I posted Krugman's column from Friday's NYT on my FB page. The column, called The Market Speaks was really insightful and explained some of the paradoxes about how the "positive" things about the stock market (record highs!) and bond markets (record low interest rates!) in reality demonstrate the weaknesses in the economy. This quote summarizes things pretty well:
I wish I could say that it’s all good news, but it isn’t. Those low interest rates are the sign of an economy that is nowhere near to a full recovery from the financial crisis of 2008, while the high level of stock prices shouldn’t be cause for celebration; it is, in large part, a reflection of the growing disconnect between productivity and wages.
He also made the point that all the fears from the right and the center (eg, Simpson Bowles) about President Obama's policies crushing capitalism and looming hyper-inflation have been entirely unfounded. The "bond vigilantes" are nowhere to be found.
An old dear friend of mine who is old school Republican -- economic conservative, socially moderate to liberal -- was apoplectic. His response is below and I have responded to the points he made. I purposely avoided using Krugman columns and posts because I wanted to show that the concepts from Krugman's column are pretty mainstream, not the ravings of a solitary lunatic. I hope you enjoy the dialog.
My friend starts out with this "Fed printing money" anxiety:
This guy is so wrong on so many points I really don't have the time to respond to all of them. But please think this over people - perhaps the stock market is going up because the FED is printing and pumping $85 Billion into the economy every month. That's just paper people. Do the math - more funny money in the economy makes everything more expensive because you need to purchase the stock, bond, bread with more paper
A quick google search led me to
this fundamental article that recites the basic principle that increases to money supply will lead to inflation EXCEPT in the case of a recession where suppressed demand limits velocity and simply creates liquidity. No inflation.
In a recession, there may be much spare capacity in the economy. Therefore, an increase in the money supply, merely helps to get unemployed resources used in the general economy. Therefore, in the case of a recession, increased money supply is unlikely to cause inflation.
In a liquidity trap, interest rates fall to zero but this doesn’t prevent people saving. In this situation there is a fall in the velocity of circulation and this can cause deflation. In this situation, increasing the money supply will not necessarily cause inflation.
The charts accompanying the piece show the dramatic increase in money supply and the fact that inflation has been at 2% for the last few years.
My friend's next point addresses the fact that inflation has caused the rise in the Dow.
Yes the Dow is back to where it was seven years ago but not in real terms since the value of your dollar has declined not because everything is now hunky dorry.
He's right. Adjusting for inflation, the Dow has not yet returned to its 2007 level.
Ezra Klein noted this a couple days ago. Ajdjusting for inflation, Dow would have to hit 15,731, about 1600 points more than the 14,164 level it hit this week, 10% over 5-6 years, or just under 2% per annum. Don't believe me, look at the
Bureau of Labor Statistics for the period
My friend's last point correctly observes that the market is up but job creation as not increased accordingly.
The companies that are making a profit, and there are not that many of them, no matter what he says, are making it because they have down sized (massive layoffs) and / or out sourced jobs over seas. That doesn't make them evil because they have an obligation to their shareholders (stock market) try to make a profit.
Again, he's right; corporations don't have an obligation to create jobs, only profits. Krugman sort of agrees, but from a different perspective:
It’s also true, however, that while the economy remains deeply depressed, corporate profits have staged a strong recovery. And that’s a bad thing! Not only are workers failing to share in the fruits of their own rising productivity, hundreds of billions of dollars are piling up in the treasuries of corporations that, facing weak consumer demand, see no reason to put those dollars to work.
No less an authority than
the Wall Street Journal recognized the well documented phenomenon that employees have not been benefiting from productivity gains for some time now. Thus the stock market is up but it's not benefitting broad swaths of the economy. Krugman's point.
In researching this I ran across two more pieces that were pretty informative on these topics. First, Bloomberg documented Morgan Stanley's apology for thinking in 2009-2010 that interest rates were going to rise. Three years later, they still haven't risen. Ten year treasuries are currently at 2.06%; 7 years are at 1.43, a half point less than inflation. You are paying the federal government to hold your money. But Washington is freaked about the debt and the deficit.
Finally, we are in no danger of becoming Greece, Greece, I tell you. The reason is that we can issue debt in our own currency, like England can. Consequently our cost of borrowing is low, notwithstanding our debt and deficit, because we can control our currency. Same with England and their economy is really crappy now. The Atlantic published a great article last week explaining this in detail.
Thank you for your patience if you read this all the way through. I did this to put this analysis in one place I can refer to in future such arguments as much as I did this to answer my friend. Feel free to use this post in a similar fashion, if you're so inclined.