Blah…Blah…Quack…Quack — Fed Creating The Housing Bubble

To fight this recession, the Fed needs more than a snapback. It needs soaring household spending to offset moribund business investment. And to do that, [Federal Reserve chief] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.’

New York Times columnist Paul Krugman, 2002

Many silly and regrettable things are said every week. It would be exhausting to try to pick out the worst of them.

Still…some — like bad visits to the dentist — are naturally memorable.

We’ll begin with a comment from US Treasury Secretary Janet Yellen this week. Business Insider reports:

Treasury Secretary Janet Yellen urged Congress on Wednesday to extend a July 31 deadline to pay down a portion of the federal government’s $28 trillion in debt to investors and foreign governments.

Without the extension, she warned of an “absolutely catastrophic” default that would imperil the nation’s economic recovery from the pandemic. 

“I think defaulting on the national debt should be regarded as unthinkable,” she told the Senate Appropriations Committee, calling it “utterly unprecedented in American history for the US government to default on its legal obligations.”

Unprecedented? Hardly.

The US effectively reneged on its obligations in 1971. That’s when the Nixon Administration cut the US dollar’s link to gold.

Thereafter, creditors would have to take whatever the US chose to give them. Secretary of the Treasury at the time, John Connally, put it to them straight:

The dollar is our currency, but it’s your problem.

Since then, tracked by the gold price, foreign US dollar holders have lost 98% of their money.

Fess up

Would it be unthinkable to finally fess up?

Not at all. We’re thinking about it right now. And what we think is that it wouldn’t be catastrophic at all.

Suppose instead of printing up more fake dollars as to pretend to honour its commitments, the US simply admitted that it can’t pay?

Bondholders would finally see what the full faith and credit of the US government was really worth. They could surely find better uses for their money anyway — lending it to the US government guarantees that it will be frittered away.

And suddenly, the whole world would have to face the music.

The current monetary system is a fraud. It robs the ordinary citizen in order to reward the rich. It slows real growth. It confuses and misleads investors, businesses, and households. It creates bubbles and blow ups. It finances zombie companies and pays for Washington’s boondoggles.

Putting it behind us would be a big improvement.

Intellectually or morally deficient

But despite the towering blockheadedness of Ms Yellen’s comment, it only comes in second in this week’s log of bogus, numbskull, or insipid remarks.

New York Times columnist Paul Krugman gets the top spot. On Monday, he argued that the inflation ‘panic’ was over. Here’s what he wrote in The New York Times:

Seriously, both recent data and recent statements from the Federal Reserve have, well, deflated the case for a sustained outbreak of inflation. For that case has always depended on asserting that the Fed is either intellectually or morally deficient (or both). That is, to panic over inflation, you had to believe either that the Fed’s model of how inflation works is all wrong or that the Fed would lack the political courage to cool off the economy if it were to become dangerously overheated.

‘[…]

To buy into this story, you have to claim […] that the Fed, which is fully capable of reining in a runaway boom, will stand idly by while inflation gets out of hand.  

Yes, you would have to think the Fed cannot, or will not, control inflation…which is just what we do think.

You might also think that the Fed is intellectually deficient. But in today’s world, you might take that for granted.

Influential and important

But first, let us put Mr Krugman’s pensée in perspective.

Because of his influence, he is regarded by some as the ‘most important’ columnist in the US. And The Economist described this Nobel Laureate as ‘the most celebrated economist of his generation.

As we discussed Friday, his influence is considerable…and lamentable.

As we saw in the quote at the top of today’s Diary entry, Krugman urged the Fed to create the housing bubble of 2005–07.

And his economic quackery is part of the reason that the US’ elite has lost its intellectual authority.

Then, when the housing bubble blew up, he came forward with more bad advice. Here he is in October 2008:

It’s politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the U.S. budget deficit should be put on hold.

Again, the Feds followed his advice. From 2008 to 2020, federal debt increased from US$10 trillion to US$28 trillion…and the Fed’s balance sheet went up almost 800% (while the economy grew just 50%).

Theoretical solution

And now that Mr Krugman has influenced the US into a total debt burden over US$80 trillion…and influenced the economy to rely on fake, below zero (inflation-adjusted) interest rates…and influenced Americans to expect bailouts and stimmy cheques…

…is the Fed really able to stop its money printing?

In theory, the Fed could ‘pull a Volcker’ and stop inflation cold. But then, the economy, the stock market, and the Fed themselves would slide into hell. Stocks would crash. Unemployment would soar.

And Mr Krugman would howl to high heaven…calling for more money.

And the Fed, so ready to go along with every cockamamie spend-a-palooza so far this century, would suddenly find itself endowed with the courage to resist the whole of America’s Elite Establishment?

Not likely.

Krugman’s solution

Instead, the inflation numbers — under duress from the Bureau of Labor Statistics — will tell a confusing tale. The feds will continue spending. The Fed will continue printing.

And inevitably…though not predictably — neither by us nor by Mr Krugman — a new crisis will arise.

Perhaps the Fed ‘taps the brakes’ and causes a crash on Wall Street…

Or maybe a spike in consumer prices causes a panic.

Either way, it will be ‘no time to worry about the budget’. Or about deficits. Or about inflation itself.

No…the Fed will not stand idly by as the inflation fire gets out of hand.

It will listen to the Great Influencer…Paul Krugman…and come running with a bucket of gasoline!

Regards,

Dan Denning Signature

Bill Bonner,
For The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.


Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.


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