Inflation Alarms May Signal Real Threat ?

The Wall Street Journal takes note of Paul Krugman’s attack on “Austrian/Ron Paul types” (1/13/13) page C1, “Ahead of the Tape”).

We have all heard of the boy who cried wolf.

A similar charge is being leveled against pundits who warned of runaway inflation as a result of the Federal Reserve’s extraordinary stimulus. Economist Paul Krugman, for example, pilloried “Austrian/Ron Paul types” for being so wrong the past three years.

Even after a tripling of the monetary base, Mr. Krugman’s sanguine view is in favor.

Of course Krugman’s charge against the Austrians ignores Henry Hazlitt’s warning to be aware of both the immediate and long run effects of an economic policy. But even in the short run the Fed’s policy is having obvious effects on prices. Here is the comment I posted on the Wall Street Journal article:

CPI is only one measure of prices. Fed policy is aimed at keeping stock and bond prices high and they have accomplished that goal. They are also obviously trying to keep housing prices propped up with low interest rates and their buying of mortgaged-backed securities. Fed policy along with other central banks have resulted in higher gold, oil, and commodity prices. Mainstream economists like Krugman are looking at a failed statistic just as Irving Fisher and Benjamin Strong did in the 1920s.


  1. Notice in Joseph Salerno’s post, “Helicopter Ben Runs Out of Ideas for Creating Money,” that Ben Bernanke admits that he doesn’t know how to create inflation. Bernanke began attempting to create inflation with massive injections of money into the economy when the economy began its decline around 2008. Even Paul Kruman kept calling for more and more injections. Both “Helicopter” Ben and Inflationist Krugman believed that the demand side QTM would cause inflation with massive injections.

    While many Austrians predicted inflation would be an economic disaster, the Keynesians predicted inflation would be the economic savior. In truth the ABCT has worked just as expected. Massive injections of money created malinvestment (bubbles) but once the bubbles burst and deleveraging began the transmission mechanism of money from the FED into the transactional economy was broken. Asset values crashed and could not be leveraged.

    Actually Bernanke and Krugman made the same mistake in judgement that Salerno and Murphy made placing more faith in monetarism than in the ABCT.

  2. The boys who cry wolf are in reality Krugman and DeLong with their tiresome warnings about taking seriously those who apply Austrian business cycle theory and monetary theory + regime uncertainity to better understand/explain current economic conditions and prospects for the future.

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