Unfortunately, no. Not Krugman. In his latest (“The Worst Economist in the World”), which I read thinking that he finally admitted to it, he says:
So, how hard is this? Higher commodity prices will hurt the recovery only if they rise in real terms. And they’ll only rise in real terms if QE succeeds in increasing real demand. And this will happen only if, yes, QE2 is successful in helping economic recovery.
Let examine Krugman’s claims individually.
1. Higher commodity prices will hurt the recovery only if they rise in real terms. Okay, I will give him this one.
2. And they’ll only rise in real terms if QE succeeds in increasing real demand. False. Real prices (price change less inflation) of commodities have increased since QE2 was first rumored, there is no question about this. Has demand increased? Demand for hard assets as a store of value has increased. The Fed admits, this is what it is trying to do. But has real demand increased? Judging by today’s durable good orders it does not appear QE is increasing real demand. Total orders are still 20% below the December 2007 peak and the year over year gains are leveling off.
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3. QE2 is successful in helping economic recovery. There is still no evidence of this. Have a look at Japan for a historical example. In fact, just today, Bill Gross who, in-spite of his seemingly cozy relationship to the Fed, said:
We are, as even some Fed Governors now publicly admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole.
There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not.
Krugman has constructed a circular argument whereby higher real commodity prices can only be due to increased real demand and therefore an improving economy. It appears to me he is conveniently forgetting that the Fed has admitted to encouraging speculation in assets with the hopes that the wealth affect improves the real economy. QE2 is not spurring an improvement in the real economy only rising valuations of financial assets. These higher asset prices are leading to higher inputs costs which cannot be passed along to the consumer; as we examined Tuesday.
Disclosure: No positions