Nobel prize winning economist Paul Krugman published a much ballyhooed article last weekend in the New York Times Magazine. The article is called, "How did economists get it so wrong? He steps on a lot of toes and thrashes many of the major Chicago School economists including John Cochrane and Robert Lucas. The article questions the current mathmatical models in modern economics and suggests that the only solution to our present economic crisis is direct government stimulus via the Keynesian model. The article indirectly speaks volumes about our current political system. Krugman is an individual cog of the Financial Elite and is definitely a barometer of future economic policy. This is my take:
- The Financial Elite are laser focused on our country's Income Statement as they continually ignore our Balance Sheet. Policy will always trend toward increasing the country's GDP at all costs. Even if we incur crippling debt in the long run. The thinking is that any debt will be paid with future gains in GDP. This policy was started during the Reagan Era when interest rates on 10 year treasuries were at 15%. The policy has worked for 25 years because of the tailwinds from the Interest Rate Mega Bubble but presently is incurring diminishing returns. According to Ned Davis Research it took $1.50 of debt to generate $1 of GDP in the 1960s, $1.70 to generate $1 of GDP in the ’70s, $2.90 in the ’80s, $3.20 in the ’90s, and an unbelievable $5.40 of debt to generate $1 of GDP in the latest decade. The trend of using debt to replace growth and savings is unsustainable.
- The Financial Elite always look to the past to solve our present problems. There is almost never any discussion of the future. Even though Krugman admits that past economic policy is not working in this economic environment he is adamant that Keynesian Policy is the only solution. I guess when all you have is a hammer, you treat everything like it is a nail.
- Going one step further, The Financial Elite rarely reconcile past events with current policy. Our current situation is much like Japan of 20 years ago when Japan started their "lost decade". Our present policy is almost exactly the same but we expect a different outcome? It just does not reconcile. Keynesian economics has never been proven as a solution. The Financial Elite say that the Great Depression is the example. I suggest that the Great Depression lasted 10 years. The depression after WWI was massive and received no fiscal or monetary stimulus. It only lasted one year and the economy came out of it on a dead run. This fact is never mentioned by Krugman or any of the Financial Elite. Also, the Austrian School of economics and behavioral economics are ignored in Krugman's article and by the Financial Elite even though both were about the only schools of economics that predicted our current crisis.
- Policy is always focused on what is less painful to the "winners" chosen by our policymakers. The "Greenspan put" of the last 20 years has rewarded speculation in Wall Street with a guarantee of easy money and bailouts if investments go bad. I am very surprised that Paul Krugman, the self professed "conscience of a liberal" has not raised questions about rewarding corporate and financial executives with windfall profits in stock options driven by the bailouts from our government. He has also never suggested that the government claw back the obscene amount of money the financial sector made as they brought our financial system to it's knees. He has stated repeatedly that we need a bigger stimulus even though most of the stimulus is rewarding bad behavior and creating winners and losers.
I have no real problem with Paul Krugman's views or his article in the New York Times. He is a small cog in a very large problem that will correct in the future, either slowly or quickly. The speed will depend on the amount of debt created by our government and The Financial Elite. My only lament is that we can't use this period to fix all of the problems with our society. In our country's past, recessions were a financial Winter that purged speculators from the system, eliminated debt, repriced assets to fair value and sent forth a functional system for our children to enjoy. Presently we are rewarding speculators, increasing overall debt in the system, artificially propping up asset values and passing these problems to our children. I would suggest that we are one of the most selfish generations that this country has ever known.
Presently I have gone to stock market neutral in my investments. I am up 54% with this run of the S and P and could definitely lose ground against my target index if people perceive that the economy is improving. But the easy money has been made and if The Herd wants to speculate, more power to them. I see no green shoots. Of course I am keeping all of my stock holdings but I am hedging with leveraged ETF's. Part of my stock hedge is a growing position in the US dollar and a short on oil. Two of the reasons for the stock run up are the weak dollar and the price of oil hence my contrarian position. I am equally long in natural gas as a hedge against my short oil position. I am short on the 10 year treasury as a hedge on my US dollar position. It's a traders market now, the gains are going to be in the volatility of the markets.