Conclusion: In attending a Paul Krugman lecture yesterday, we came away with two main takeaways: 1) the Perceived Wisdoms of academic dogma run rampant throughout U.S. monetary policy; and 2) Keynesians really don’t get it.
Yesterday, I had the “pleasure” of attending a Paul Krugman lecture in one of my old classrooms at Yale and came away with a very different experience than the one I would have had as a wide-eyed undergraduate immersed in the dogma that is Yale econ theory. Also, I was really taken back by the fact that only Yale undergraduates were able to ask him questions; the older, more-informed members of the audience (roughly 50% of total attendees) were not allowed to partake in the discussion and ask challenging questions. Below, I’ve posted my “lecture notes” for your education/entertainment purposes:
My takeaways on Professor Krugman are below:
- Like any good charlatan, Krugman does a great job of defecting attention away from what others perceive as the real issues towards his Keynesian musings. Of course, it didn’t help that he was surrounded by the academic dogma that is his self-proclaimed “Yale-MIT axis” [of economic leadership].
- He was very smug towards Fed critics and essentially laughed off the Sovereign Debt Dichotomy – suggesting that advanced economies could issue much more debt and stimulus than perceived by the markets.
Krugman’s key quotes and conclusions from the Q&A session:
- Austerity is depressing European economies
- He wrote off the bond market’s views on the sovereign debt/deficits, using the U.K. (1920’s-1950’s) and 1990’s Belgium and Italy as examples of high debt/GDP ratios that didn’t matter to markets
- Our capitalist, free-market economy is a real disaster now and Europe’s social safety nets mean that there is less “misery” there
- The U.S. can pile on more debt and gov’t spending b/c they can issue debt at low yields
- He uses the recent -0.55% TIPS auction as an example of the U.S.’s low cost of borrowing (completely ignores the inflation expectations embedded in a negative TIPS yield)
- “The problem in the U.S. is that we’ve run out of room for monetary policy and we don’t have enough government spending to prop up demand long enough for the private sector to get healthy”
- The Federal stimulus was not big enough, rather $1.2 Trillion would have been a more appropriate sum
- 40% of the stimulus was just tax cuts that were mostly saved, not spent
- The stimulus didn’t even have a net increase in total government (federal, State, local) spending growth when you factor in the cuts made on the State and local level
- China sucks demand away from the rest of the world and their currency manipulation shaves 1% of global GDP
- China is largest example of currency manipulation in history
- Also one of the largest examples of protectionism in history and we need to punish China for the sake of “playing by the rules”
- China is doing its best to push global growth in the wrong direction
- Imports/exports are more about exchange rates than they are about saving/consumption
- Should the Fed take into account the global impact of QE?: “Yes… some.”
- “The U.S. can’t bear the world’s weight on its own”
- “Yes, QE tends to reduce the U.S. dollar’s exchange rate, but that is offset by the growth QE provides to the U.S. economy”
- “The U.S. has to look out for itself regarding its decision to move forward with QE” [I find his rationale here very interesting, given that he’s publically lambasting China for acting it its own self-interest re: yuan]
- QE is designed to help housing, corporate borrowing, encourage consumer spending (via driving up asset values)
- The U.S. should have more academics in policy-making roles and we would have been better off over the last few years had more academics been in key policy-making roles over the last decade
In short, we continue to stand counter to the academic dogma that is associated with Quantitative Guessing being positive for the U.S. economy and the bullish hope that it will end well. We have expressed this conviction by being short U.S. equities (SPY) in our Virtual Portfolio. Further, we will continue to hold the U.S.’s economic and political leadership (or lack thereof) accountable each day.
Yours in Risk Management,