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Thursday, March 13, 2003

Krugman And DeLong - The Center Does Not Hold

Mickey Kaus has kicked off an interesting discussion about Paul Krugman's column in which the earnest Professor worries about possible deflation now, and hyperinflation later. "Must we have both?", Mickey wonders aloud, and Brad DeLong responds. Deflation now, hyperinflation to follow, is what Krugman must have meant, although he was in such a hurry to refinance his home mortgage that he had no time to explain how much later "later" might be.

Well, it is hard to know how seriously to take these long range forecasts, and I don't know whether Micky or Prof. DeLong are still taking questions from the floor, but here are mine:

(1) Does this mean we do not need to worry about a housing market bubble, as Krugman did last August? As markets commence to worry about future inflation, surely that will be a prop to real estate prices.

Or perhaps there will be a whipsaw - deflation, homeowners screaming for relief, the will to control inflation gone, Congress and the Fed to the rescue, and a dramatic overshoot resulting in hyperinflation! Cool.

(2) Social Security has COLAs linked to wages. Lots of Gov't debt is short term, and will be re-issued at higher rates as the expectation of onflation settles in. Can the Government really hyper-inflate its way out of this, or will it be clear that the amount of fixed rate long term debt available to expropriate is too small a fraction of the total Gov't obligations?

Again, YES! If we can hyper-inflate beyond people's expectations, wages and interest rates will never catch up. Watch your wallet!

(3) Regime change: Krugman refers to "some future administration". An evil Republican one? Is Krugman so gloomy as to imagine that Dems are unelectable at the national level for the foreseeable future? It's the McCain-Feingold effect! Or does Krugman see irresponsible Dems in the cards, or crystal ball, or whatever he is using? C'mon, Hillary! won't let the country down.

(4) Is this hyperinflation simply a ploy to render McCain-Feingold even more absurd, in the waning days of the American Empire when $2000 won't buy a loaf of bread?

As prospective "worst case" scenarios go, hyperinflation in the US seems more likely than nuclear blackmail of the US by France, as noted below. Thanks for the heads up! We eagerly await the next long range forecast a few months hence.

UPDATE: I'm late to the party! The Man Sans Q, the now-many Brothers Judd, and Don Luskin are already enjoying themselves.

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