Friday, August 26, 2011

Laugh Out Loud, Paul Krugman Edition

Paul Krugman thinks Ben Bernanke can solve the nation's economic problems by having the Fed perform some or all of the following:
  • Purchase long-term government debt to push down interest rates and thus borrowing costs
  • "[Announce] that short-term interest rates would stay near zero for an extended period, to further reduce long-term rates"
  • "[Announce] that the bank was seeking moderate inflation, 'setting a target in the 3-4% range for inflation, to be maintained for a number of years,' which would encourage borrowing and discourage people from hoarding cash" (emphasis mine)
  • Depreciate the dollar

I'm no economist, and I never gave economic advice to Enron, but even I can see the holes in these proposals. First, the Fed's been buying government debt for two years in order to lower interest rates, but private borrowing hasn't increased. Second, as Krugman notes, the Fed has all but announced that short-term rates would stay zero through mid-2013. Call me stupid, but how is a bleak economic forecast for 2012 supposed to increase businesses' and consumers' confidence? Third (I'm taking this out of order), the dollar has already been depreciated against world currencies. In fact it's been depreciating for years. And yet imports continue to rise and exports continue to fall. How does that help the economy?

But here's what really got me laughing: years worth of increased inflation to "discourage people from hoarding cash." Who is he talking about? Who in the world is hoarding cash right now?! Who even has cash to hoard?! Is he talking about large corporations like Apple, Google, and GE, who according to their 2011 Q2 filings had cash reserves of $12, $10 and $91 billion respectively? That's a lot of cash, to be sure. But why would increased inflation motivate these companies to spend more? What would they spend it on? In any case Krugman doesn't say "companies from hoarding cash," he says "discourage people." What does he think "people" will do with all this cash he thinks they've hoarded? Buy more Chinese imports? Buy real estate in Detroit? Invest in precious metals? Trade in their SUV's for sleek new EV's?