Bloomberg viewers estimate that Ron Paul was the winner of the clash of the Pauls (Ron Paul fans, of course, are very studious at phoning in their support him for). But that is very much beside the point. This wasn’t really a debate. Other than the fascinating moment where Krugman denied defending the economic policies of Diocletian, very little new was said, and the two combatants mainly talked past each other.
The first debate happened early last decade.
To wit:
And so, round two. Krugman wants more inflation; Paul is scared of the prospect. From Paul’s FT editorial yesterday:
Control of the world’s economy has been placed in the hands of a banking cartel, which holds great danger for all of us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency crisis involving the world’s reserve currency would be an unprecedented catastrophe. No amount of monetary expansion can solve our current financial problems, but it can make those problems much worse.
Or, as Professor Krugman sees it:
Would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.
How so? For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recover.
Ron Paul believes that inflationary interventions into the dollar economy will have unpredictable and dangerous ramifications. Paul Krugman believes that a little more inflation will spur economic activity and decrease residual debt overhang. Krugman gives no credence to the prospect of inflation spiralling out of hand, or of such policies triggering other deleterious side-effects, like a currency crisis.
The prospect of a currency crisis is a topic I have covered in depth lately: as more Eurasian nations ditch the dollar as reserve currency, more dollars (there are $5 trillion floating around Asia, in comparison to a domestic monetary base of just $1.8 trillion — the dollar is an absurdly internationalised currency) will be making their way back into the domestic American economy. Will that have an impact?
I don’t really know how much of this is to do with the Fed’s reflationary policies, and how much is to do with the United States’ endangered role as global hegemon. I tend to think that the dollar hegemony has always been backed by American military force, and with the American military overstretched, the dollar’s role comes into question. If America can’t play the global policeman for global trade, why would the dollar be the currency on global trade?
However it must be noted that America’s creditors do believe that their assets are threatened by the Fed’s inflationism.
As the Telegraph noted last year:
There has been a hostile reaction by China, Brazil and Germany, among others, to the Federal Reserve’s decision to resume quantitative easing.
Or as a Xinhua editorial rather bluntly put it:
China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.
Of course, China may be totally bluffing, or getting it wrong on the danger of inflation to its assets.
If the reflationism is angering the exporter nations perhaps it is a cause for concern. After all, if America’s consumption-based economy is dependent on China’s continued exportation, and Krugman is advocating inflating away their debt-denominated financial assets, then to what extent do Krugman’s suggestions imperil the trans-Pacific consumer-producer relationship?
And this is a crucial matter — there is nothing, I think, more crucial than the free availability of goods and resources through the trade infrastructure. Getting into a fight with China is risky.
As commenter Thomas P. Seager noted yesterday:
[The situation today] is directly analogous to the first Oil Shock in 1973. In the decades prior, the US had been a major oil producer. However, efficiency gains and discoveries overseas resulting in an incrementally increasing dependence of foreign petroleum. Price signals failed to materialize that would caution policy makers and industrialists of the risks.
Then, the disruption of oil supplies from the Middle East caused tremendous economic dislocations.
Manufacturing is undergoing the same process. The supply chain disruption from the Japanese earthquake and Tsunami was merely a warning shot. Imagine if S Korean manufacturing were taken off-line for any length of time (a plausible scenario). The disruption to US industry would be catastrophic.
In the name of increased efficiency, we have introduced brittleness.
Time will tell whether Krugman’s desire for more inflation is wise or not.
azizonomics 
Where can I watch part 1?
http://www.bloomberg.com/video/91689761/
Thank you!
Just struck me that the oddest thing Krugman said (besides the Diocletian thing) is that shadow banking is somehow analogous to “competing currencies”.
I was actually very impressed with how Ron Paul handled that in part 1. He comes over very wacky to me when he talks economics most of the time.
What is going on? Ron Paul is far more insightful than Krugman. How does someone like Krugman have the ear of the President?
The situation is actually concerning. We have someone like Ron Paul who is entering his twilight years, so if we don’t follow his lead we only have ourselves to blame. AS an Australian I can’t vote, but as a world citizen I have a vested interest in a prosperous USA.
Are we deliberately running for a cliff?
We will write about this in the future!
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This link came via my Debka subscription (Jewish-Israeli readership)
http://www.lombardidigital.com/lcpa-sept26/index_ca.php?sb=DEBKA&sdate=05032012
Very long winded, but I agree with the investment trategies.. He charges $195 for the subscription.
The irony is if enough pople follow this advice it is self fulfilling.,
I will put my balls on the line. You have been reading since last August so you know me pretty well. I said I was 90% sure there would be no hyperinflation in 2011. In 2009 and 2010, I felt the same thing. So even while some the deflationary pressures are gone I am 90% sure there will be no hyperinflation in 2012. I think we are watching a slow decline that may drag into 2015-16. But if there is hyperinflation, it will come from the source he and I are talking about, which is the slow end of the dollar as a reserve currency.
I agree. I think the only difference between now and the decline of Rome, is our global tradelinks and overcapacity. You correctly note that we have a problem with biflation. My fear is we no longer buy consumer goods which have experienced deflation from over capacity and commoditisation. As a result, they available income to the median population is hostage to inflation in necessities.
BTW the Roman elite used lead plumbing, so their decision making skills were shackled!
But I guess today’s elite have other insidious luxuries.
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Aziz,
On austerity, it seems better to rip the bandage off than to take years to reduce uncalled for spending. Greece’s GDP is crashing, in my oppinion, not because of austerity but because they are moving back to living within their actual production level. Having lots of Euros floating around for free inflates GDP, which is no longer the case. The way I understand it, it is not the quantity of good being produced in Greece that is going down, it is the supply of money. If anything I would guess people would be working harder and producing more. Thoughts?
I wish that as true.
Nope.
From the WSJ:
The bottom line here is that as a deficit hawk I want a policy that will not increase deficits. The Euro austerity increases deficits even faster. It is totally self-defeating, and most worryingly for me it is making the Keynesians look good.
There are lots of policies other than what the Keynesians are suggesting that can get us out of the slump. You can cut bureaucracy and waste and foreign wars, just so long as you distribute the amount of money you’d have spent on it back to the public, maybe as tax incentives for hiring people or opening factories.
Once you are out of the slump and the economy is growing self-sustainingly, then you can really cut government expenditures.
If the government stopped spending would that increase deficits? It appears to me that austerity causes hard times but does not directly increase deficits.
It’s to do with falling tax revenues. Or at least that has been the case in Portugal, Spain, Greece, Hoover’s America, the IMF austerity projects. Deficits are a two-sided equation taxes – spending. If you cut the spending figure, and that causes the taxes figure to drop (as it very often does in a highly statist environment where most economic activity goes through the state, e.g. Greece, etc) then your deficits get bigger. This tends to be the case more often when the economy is contracting than when it is growing. When it is growing this is not so much of a problem.
I think it should be obvious that from Greece’s experience this is not working, the deficits keep getting bigger and the people hate austerity, and so will default.
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Ok, now let’s put the other candidates like Romney up against Krugman, and see how they do. What’s your guess? Would Romney know what Krugman is talking about? Would it be a love fest between Krugman, and Obama and maybe Romney because they agree on government policies and control?