation everywhere?

No, but there is inflation. Inflation according to the way they used to measure it:

tatupu70 says

Hmmm.. When have I heard this before. Oh yeah, every year since the early 80s.

Yes and you will end up with a black swan up your ass

4   indigenous   2015 Oct 5, 7:20am  

In fact much of the down trend, read all of the down trend, is because of advances in technology. Especially regarding oil.

5   tatupu70   2015 Oct 5, 7:34am  

indigenous says

No, but there is inflation. Inflation according to the way they used to measure it:

And they changed because it was clearly wrong. Do you really think we had 13-14% inflation in 2009?? Do you have any idea what that would look like? Or that we currently have 7-8% inflation?? Only an absolute idiot could think that the 1980 inflation calculation is correct.

indigenous says

Yes and you will end up with a black swan up your ass

I'm not holding my breath.

6   tatupu70   2015 Oct 5, 7:34am  

indigenous says

In fact much of the down trend, read all of the down trend, is because of advances in technology. Especially regarding oil.

Your point is?

7   indigenous   2015 Oct 5, 7:37am  

tatupu70 says

And they changed because it was clearly wrong. Do you really think we had 13-14% inflation in 2009?? Do you have any idea what that would look like? Or that we currently have 7-8% inflation?? Only an absolute idiot could think that the 1980 inflation calculation is correct.

Yea it would like the stock market and the housing market it the Bay Area.

8   indigenous   2015 Oct 5, 7:38am  

tatupu70 says

indigenous says

In fact much of the down trend, read all of the down trend, is because of advances in technology. Especially regarding oil.

Your point is?

That is my point.

9   tatupu70   2015 Oct 5, 7:44am  

indigenous says

Yea it would like the stock market and the housing market it the Bay Area.

I believe we've been over this. The stock market is NOT included in the CPI. Assets are not and should not be.

Rents in the Bay Area are up, but the CPI is a national number.

10   tatupu70   2015 Oct 5, 7:46am  

indigenous says

tatupu70 says

indigenous says

In fact much of the down trend, read all of the down trend, is because of advances in technology. Especially regarding oil.

Your point is?

That is my point.

Wow--great insight there, junior. Got any other breakthroughs to share with us?

11   indigenous   2015 Oct 5, 7:48am  

tatupu70 says

I believe we've been over this. The stock market is NOT included in the CPI. Assets are not and should not be.

Rents in the Bay Area are up, but the CPI is a national number.

Why not?

12   tatupu70   2015 Oct 5, 8:20am  

indigenous says

Why not?

Listen, I don't have time to explain basic economics to you. Google inflation and do a bit of reading on your own.

13   indigenous   2015 Oct 5, 8:30am  

tatupu70 says

Listen, I don't have time to explain basic economics to you. Google inflation and do a bit of reading on your own.

You should follow your own advise. Trouble is that you think you understand the definition of inflation because of your Keynesian pathology, which has rendered you feeble.

14   Shaman   2015 Oct 5, 9:33am  

I wonder what a restaurant owner would think the inflation rate is?

15   tatupu70   2015 Oct 5, 9:34am  

Ironman says

Haven't been to the grocery store, have you?

Yep, I have.

16   indigenous   2015 Oct 5, 9:40am  

Are you sentient?

17   tatupu70   2015 Oct 5, 10:23am  

Ironman says

You really need to have your wife let you look at the checkbook once and a while. Has she given you a raise in your allowance so you can buy the milk and cookies at work?

And you really need to work on making an argument rather than continuing to troll with personal insults.

18   indigenous   2015 Oct 5, 11:14am  

Back at ya

19   MisdemeanorRebel   2015 Oct 5, 11:19am  

tatupu70 says

And they changed because it was clearly wrong. Do you really think we had 13-14% inflation in 2009?? Do you have any idea what that would look like? Or that we currently have 7-8% inflation?? Only an absolute idiot could think that the 1980 inflation calculation is correct.

Shadowstats adds on an arbitrary constant to gin up the inflation numbers.
http://azizonomics.com/2013/06/01/the-trouble-with-shadowstats/

20   tatupu70   2015 Oct 5, 11:27am  

thunderlips11 says

Shadowstats adds on an arbitrary constant to gin up the inflation numbers.

http://azizonomics.com/2013/06/01/the-trouble-with-shadowstats/

Good link. In retrospect, it is obvious that he is just using an adder as the shape of each is EXACTLY the same. It's interesting that he stopped increasing the "adder" in about 2008. I wonder why?

21   indigenous   2015 Oct 5, 12:47pm  

"Why don't you get off your lazy pathetic ass, pick a consumer product like gasoline, and plug your fucking moronic shadowstats numbers into that product for the last 30 years and see what that product is supposed to cost now"

So you are saying that we are not experiencing any substantial inflation?

Do you think the currently reported what 2 percent inflation rate is accurate?

22   bob2356   2015 Oct 5, 3:37pm  

Ironman says

tatupu70 says

Or that we currently have 7-8% inflation??

Haven't been to the grocery store, have you?

Bought pork ribs, really nice looking meaty babies, for 1.88 a lb today. Does that count?

