The Gold Standard  

Extra serving: the battle continues in Op-Eds

 It may be a digression but Gold Standard (TGS) must record here the profound distaste he felt when he first read the ‘triumphalist’ Chimerica piece by NF and a co-author. It appeared to have been written in the early part of 2007 but appeared in a journal in December 2007. It turned out to be spectacularly wrong.

 He did an exercise in revisionism (only partially) in September 2008 and earlier this year. See here and here. Note that he takes a swipe at other ‘panglossian economists’ who thought that Chimerica would endure for ever. But, he pointedly excludes himself. If you read his original piece, you would think that he was being less than scrupulous in excluding himself from the ‘Chimerica’ cheerleading gang.

 Unfortunately, the battle did not end there, as we noted earlier. Moreover, it has continued in their respective Op-Eds.

 Paul Krugman wrote in his Op-Ed on May 28, 2009 that the only thing we have to fear is inflation fear itself.

 He seemingly makes a persuasive point here:

Is there a risk that we’ll have inflation after the economy recovers? That’s the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt — that is, drive up prices so that the real value of the debt is reduced.

Such things have happened in the past. For example, France ultimately inflated away much of the debt it incurred while fighting World War I.

But more modern examples are lacking. Over the past two decades, Belgium, Canada and, of course, Japan have all gone through episodes when debt exceeded 100 percent of G.D.P. And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P. In none of these cases did governments resort to inflation to resolve their problems.

What PK conveniently fails to mention is that in all these ‘modern’ examples including that of his own country, the overall national debt (public and private sector) were far more modest than what the US boasts of now. Every one splurged on debt. That is the difference.

He says that it was hard to escape the conclusion that inflation fear-mongering was partly political, although he waves a white flag (sort of) towards fellow economists who might disagree with him.

Inquiring minds want to know if he thinks that Federal Reserve Chairman and members of the FOMC were indulging in inflation fear-mongering.

Both the OECD and the Michigan consumer surveys in the US point to rising inflation expectations among the US public. That started to happen well before ‘inflation fear-mongering from politicians’ and pundits.

He should also note that crude oil had its best month in May and retail gasoline price inflation would now be turning significantly positive on a YoY basis. The base effect of falling gasoline price is now over. Retail gasoline has come up more than 70% from its recent floor.

 Not to be cowed down, NF has fired his salvo again in today’s FT. Clearly, his ego has been piqued. The first part of the Op-Ed is consumed by his pique. The second half of his post is more substantive. The key sentence is this:

The policy mistake has already been made – to adopt the fiscal policy of a world war to fight a recession.

That is indeed worth debating. In fact, I would debate both the fiscal and the monetary policy responses. In the end, we may come away with the conclusion that it was all worth it. But, no conscious debate has taken place and no costs have been identified and chalked up against these efforts. It is inconceivable that there won’t be costs. It is important to know what they are and on whom would they be apportioned globally.