"Back to the Future"
by Bill Bonner
YOUGHAL, IRELAND – "We’re going to stick with Paul Krugman today. Not because his thoughts are especially original or provocative, but because they are not. They reflect elite, mainstream thinking. They tell us what lies ahead. As we showed you last week, the New York Times’ go-to economist’s predictions are almost always amiss. So, if we want a contrarian indicator, who better than the Great Man himself? But Krugman’s pensée is more important than just a shrewd investor’s contrary signal. He is the elite of the elite… It is to him that Washington’s apparatchiks, movers and shakers, politicians, and kingmakers look for guidance. He points to the mushroom. The elites eat it. And Western Civilization turns pale.
Krugman’s Predictions: Just to recap… Mr. Krugman’s solution to the dot-com bubble blow-up was to create another bubble, this time in housing. When that blew up, he urged the Obama team to pump up another one. And when Donald J. Trump was elected, he completely missed the boat. He thought Mr. Trump was going to end the Bubble Epoch. Instead, Mr. Trump fell right into line with the other bubbleheads… and gave us the biggest deficits ever.
Knowing what Mr. Krugman thinks now could be invaluable. It could inform our investment decisions… as long as we remember to do the opposite of what his views imply. But it also helps us understand what is ahead for Western Civilization. Not that Mr. Krugman himself is particularly influential outside of the U.S. But his claptrap ideas are widely consumed by the elites of Europe and other westernized economies. All dine on the same funghi velenosi. All share the same hallucinations. So, we return to the sage’s New York Times column… and see the future.
The Fed has been arguing that recent price rises are similarly transitory. True, they’re not coming from food and energy so much as from pandemic-related disruptions that caused surging prices of used cars, lumber and other nontraditional sources of inflation. But the Fed’s view has been that this episode, like the inflation blip of 2010-11, will soon be over. And it’s now looking as if the Fed was right. There you have it. Inflation is so… “last week,” says Krugman. Which makes us think it must be next week. And the week after.
Statistical Hocus Pocus: In fact, it is already here. And the only reason it is not more obvious is that the feds fudge the figures. It has never been politically attractive to report high inflation numbers. And it became fiscally unattractive, too, after Congress added COLA (Cost of Living Adjustments) to Social Security payments in 1973. Then, the feds had a very strong incentive to redefine the Consumer Price Index (CPI), so as to disguise the real effect of their inflation tax and neuter the COLA increases. This they did in two moves – one in 1987 and another in 1998.
As our friend David Stockman points out, the effect was to turn the inflation index (a measure of rising prices) into a cost-of-living index (a measure of how much it costs to make substitutions and quality adjustments more or less as the feds choose). If strawberries are especially expensive, for example, they’ll take them out of the index and replace them with raspberries. Or if they think the strawberries have been genetically modified to make them better… they can pretend they are less expensive. These adjustments make some logical sense. But they also open the door to all sorts of statistical hocus pocus.
As we’ve shown several times, a new Ford F-150 is much more expensive than a 1971 version – both in terms of dollars… and the time it takes to earn them. But the new truck is much better, say the statisticians.
Back to the Seventies: We’re not here today to quibble with the statistics. We’re just going to point out that inflation is already here… and Krugman is probably wrong about where it is going. In the first place, if you calculated inflation the way they did before the Boskin Commission reworked the formula in 1996, the CPI would be running around 9%. Or, if it were the 1970s, and you figured the CPI as they did back then, today’s raw numbers would give you a CPI between 12% and 13% – almost exactly what it was in the late 1970s.
But Krugman is as calm as a cucumber. He maintains that the Federal Reserve is on the job. And even if inflation were to go back to 1970s levels (he is unaware that it is already there)… the Fed would “step on the brakes if the economy really is exceeding the speed limit.” By its recent “hawkish” statements, says Krugman, “the Fed has largely undercut whatever case there was for worrying about a return to the 1970s.”
Up, Up, and Away: He is wrong about everything. The Fed has been inflating heavily for the last 10 years. And it uses the new cash it prints to buy Wall Street assets. The stock market has risen more than six times from its 2009 bottom. The top 1% of Americans have increased their wealth by $25 trillion. Just yesterday, the S&P 500 hit yet another new high… its 32nd record close of 2021. And Facebook (FB) shares have gone up more than 60% in the last 12 months, yesterday reaching over $1 trillion in market capitalization for the first time.
While Fed governors suffered occasional bouts of sanity during this period, never once did they seriously “tap the brakes.” And now, inflation is showing up in consumer prices. That’s not likely to stop either, since more and more of the “stimulus” money is going, via federal deficits, into the Main Street economy as well as Wall Street.
Lessons Learned: But what do we learn from Krugman? He tells us not to worry about inflation – so, it is inflation we should be worried about. He tells us central bankers will “step on the brakes” when inflation begins to go over the “speed limit.” Ergo, central bankers will not put on the brakes at all; they will push down on the accelerator. He tells us not to worry about a replay of the 1970s. But wait… In the 1970s, U.S. national debt stayed under $1 trillion. Now, it is over $28 trillion. Total U.S. debt – households, businesses, and the government – was still under $2 trillion in 1971. Now, it’s over $85 trillion.
And in the 1970s, central bankers – as well as leading economists – still feared inflation and believed they had a duty to keep it under control. Now, they are under Krugman’s spell. Inflation is no problem, they believe. And more government spending is the cure for every problem – from global warming to inequality. So… put Super Fly back on the big screen… and get out the beige leather couches, leisure suits, and disco music. The badass 1970s are ba-a-a-ck! Ba-a-ader than ever. More to come…"
