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Krugman’s Ignominious Retreat on Quantitative Easing


In the 1980’s Paul Krugman worked at the White House under Reagan. In later decades, he somewhat mysteriously acquired a left wing reputation for what he wrote (in particular for daring to oppose the Iraq War; that, in 2003, qualified you as far out leftist). Naturally, after he got the Nobel Prize in Economics, his colossal reputation gave him great influence in the Obama administration.

Krugman gave the advice to institute a massive “Quantitative Easing”. In this the Central Bank (“Fed” in the USA) buys assets held by the largest banks (so a branch of government, the Central Bank, buys something sold by another branch of government, Government Bonds, and held by others, supposedly private parties, large banks; it’s all very absurd).

The USA and the EU engaged in trillions of Quantitative Easing.


More plutocracy than ever, as I had anticipated, more than 6 years ago by calling TARP (the lending of nearly a trillion dollars to the largest banks), Transfer of Assets to the Richest People

Increasing the money supply to banks is not increasing the money supply to people. Especially with the derivative trading being 12 times world’s GDP. So no wonder QE does not work: most of the financial activity is not about financing the real economy, but the big banks casino.

Under the last part of his reign, when Clinton demolished the Banking Act of 1933, FDR’s great work, financial derivatives trading was only 80 trillion dollars. Now it’s 800 trillions. A weakening of rules in effect only weeks ago, written by Citigroup, is now the new law…

People need money and they need work. The government is the lender, and employer, of last resort. When things go back to normal, the government can withdraw. Cyrus the great, founder of Achaemenid Persia used the government, and then, wild private capitalism: there is a time for either. Now we are at a time where governments need to provide with an economy for common people, not just an economy for fat cats.

Absent the will to do this renewal of economic activity in a civil way, the military option will show its ugly face… Yes, could start in Russia… Wait…

Here is Krugman:

“Money isn’t everything… Well, the money supply isn’t everything, either.

… I argued that it’s hard to see why anyone believes that money supply increases will do the trick after the past six years. … maybe describing my own conversion to monetary pessimism may help clarify what’s happening now. 

So, back in 1998 I was looking at Japan’s troubles, and — like Evans-Pritchard and many others now — believed that the Bank of Japan could surely end deflation if it really tried… doubling the monetary base will always raise prices, even if you’re at the zero lower bound… To my own surprise… when you’re at the zero lower bound, the size of the current money supply does not matter at all. You might think that it’s a fundamental insight that doubling the money supply will eventually double the price level, but … short-term interest rate is currently zero, changing the current money supply without … raising expected inflation — matters not at all.

And as a result, monetary traction is far from obvious. Central banks can change the monetary base now, but can they commit not to undo the expansion in the future, when inflation rises? …

But, asks Evans-Pritchard, what if the central bank simply gives households money? Well, that is, as he notes, really fiscal policy — it’s a massive transfer program rather than a conventional monetary operation… it would have no effect … households would know that future taxes will have to rise to pay for today’s gift, and save all of it.

[How silly and wealthy can Krugman be? Really poor people have no money… And very good things to spend it on, should they have any. All poor people know that, but Krugman never interviewed any of them, apparently. If the government gave the poor money, they would spend it right away. It’s actually a well-known fact that all the money given to the poor is immediately recycled in the economy!]

More Krugman:

“… Central banks aren’t in the business of just giving money away; what they do is always some kind of asset swap, in which they buy assets or make loans which then become assets. I’m pretty sure that neither the Fed nor the Bank of England has the legal right to just give money away as opposed to lending it out; if I’m wrong about this, put me down for $10 million, OK?”

Still, isn’t this just theory? Well, no. Huge increases in the monetary base in previous liquidity trap episodes had no visible effect.

And now we have the post-2008 experience, and it’s certainly not an example of central banks easily dealing with economic downdrafts.

Just to be clear, I have supported QE in both Britain and the US, on the grounds that (a) central bank purchases of longer-term and riskier assets may help and can’t hurt, and (b) given political paralysis in the US and the dominance of bad macroeconomic thinking in the UK, it’s all we’ve got. But the view I used to hold before 1998 — that central banks can always cause inflation if they really want to — just doesn’t hold up, theoretically or empirically.”

So Krugman supported Quantitative Easing for the same reason as a drunk searches for his keys below a lamp post: it’s the only thing he sees. How smart is this?

As I said, the state will have to be the employer of last resort, it has always been, and always will be. The free market is great, but it’s not really free; the state pays for it.

Patrice Ayme’


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