Monday, February 18, 2013

Paul Versus Joe




Paul Krugman (PK) and Joe Scarborough (JS) have been having an on-air feud of late. The issue is debt, spending and inflation . The two have been going at each other on their blogs: Here, Here, Here and Here.

The bottom line is that PK thinks debt is no problem at all; nothing should be done with spending, and absolutely nothing should be done with America’s entitlement programs. JS, sees it differently. He points to the country’s $60T of unfunded liabilities, another decade of trillion dollar deficits and the very real chance that high inflation is the outcome.


Atlantic magazine (Egad!) has jumped into this fray with both feet (Link). The folks at Atlantic love PK, and they too see no problems at all. The Mag did its best to take JS down with his silly concerns.




In defense of its position, The Atlantic offered up the following chart on the 10-year TIPS implied forecast for inflation:




The Atlantic had this to say about the market’s inflation outlook:


Core PCE inflation averaged 1.9 percent over this period, while 10-year breakevens, which tell us market expectations of future inflation, averaged 2.18 percent.


Yes, inflation expectations averaged 2.18%, but the only relevant question is – What are those expectations today?” The TIPS spread is now pricing in 2.56% inflation (15% above the ten-year average) The folks at Atlantic looked at the TIPS info and concluded:


If markets feared future inflation in the face of mounting debt, they sure had a funny way of showing it.


I look at the TIPS chart and come away with a different take than the Atlantic. What I see isn’t so “funny“. We are approaching the highs for the past decade. The past few years have seen a steady increase in expectations. If you drew a trend line for the past two years, it would point you to an upside breakout for inflation expectations.


What is the main factor pushing up inflation expectations? It’s the Fed, of course. The stated policy of Bernanke to increase inflation. The Fed is currently at Full Speed with money creation. There is no end in sight for QE and ZIRP. It’s not just the US that is pushing the inflation button. Japan and England have an oar in this water. China is on a tear. I think the EU is not far away from its own QE experiment. Yet the Atlantic concludes the opposite.


The Atlantic should know that it’s foolish to Fight the Fed. The Fed is going to win; higher inflation is a sure thing. The TIPS market is the best indication of this. I think it’s the Atlantic that could use a lesson on markets and the economy.






  1. dang BK,with all this money printing i expect stocks to rise but,why has gold gone down

    • Gold is a safe haven trade. It always has been.

      What are other traditional safe haven places to go? The Swiss Franc and the Yen.

      Both of those safe haven trades are busted today. Gold is no different.

      Someday the safe haven trade will back on again. And when that happens where will the safe haven money go?

      The Yen? That’s not safe anymore. It won’t be safe for years to come. The CHF is no better. The SNB says it can’t appreciate, therefore it has no safe haven status.

      So I think gold will shine again. Give a it few months for this to sort itself out.

      • Good luck with your commodity investment strategy. Gold like oil, diamonds, and corn, they have no real value other than what the market says they have. And that is based on demand.

        So as these old gold mines reopen, expect gold to plummet. As this fracking spreads around the world, oil will be cheap. Diamonds, they will stay expensive (cartel control). And corn, well government policy and subsides have made it profit worthy.

        So stop worrying about fiat money, and invest in some AR15 stocks before the peak. And Google is always a good investment.

        • Rich,
          Please correct me where I am wrong….
          Nothing is used as it was initially conceived. The concept of money was to be used as a means to help assist in barter, not as wealth. Let the wealthy build a castle and put people back to work. Let them accumulate gold among themselves and leave the rest of us alone. Let them build companies for us to work and produce goods more efficiently and compete among themselves.
          SS was designed to help that poor man or woman to survive after they had produced a life time of labor, to help that woman with 6 kids and is not able to provide for her family.
          True, the world has changed and many cannot find work after 55 but we are producing much more efficiently and the world should be able to provide.and not strip through inflation. We should be producing better quality goods and not something that is designed to breakdown after 2 years. I could go on but you get my point.

          • Who told you that money was invented to facilitate barter? There is no historical evidence for that whatsoever. Quite the contrary in fact. Credit predates money. Money was only needed when you got rid of existing credit arrangements.

            Mr. Krastings. What would “funding” social security mean? How does putting some paper money aside now, help anyone retire in 30 years? What is needed is productive capacity. Juggling values of paper does very little to change the future productive capacity. It does however assist in maintaining the current value of those pieces of paper.

            • David & Harry,
              You both make good points.

              My congressman has a business (an accounting firm), so anyway I called him and asked him. If he gets his taxes cut by 10%, how many more people will he hire. Or will he need new contracts before he brings in more folks. (no he would not reply).

              This enabling the job creator (supply side economics) is flawed in a depressed economy. Demand has to be created then businesses will hire for these new contracts. Businesses have no new contracts, even Reagan (who tripled the national debt) knew government spending was how you got out of a recession.

              The GOP is trying to protect the value of existing money for folks that still have money. If they would just open up investment in infrastructure, those job creators would have increased business, more employees, and tax revenues would rise. Then this conversation about gold, stocks, deficits and debt would go away as inflation of GDP would reduce the GDP/debt ratio. That is my logic.

  2. doesn’t going to the ZLB provide quite a bit of yield curve pressure? I would laugh and then cry and then vomit if I saw short rates go from 0.2% to 0.5% within a short time. The Bernank cannot raise short rates ever again, and it doesn’t seem like that occurred to him / the Fed until they recently changed the federal funds rate language to start targeting unemployment because they know we’ll get back to 6.5% unemployment when elephants learn how to fly.

  3. What I’ve never understood about the Fed is that part of their so-called “dual mandate” is stable prices. Doesn’t the “stated policy of Bernanke to increase inflation” directly contradict this part of their mandate? Since the Fed came into existence there has always been “inflation”, so why don’t they drop the charade and remove “stable prices” from their mandate?