23   tatupu70   2015 Oct 5, 3:52pm  

Ironman says

Sure bob, because that's the ONLY product the grocery store sells!! Nice job!!

So, why don't you post some data on actual food inflation then? That's typically how educated people support an assertion.

24   tatupu70   2015 Oct 5, 4:17pm  

Ironman says

Go shopping and figure it out for yourself

I think we've already established that I do go shopping. And I know what food inflation has been.

Ironman says

It wasn't an assertion, but then again, you wouldn't understand.

Oh, sorry. So tell me what was the point of all of your posts here then?

25   indigenous   2015 Oct 5, 5:04pm  

No mutt.

If you simply go to the grocery store there seems to be around 10% inflation. Not the 2 % advertised by the CPI.

But the original point was that debt does not help the economy grow, only the K tards believe this.

26   tatupu70   2015 Oct 5, 6:29pm  

Ironman says

If you REALLY know like you SAY you do, you wouldn't be challenging me on that fact.

The fact that you're still commenting shows me, in reality, you're totally clueless on the subject.

What fact? I thought you didn't make an assertion?

28   tatupu70   2015 Oct 6, 4:31am  

Ironman says

So, as you now have been educated, I did NOT make an assertion like you claimed I did... I stated a fact about food inflation...

You did? Please quote the post where you stated a fact.

Because I just looked through this entire thread and every one of your posts is your usual trolling BS

29   tatupu70   2015 Oct 6, 5:25am  

indigenous says

This is actually pretty funny. You're posting a graph from the CPI to show that the CPI is wrong.

30   Y   2015 Oct 6, 6:34am  

I agree with this. The huge number of S&M aficionados can be directly attributed to the 4M,SM+40ST,A karyotype parental carriers...

bgamall4 says

There is massive demand for long bonds because of derivatives.

31   Y   2015 Oct 6, 6:39am  

I agree with this. Here's proof the Lantern kept a Lantess for procreating at local campgrounds...

bgamall4 says

Greenspan created a monster.

32   bob2356   2015 Oct 6, 7:01am  

Ironman says

Sure bob, because that's the ONLY product the grocery store sells!! Nice job!!

Of course not, they sell pork chops also. Kosher at that. Man does not live by ribs alone. My price is an infinite multiple of the 0 prices than you have posted. Then again there are currently 122 trillion people with ebola according to your calculations so I don't trust your numbers very much anyway.

Ironman says

, I claim FACTS

Wow, Holy shit, when did that start? Was there a tectonic shift in the time space continuum?

33   tatupu70   2015 Oct 6, 9:39am  

lol--so your "fact" is that I don't go to the grocery store? Are you kidding me?? Even you aren't this big of an idiot.

That would be an assertion--you have no evidence to back that up. I clearly understand food prices have been rising. The point is that they are accounted for in CPI as indig's graph shows. His graph proves me correct and you incorrect. You're just too stupid to understand. As usual.

34   tatupu70   2015 Oct 6, 4:30pm  

Ironman says

Looks like your wife let you look at her checkbook.... It's nice you're waking up just a bit!!

And I see you are still an idiot. Not only can't you follow the conversation, you don't even realize when you've been made a fool of.

35   indigenous   2015 Oct 6, 6:17pm  

You implied that with your lower inflation post from post 1

36   tatupu70   2015 Oct 6, 7:15pm  

Ironman says

BTW, you didn't answer my question:

And you still don't know what a fact is. Or even what this conversation is about.

37   indigenous   2015 Oct 6, 10:07pm  

Whoops 140%

But MUTT the point is the same, nice try though

38   indigenous   2015 Oct 6, 10:16pm  

Which is besides my main point, which is that Krudmans point that debt helps economic growth is a steaming pile.

39   tatupu70   2015 Oct 7, 9:03am  

I'll try to dumb this down enough so that Indig and CIC can understand.

Say we have 8 numbers(inflation % on different items): 2,5,7,10,6,3,14,7 Hopefully you agree the average is 6.75%

You are basically arguing that there's no way the average can be 6.75% because look--one of the numbers is 14%!! Do you see how ridiculous you are?

indigenous says

Today's dollar would buy 4 cents worth of goods in 1913. Now you will say that wages are adjusted during that time. But the margins are what count, as in the wages have not been inflation adjusted for the last 6 years, and as in mutts such as yourself have had their investments skyrocket at the same time.

Here's the problem with that line of thinking. Mell also makes this mistake. The reason wages haven't kept up with inflation has ZERO to do with the actual rate. If inflation was zero now, wages would be falling and still not keeping up. The reason real wages are not growing like they did in the past is precisely because of the policies that Reagan started and other Reps have continued. Reducing the power of labor vs. owner/capital. That's why inequality keeps growing. That's why unemployment is stubbornly high.

Austrians are part of the problem. Everything you think you know is wrong.

40   indigenous   2015 Oct 7, 12:57pm  

I will try and say this in terms you will understand, what you stated is not true at all. Unions have been disappearing long before the 80s.

The culprit is demographics and TARP and the other Fed meddling

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