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Paul Krugman’s Crack Fix for the Economy

Posted on November 9 2010 2:00 pm
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More crack cocaine, anyone? A narcotic as potentially addictive as crack is essentially what the Federal Reserve is administering to our economy, with its recent decision to infuse$600 billion more of new printed money into our system.

The Federal Reserve is monetizing the federal debt – printing more money with which to “cover” it.  Never mind that this strategy has led to hyper-inflation and the devaluation of currency every time it has been tried in world history.

Yet left-wing economists like Paul  Krugman don’t think that the Fed went far enough to get the job done in stimulating our economy.

Krugman wrote in his New York Times op-ed article yesterday that the Federal Reserve needs to pump far more money into the system:

The case for a more expansionary policy by the Fed is overwhelming.

Don’t worry about the falling dollar, Krugman tells us. Never mind that the emerging economic powers like China and Brazil are already giving us a hard time over this issue. Krugman dismisses them as a bunch of hypocrites:

All I can say about this line of criticism is that the hypocrisy is so thick you could cut it with a knife.

Krugman may well be right about the hypocrisy part, particularly with respect to China. But it is irrelevant to the danger China in particular poses to our economy. That danger comes from the economic power they can wield as our major foreign creditor and the principal source of vital rare minerals.

Moreover, the dollar’s current favored status as the world’s de facto reserve currency is being placed in increasing jeopardy as the value of the dollar continues to decline. If enough major holders of U.S. dollars as their reserve currency switch to an alternative, the demand for the dollar will spiral downward and its value could well crash. One such alternative that has been discussed is the International Monetary Fund-created international reserve asset called Special Drawing Rights.

The result may be the very deflationary nightmare that Krugman is so intent on avoiding. If and when a conversion away from the dollar begins in earnest – which some other left-wing economists like Dr. Joseph Stiglitz said he hopes would happen as early as this year  — we may well find ourselves giving away dollar devalued hard assets in order to accumulate enough of the new reserve currency to purchase oil and other commodities that will be priced in the new reserve currency.

Moreover, the U.S. government will no longer be able to borrow money at a comparatively cheap rate, since there will no longer be a significantly larger market for the dollar than for other currencies. This will have a ripple effect throughout our economy. Americans will end up paying much higher interest rates on their credit purchases, including automobiles and houses.

With consumer demand drying up, our economy could then sink into a catastrophic depression far worse than anything this country has experienced since the Great Depression.

Krugman does not appear to be concerned about any of these risks arising from his recommendation to keep printing more money, no matter what the impact is on the dollar.

Krugman also derides the critics of aggressive monetary expansion who are concerned about the potential for runaway inflation. He calls them “inflationistas.”

How does Krugman explain the soaring increases in commodity prices? And in particular, I wish Krugman would explain why we shouldn’t be worried about the recent sharp rise in food commodities, as illustrated in the following chart prepared by the Food and Agricultural Organization of the United Nations. We are already seeing evidence of the price rises at the supermarket:

Does Krugman really think that wages will keep up with such inflation, once it gets fully into gear as a result of the Fed’s monetization of our debt? And what does he say to those trying to get by on fixed incomes?

By the way, those low interest rates that the Fed is trying to maintain will be a thing of the past. Inflationary expectations will normally cause interest rates to climb, which will mean more bad news for businesses trying to expand and consumers trying to purchase homes, cars, etc.

Once again, Paul Krugman has allowed his left-wing mindset to cloud any reasoned economic analysis. Then again, is anybody really surprised by that?

Joseph A. Klein is the author of a new book entitled Lethal Engagement: Barack Hussein Obama, the United Nations and Radical Islam.

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