    Anyway, Obama’s idea to raise the minimum wage is a sure fire way of increasing inflation.

  4. Since too much debt is the burden and the problem, inflation is the solution we get to root for. Wiemar Germany had WWI reparation payments to drive its currency into oblivion. Our excuse will be unfunded entitlement liabilities.

    • Entitlement liabilities are consuming way too much of our taxes in my opinion. We have to address the issue…. how much do we want the government to provide and what are we willing to pay for this.

    • I can see it now, Jack Lew will blame a youtube video for our currency devaluation and the masses will nod in agreement

    • It wasn’t just reparations that was the problem. In 1923, France and Belgium occupied the Ruhr to enforce the payment of reparations. Germany promoted a sit-down strike and continued to pay the workers. It was in this period that inflation took off.

      • Agree, there were many contributing factors but the underlying driver was a nation trying to meet mathematically impossible financial obligations. This led to widespread corruption and a general disregard for anything outside of an individuals own welfare. Virtually anyone who could grab from state coffers did so. The modern situation of enormous pension, medical and social security promises offers a similar incentive for currency debasement. While it seems to be working at the moment, the possibility that debasement can begin to work against itself and create a similar inflationary cycle certainly exists. The typical outcome is a very stressed population and economic system.

  5. 1.9% inflation per year over the last 10 years means there was a 20% inflation for the same time period? What percentage of the population’s income went up by 20% over the last decade?

  6. Bruce, it is not exclusively the inflation expectation (and I agree it is going up to a worrisome level), it is the systemic event risk, which Krugman, et al do NOT understand or badly underestimate. The underlying forces for event risk on interest rates, GDP and debt growth (due to passing the point of being solved by reasonable tax increases and reasonable expenditure decreases) are now such that a series of shocks from unexpected events such as nuclear attacks (whether rogue or by the countries), earthquakes, etc. WILL take down the system because it is so out of balance and can not be fixed conventionally. Interest rates can and do move due to issues such as investor confidence and not soley due to inflation expectations (although large negative events can often lead to inflation over time for economic reasons due to the need to print more money), so this time it is much more likley that the ten year rate will jump much more quickly due to fear from events than inflation expectation in the near term. When the 10 and 30 year jump 300-400 basis points in a short period, the damage will be catastrophic. The negative feedback loop from housing and the stock market will be one for the ages.

    • AJ Mullen – Thanks for the incisive post. The debt increase will reduce the buffer the government and the US has to resist unexpected shocks, My only input would be to emphasize unexpected financial and business events over the geopolitical risks you list.


    • I disagree.

      I think the US will print the balance of any short fall. This will only create aggregate inflation if there are no spare resources in the US. It will create massive relative price shifts. Indeed I predict that the cost of domestic parmesan will fall sharply compared to imported parmesan, but its not such a big deal is it?

      There is a retirement problem but it is not that debt wont get paid. It is that the cost of the lifestyle people have come to expect will become prohibitive for all but the super rich.

      The holders of US debt are welcome to sell it at any point. I dont know what you expect them to buy instead but so far they clearly havent found any good alternatives. There is a reason for this. Future consumption is a very difficult thing to guarantee. When you buy an equity you have no idea what future consumption that will buy you. When you buy a bond you have a slight amount more certainty but prices change and relative prices can change too. TIPs are better but hardly perfect. Social Security? You see my point?

      We buy US bonds cos we are aging and we would like to retire. If we can buy US Treasuries would would you suggest we buy instead? I have already come to expect my returns will be negative. My question is how to keep the negative return as small as possible. So the bottom line is please tell me how I can transmit some of my current consumption into the future in a safe fashion?

  7. AJ Mullen – Thanks for the great post. The increase in debt will reduce the buffer the federal government and the US has to overcome unexpected future shocks.

  8. Harry:
    Buying Treasuries is certainly one way to go.
    Doing so puts the transaction in the “debt held by the public” category, which is an explicit liability, actually loited on the balance sheet.
    Contrast that with Treasuries “bought” with the Social Security trust fund’s “reserves.” That is intragovernmental debt, an implicit, not explicit liability.
    And why should it be explicit? It was bought with fake money, while your Treasury was bought with real money.
    As another alternative, consider fixed-indexed annuities.
    They garner a percentage of the growrth in various indexes, such as the S&P. If the index goes down from year to year, you lose nothing, and start from a lower base – with a better chance of growth the following year.
    While the S&P index has grown very little in the last 10 years, one of these annuities would have returned about 6% a year.
    Don Levit

    • Don,

      Thank you for engaging. I would argue that the problem with future consumption is that none of us can guarantee it. After all, in most cases the iten that you wish to consume has not yet been produced. So when you buy a UST or some common stock or even an annuity, you are buying a contract. A contract is a legally enforceable promise, but in the past we have seen many occasions where legally enforceable contracts were unenforceable. If you bought some Enron stock at some point you will be aware of this. Or if you bought some Russian government defaulted debt you would already be familiar with this problem.

      I could try and guarantee my future consumption by buying stocks. If I do that then I rely on the company being around and able to pay. But if I suspect that there is going to be a problem of aggregate production being insufficient to meet the total retirement consumption needs of the population, then I have a dilemma. The dilemma is that I know that someone is not gonna get paid. I just dont know who. Technically the company might be able to pay me and the US government looks like it will not be able to. But the US government can print money, and they can also change the rules. They have access to military force. So if I really thought there was a retirement problem for the country as a whole, I might worry equally about about the public sector as the private sector.

  9. The article is very interesting and useful for me.Thanks for sharing the post.

  10. Thanks!The blog article very useful to me

  11. A single point I just need to say is your Web site is so excellent useful for us.