NY Times: Paul Krugman

I’m not sure I’m a 100% fan of Paul Krugman. On the other hand, he is an expert on international economics, he has won a Nobel Prize, and he has been a round for a relatively long time. So he’s worth paying attention to. He’s also written several recent opinion pieces for the NYT that I think are important.

–in one from June 14th titled “How America Lost Its Edge,” recent international travel has caused him to observe that the US seems to be at best in the middle of the pack among the wealthy countries of the world, and in important ways falling behind. My sense is that this is right, even though the US is being compared with places like Europe and Japan, where the population is significantly older–a significant advantage for the US. In a sense, the Ghost of Christmas Future is turning into the GoC Present.

Washington has long had an obsession with industries of the past. Add in the Trump tariffs and his decision to shrink the domestic workforce and you have a recipe for continuing stagnation. And that’s without the coup attempt.

As an investor, this all seems to put a premium on companies that, while incorporated and traded in the US, have strong intellectual property, global sales and limited plant and equipment in the US. It also argues for rooting through the current tech rubble.

–two others are more important for the near-term stock market, I think. From the past few days, they are “Is the Era of Cheap Money Over?” and “Wonking Out: Hot Economies and High Prices.”

In the first he addresses the issue of a decade of low nominal interest rates, which some are arguing has produced an epic stock market bubble over the past couple of years that can only be cured by much higher rates in the future. Krugman points out that the mother of recent stock market excess, the Internet bubble of 1998-2000 happened when real rates were 4%, or 8x what they’ve been during the pandemic. He also suggests that today’s low rates are more a function of an aging population and lack of population growth–Japan is an extreme case of this, and, I think, a harbinger of the fate of an anti-innovation US–than anything else.

In the second, he observes that most commentators on inflation, even in the academic world, don’t have much of an idea about what inflation actually is. For one thing, on the most basic level, they mix up one-time price increases with inflation, which is a steady, years-long rise in prices. In particular, over the past year crude oil has gone from, say, $70 a barrel to $110. Is this a one-time event, or do consumers (and the stock market) expect inflation in the oil price–that crude will be going for $140 a barrel in 2023, $170 in 2024 and $200 in 2025 (and that no one is going to buy an electric vehicle)?

Also, doomsayers on inflation often refer to the Phillips curve, a generalization from the original empirical observation that at low employment rates prices tend to rise. In the 1970s, economists noted that at low employment rates, not only do workers expect prices to rise today but also for prices to continue to rise for years afterward. In other words, the idea of inflation quickly becomes imbedded in consumer expectations.

From this comes the idea that the money authority must raise interest rates to a level where unemployment rises significantly, so that inflation expectations dissipate.

The truly unfortunate part of this analysis, for Krugman, is that the the 1970s version of the Phillips curve hasn’t held true for any other period in the nearly half-century since it was formulated–and which was also not characteristic of the time before the 1970s, either.

So, if we have headline number for prices as being 8% higher today than a year ago, my guess is we should probably break this out into 4% one-time, pandemic- and Ukraine invasion-related, price rises + 4% “ordinary” inflation. If so, the Fed’s task isn’t anywhere near as Herculean as inflammatory headlines might make it seem. Also, given recent reports that merchants like Target and Walmart have massive excess inventories, we should probably question what scope retailers have to push prices higher.

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