Stagflation Keeps Making A Fool Out Of Paul Krugman

How many times can an Ivy League economist be wrong before they have to turn in their diploma and their Nobel Prize and move on to a job better suited for them, such as food service management?  Apparently in the world of establishment economics the best path to success is to fail upwards; Paul Krugman is the proof.

Outside of financial circles the majority of people don’t know or care who Krugman is, but it’s a mistake to dismiss his influence within the mainstream media and politics.  You will hear many of his arguments repeated by human parrots when you least expect it.  His faulty narratives and illogical conclusions tend to spread into regular dinner table conversation in the weirdest ways.

His best known terrible prediction is perhaps his internet prophecy.  In 1998 he predicted that the growth of the web would ‘slow drastically’ and would have little overall meaning for the global economy, comparing the internet to the fax machine in terms of relevance.  This might seem like a harmless fail today, but the problem is not the prediction, it’s the fact that Krugman consistently proves that he is arrogant enough to venture wild analysis on subjects he has zero understanding of.  This is a characteristic that has followed him around for most of his career. 

Another habit of Paul Krugman is his propensity to flip-flop on every economic issue so that when the consequences of events become readily clear he then searches through his backlog of hundreds of contradictory editorials and contradictory comments to find the one prediction that fits the bill; he then proclaims himself the great prognosticator of crisis or recovery depending on whatever happens first.  

His very limited mentions of the possibility of a “housing bubble” in articles published in 2006/2007 conflicted greatly with his unicorn optimism on stocks going to the moon.  When the housing bubble imploded, he declared that he predicted the whole thing.  In truth, his analysis was a joke while others like Ron Paul and Peter Schiff had outlined in great detail exactly what would happen to the housing market years in advance.  All Krugman did was vaguely predict a “slowdown” at some point; he never predicted the epic worldwide credit disaster that actually occurred.

Krugman went on to champion an endless array of bailouts, stimulus packages, QE and near zero interest rates in response to the credit crisis.  Keynesians only have one answer to every economic problem, which is government spending and central bank fiat printing ad nauseum.  Krugman even suggested that the initial bailouts of 2008/2009 were “too small” and argued in favor of trillions more.  He was not aware at the time, but a GOA audit of the early bailouts, pursued only because of the relentless efforts of Ron Paul, would reveal that the Federal Reserve had actually created over $16 trillion from thin air.

It is actually the Keynesian arrogance (or perhaps malice?) of central bankers and economists like Krugman that led directly to the stagflationary crisis we are witnessing right now.  While supply chain issues certainly abound, the US was suffering from rising prices well before the covid pandemic or the war in Ukraine and resulting sanctions on Russia.  

In fact, these events act more like a fog or cover for the REAL cause of inflation, which is a decade of fiat printing by central banks in classic Keynesian fashion.  The $6 trillion-plus in covid stimulus in 2020 was nothing more than the straw that broke the camel’s back.  

Krugman is partly culpable.  This might be the reason why he refused to acknowledge the stagflation threat for years despite mounting evidence, calling price inflation “transitory” until the end of 2021.  Then he flip-flopped as usual and noted the “possibility” that prices might stay high and that he might be wrong.  This was only after ridiculing many analysts in the alternative economic sphere for sticking by their inflation predictions.  

Inflation/stagflation often takes time to circulate through an economy and register in a way that noticeably affects the public.  In the 1970s, the process took around 10 years to culminate.  It grew exponentially until the early 1980s when Paul Volcker finally hiked interest rates to around 20%, crushing many businesses in the process.  Because America has enjoyed the rise of the dollar as the world reserve currency since that time, trillions in fiat stimulus was not an immediate threat because those dollars were sure to circulate into the coffers of numerous foreign banks and stay overseas.  Now, the dollar’s reserve status is in decline, more and more greenbacks are staying within circulation in the US, there are more and more dollar’s chasing less and less goods and the party is finally over.  

A week ago Krugman once again put his foot in his mouth.  After admitting that he was wrong on stagflation, he flip-flopped, stating that the ‘stagflation narrative is collapsing’ and dismissed concerns about higher prices.  And, as always he attacked other economists, saying they were just ‘propping up’ a threat that’s in reversal.

Krugman’s claim was that the Fed’s 75 bps rate hike along with falling stocks was an indicator that inflation was over.  He refused to even entertain the idea of stagflation, which is a combination of rising prices and declines in other sectors of the economy including GDP and employment.  Krugman’s flip-flop was built on a naive understanding of inflation/stagflation and what it entails.  For him, plunging stocks mean deflation, and being a Keynesian, deflation cannot be tolerated.  

Then, the CPI print came in on Wednesday and made Krugman look rather foolish, with official inflation numbers hitting 9.1% and new 40 year highs, well above market expectations (and Krugman’s expectations).  Krugman refused to admit defeat, saying that 9.1% inflation was not much to be worried about.

His argument?  That the CPI print is “outdated” because of recent declines in stocks and gasoline.  This is the same idiotic narrative regurgitated by Joe Biden and the White House recently.  If CPI had come in lower than last month, would Krugman and Biden be shaking their heads and telling the public that the numbers are “outdated” and not a reflection of the real situation?  No.  They would be crowing on the mountain tops and demanding praise.  They would be ignoring the fleeting circumstances of stocks or gas prices instead of hyperfocusing on them.

But what is reality?

CPI is actually a rigged statistic designed to downplay real inflation rates.  If we were to calculate inflation according to the methods used by the government in the 1970s and 1980s the actual inflation rate would be closer to 17%.  But even if we ignore true inflation, a CPI print of 9.1% is not to be taken lightly.

Stagflation is a fact according to the spread between rising prices and falling GDP as well as frozen wages.  The only technical factor that is missing is growing unemployment, but that is a situation developing now as job growth slows and more companies announce impending layoffs.  

Stock markets have little to no bearing on stagflation status (sorry Paul).  Stocks are a TRAILING indicator of economic instabilities that have long been in play, not a leading indicator of what is about to happen in the future.  As for gasoline prices falling, they have barely dipped.  And, this minor dip was probably helped along by Biden once again dumping millions of barrels of oil onto the market from the US strategic reserves.  This is not enough to dismiss stagflation, not by any means.  

For Krugman, the bigger picture doesn’t exist.  He is only interested in the data of the moment and being right no matter what.  If even one indicator supports his biased position, he will focus on it and ignore hundreds of other indicators that contradict his position.  When his position becomes obviously untenable he shifts stance and acts as if he saw the danger coming all along.  Again, how many times can an economist be wrong or flip-flop on his claims before he is no longer relevant?  It would seem that Krugman’s novelty has worn off and now it’s time for him to hang up his hat.