He's at it again. This time, Lee uncovers another New York Times article from 2003 entitled A Fiscal Train Wreck, by none other than Paul Krugman. Unlike today's Krugman, for whom a $9 Tillion deficit is nothing to be concerned about, the Krugman of the Bush years was much different... I'll let Ben take it from here:
* * * * *Anyone who regularly reads Paul Krugman, our latest “Nobel Prize winning economist”, knows that his position on inflation that it is not a threat to the economy at all. He has regularly been a defender of large fiscal deficits and expansionary monetary policy claiming that it is our road to salvation from our so called deflationary spiral.
We’ll ignore the fact that the deflationary spiral involves six straight months of price increases and regular complaints from Mr. Krugman himself about the skyrocketing costs in health care. He recently stated in an article that deficits saved the world, with a little help from his former boss at Princeton, Ben Bernanke. However, in 2003, when Alan Greenspan and the Bush administration were busy destroying this country’s balance sheet, Krugman was scared to death about inflation for good reason. The rest of this article references several paragraphs from Mr. Krugman’s March 11th, 2003 article, “A Fiscal Train Wreck”, which can be found in his New York Times archive.
"With war looming, it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits."I’ll ignore the fact that he was crazy enough to sign an adjustable rate mortgage in the first place. Since 2003, the dollar has not only lost purchasing power, but the inflationary pressures that existed then have grown like a cancer. Our deficits are bigger and our economy is weaker. Meanwhile, Ben Bernanke has run the printing presses at full speed and has given no indications that he will slow them down.
"Last week the Congressional Budget Office marked down its estimates yet again. Just two years ago, you may remember, the C.B.O. was projecting a 10-year surplus of $5.6 trillion. Now it projects a 10-year deficit of $1.8 trillion."So, in eight years, the deficit projection went from a $5.6 trillion surplus to a $9 trillion deficit. That’s a $14 trillion swing. Let us do ourselves a favor and stop acting like any of their projections are realistic. If Vegas were taking bets, the point spread would be another $7 trillion. As far as the CBO goes, Mr. Krugman says himself:
"The Congressional Budget Office operates under ground rules that force it to wear rose-colored lenses."We are royally screwed when a $9 trillion budget deficit is put forth through rose colored glasses. Maybe we should be preparing for $16 trillion.
"...that the 10-year deficit will be at least $3 trillion… So what? Two years ago the administration promised to run large surpluses. A year ago it said the deficit was only temporary. Now it says deficits don't matter. But we're looking at a fiscal crisis that will drive interest rates sky-high… But what's really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government's solvency. That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 — make that 3, O.K., maybe 4 — percent of G.D.P. But that misses the point."If Paul Krugman was worried about a $3 trillion budget deficit and a debt to GDP ratio of 4 percent six years ago, a $9 trillion budget deficit and a debt to GDP ratio of 40 percent should have him preparing for financial Armageddon. The reality of the situation is that it is financial Armageddon.
"Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen." So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest."This is exactly what most sane economists are saying today. Ironically, Mr. Krugman now likes to conveniently ignore those Social Security and Medicare liabilities that he was so frightened about in 2003. Let’s not forget, he conveniently ignores our newly pledged liabilities to Fannie Mae and Freddie Mac as well.
"But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar."His point here is 100% correct and crucial. The government, now under Barack Obama has officially entered the stage of printing money to pay its bills and inflate away the debt. The problem is, Mr. Krugman now denies that such actions (printing money) are even occurring and he is cheering the quantitative easing performed by Ben Bernanke with a megaphone. He also attacks any person that even mentions the possibility of interest rates rising.
"I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that "a fiscal crisis threatens our future standard of living"."Obviously, Mr. Krugman was 100% fearful of inflation throughout this entire article, which is why he was so eager to convert his mortgage to a fixed rate. He wanted his nice home in Princeton to be paid off with funny money from the Federal Reserve. Don’t worry Paul, you’re getting your wish.
The key message is that in the article that Mr. Krugman wrote in 2003 was a great article with an incredibly accurate picture of the financial health of the United States at the time. There is no question that George Bush was the worst president we ever had. There is also no question that Alan Greenspan was the worst Federal Reserve Chairman we had. The current problem is that everything Mr. Krugman now writes entirely contradicts this article, despite the fact that every single problem the economy faced six years ago is now much worse. Mr. Krugman has no issues with Barack Obama and Ben Bernanke committing the same atrocities. Obama has ramped up every budget, including the military while Bernanke runs the presses faster than Greenspan ever had.
Mr. Krugman has consistently stated throughout this year that there is no danger of interest rates rising and the budget deficit is not disastrous by comparing the numbers to the 1940s United States and Japan in the late 1990s. The problem is, our GDP consists heavily of government spending and a consumer based service sector economy, which is apparently a non-issue in the mindset of your typical Keynesian crackpot. The problem with GDP is that it severely overstates our nation’s productive capacity and is no measure of economic strength. How can a country that produces so little have a high Gross Domestic “Product”? After World War II, the United States was a creditor nation. Japan is currently a creditor nation. The present day United States is a debtor nation, the largest one we have ever seen. Our debt is held externally while the 1940s United States and 1990s Japan were held internally. In the past, we financed our debt through 30-year bonds, as did Japan. Today, a large portion of our debt is financed through 2-year bonds.
What happens if those interest rates do creep higher? The US must turn to the printing press to avoid default.
"...investors still can't believe that the leaders of the United States are acting like the rulers of a banana republic. But I've done the math, and reached my own conclusions — and I've locked in my rate."Listen here Paul, we are officially becoming a banana republic, no matter how many times you tell us on TV that we are not Argentina. You made a wise choice in 2003 to convert your mortgage to a fixed rate over the course of 30 years. Why on Earth would you recommend that the entire nation take out debt financed in 2-year bonds? America is essentially signing up for a sub prime mortgage and we are assuming that we can simply refinance before the rates reset. Do us all a favor, stop lying to the American people. When interest rates rise and inflation skyrockets out of control, millions of Americans are going to wonder why you told them it wouldn’t happen. Either you care, or you don’t. With every word you write, I wonder how big that conscience of a liberal really is.
* * * * *
I think Ben really said it all right there, but I just feel compelled to repeat one thing.
Krugman, in 2003 says:
Krugman, in 2003 says:
"...politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt."EXACTLY!
Now why can't Paul Krugman wake up and realize that that's precisely what politicians are doing now?? 2009 Paul Krugman bears little to no resemblance to 2002-2006 Krugman... The reality is, Krugman could care less about irresponsible government - his only concern is that the "winning" team is wearing blue.
All that said, Krugman still managed to be wrong about something in 2003: Interest rates haven't gone up - they went down to perpetually historic lows! - and it seems to me nearly impossible that they ever will again. At least not significantly... The thing Krugman didn't take into account about that is that raising interest rates would require a Federal Reserve that was actually interested in a stable currency, which I think my chart has decisively proven, has never existed. Ben Bernanke doesn't have the stones to raise interest rates, and at this point it would do nothing at all to stop the massive levels of inflation we're headed towards.