A Nobel Prize Winner gets it VERY Wrong

Paul Krugman doesn’t hide his far-left leanings (calling his blog the “conscience of a liberal”), perhaps why his economic policies frequently come out rather bizarre and slanted.

Recently Mr. Krugman noted personal debt, as a percentage of personal income, has shot up from 60% in 1985 to 115% in 2007. Since today people have to pay back that debt, demand for products has gone flat; he laments over solutions:

The question is, what will replace their spending? We’re told that we can’t have fiscal expansion, because that’s Big Government. And now we’re being told that we can’t have monetary expansion, which might induce businesses and low-debt consumers to spend more, because that’s debasing the dollar. Oh, and while we’re on that, we can’t allow the dollar to fall, which might help exports.

In case you missed it, monetary expansion is a code for inflation, as the government begins QE2. Inflation is a hidden tax, or transfer of your assets to the government. Perhaps you’ve heard of “Keynesian economic theory” recently as it’s quite popular today while it promotes stimulus and deficit spending. But what did Keynes himself say?

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. …

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. (John Maynard Keynes “The Economic Consequences of the Peace” chapter 6 )

Inflation isn’t the only problem; Krugman (a Nobel prize winner in economics), fails to understand what personal debt implies. Borrowing simply means the demand for goods and services has been pulled forward from future years. Think about that for a bit. If you buy a big-screen TV today on credit, that means you’ll have less income to spend later as you make monthly payments on it. Next year you can’t buy the blu-ray player, at least until you pay off the TV.

To use a popular term, spending levels (on both a personal and government level) are unsustainable.

How a Nobel prize winner in economics fails to grasp such a simple concept remains a mystery.

The same principle applies to the Federal Government and their current borrow-and-spend policies (with Trillion dollar deficits, new Trillion dollar entitlements, and Trillion dollar “stimulus” spending). As we’ve seen in Europe, that simply can’t continue (as it’s just pulled-forward demand); at some point you’ve got to stop spending and pay back the debt.

You’ll hear more and more about “government austerity measures”, meaning cutting spending to use money to pay back accumulated debt (they’ve essentially spent on your credit card). It’s inevitable, and must happen unless the government defaults and declares bankruptcy. As any person knows — or learns the hard way — you can’t spend on your credit card forever — sooner or later the bank wants their money back, and when they do, you’ll have less to spend as a chunk of your paycheck goes to pay back the debt … with interest.

The problem is the increasing Federal deficit caused by wildly irresponsible spending, and the fantasy idea the government had a surplus in recent history. The fact remains the Federal government has run a deficit for decades, and the problem only gets worse. Much worse.

It’s irresponsible spending, not revenue, causing the problem.

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery. (Charles Dickens, “David Copperfield”)

Naturally, our friendly Nobel prize winner Mr. Krugman has a solution, saying the deficit will be solved by “death panels and sales taxes”, but strangely, he never mentioned a spending problem.

Simply put, his idea uses the national health-care plan (aka “Obamacare”) to ration medical care and slash the medical treatment you’ll receive, and then raise taxes on anyone surviving the reduced medical care. Funny, he never mentioned cutting spending … not one cent (as it turns out, everyone who noted the national health-care plan would involve death panels turns out to be correct).

Mr. Krugman provides yet another lesson — anyone with a PhD, or Nobel prize, or other fancy letters after their name can be just as wrong as anyone else. In this example, a Nobel-prize economist can’t understand the basic principle noted by Charles Dickens — you can’t continue to increase spending.

Or as Margaret Thatcher noted — “The problem with socialism is that you eventually run out of other people’s money”.

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