Today’s Brew 12-10-14

Alan Reynolds responds to recent comments from The Krug. Mr. Reynolds probably has dreams about easy opportunities like these to set the record straight on Krugmanomics.

If Paul Krugman Gets The Higher Inflation He Wants, The U.S. Will Return To Recession

“New York Times columnist Paul Krugman explains that, “People have to believe in higher inflation, which produces an economic boom, which yields the promised inflation. A necessary . . . condition for this to work is that the promised inflation be high enough that it will indeed produce an economic boom if people believe the promise will be kept.”

Why does Krugman theorize that “high enough” inflation would produce an economic boom? “Investors expect inflation,” he explains, “which makes them willing to spend more, which pushes the economy to full employment, which then generates the inflation investors expected.”

This whole construction rests on flimsy foundations. For one thing, the pretense that central banks have the knowledge and skill to hit some precise inflation target is just academic hubris. Since the Fed can’t hit a 2% target with sufficient precision to please secular stagnationists, why assume the Fed could hit a 4% target?

Secular stagnationists also define real interest rates in ways that have no relevance to private incentives to borrow or save. Krugman defines real interest rates as the fed funds rate minus “core” inflation (excluding food and energy). Households and firms cannot borrow at the fed funds rate, and do not make decisions to save based on the fed funds rate.”

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