Paul Krugman doubts Inflation

Paul Krugman, who constantly congratulates himself on predicted the housing collapse, is putting his reputation on the line in his belief that the U.S. is living out the Keynesian model.

He writes:

First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

Hmmm...deflation?

Oil has gone from $32/barrel to $66/barrel (WTI morning of 5/29). The dollar keeps dropping. The 5yr TIPS-Treasury spread (a market indicator of inflation) has risen from -0.7% to +1.4% over the last few months and its growth shows no signs of abating.

Then, in his standard style he throws up a straw man:

But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

Find me one libertarian economist who had no problem with Bush's profligate spending. Right now, it's the libertarians making the most noise about inflation, not the middling "conservatives" like Greg Mankiw who is all for massive money printing.

Someone is going to be gloating over the next few months, we'll just have to wait and see.

Inflation in the U.K.

From what I have read, the U.K. has been as profligate with their money supply as the U.S. In this recent article from The Australian, one of their Bank of England Governors (Mervyn King)stated in reference to the money supply:

"There is no limit to how much we can do, which is why, in the end, this policy will work"

They are now considering to begin "printing money".

Then this article at Bloomberg today:

Consumer prices climbed 3.2 percent from a year earlier, the Office for National Statistics said today in London. The median forecast of 28 economists was for 2.6 percent. Bank of England Governor Mervyn King wrote in a letter to the Treasury explaining the increase from the 3 percent limit that a “sharp decline” in the inflation rate is likely to resume.
...
“It’s a big surprise,” said Stewart Robertson, an economist at Aviva Investors in London

How shocking, Mr. King, that you hold no upper bound on the money supply, yet your country experiences surprisingly higher inflation.

The article goes on to blame the drop in the value of the Pound as a reason for price hikes by foreign companies like Ford Motors. You print money and your currency loses value? What? That can't be right.

Federal Reserve Cranks It Up a Notch

The Federal Reserve announced yesterday that it was going to buy some assets worth north of $1 Trillion yesterday to pump money into the ailing economy. It will have a temporary expansive effect on the economy, but it also increases the chances of runaway inflation.

The dollar tanked yesterday and gold soared. Oil took a jump as well. These aren't definitive signs of impending inflation, but they will put upward pressure on prices. Everyone should carve out time to think about how to position themselves financially for the possibility that inflation may become a serious problem.

Also note that the metric I often use to look at inflation expectations is the spread between the TIPS and Treasury yields. If you happen to have bookmarked it, you should pay much less attention to it in the near future as the Fed is going to be directly manipulating those rates through Treasury purchases. For now, it is a bogus metric.

U.S. Govt Crowding Out International Borrowing

A while back I brought up the idea that the U.S. government was borrowing so much money that some other governments might begin to have trouble borrowing for their own purposes. The world has a finite amount of cheap capital, and with the amount of money that our government and several others are trying to borrowing to prop up financial firms and wager on Keynesian stimulus that the supply of those funds might dry up.

After a conversation with Robert Wenzel of the blog EconomicPolicyJournal, I feel more confident that this may occur. I have also predicted inflation, which I also expect to see overseas first.

Then, I ran across this interesting chart (HT: Objectif Liberte)

Original image source here, and data here.

What we see here is that the required rate of interest for these EU countries compared to Germany has been skyrocketing. In late 2007, there is little difference between the worst countries and Germany (with the lowest cost of capital). What this implies is that either these countries are all becoming worse credit risks compared to Germany or that the pool of resources available to them is dwindling.

Who Didn't See Inflation Coming?

Clearly Martin should have been reading my blog.

From Yahoo News and the AP:

Wholesale inflation takes biggest jump in 6 months

Martin Crutsinger, AP Economics Writer
Thursday February 19, 2009, 8:53 am EST

WASHINGTON (AP) -- Inflation at the wholesale level surged unexpectedly in January, reflecting sharply higher prices for gasoline and other energy products.