Bill Anderson
LRC Blog
March 2, 2009

It is Monday morning, and time for the semi-weekly howler from Paul Krugman, who rarely disappoints. Today, he tells us about the evils of saving money. Yes, Peter Schiff, saving. (Schiff is telling us that capital comes from saving, and the development of new capital is paramount in growing an economy. But, Schiff does not have a newly-minted Nobel Prize in Economic Science given by the Swedish central bank, so what would Schiff know, anyway? Hail the wisdom of the Nobel winner, Paul Krugman!!)

Krugman plays detective and solves the mystery of the crisis, and finds that it is due to those Asians saving money. His source? None other than Ben Bernanke, who everyone knows has inherited this mess and now is valiantly fighting against the Forces of Reaction and Capitalism and Sound Money.

The speech (given by Ben Bernanke), titled “The Global Saving Glut and the U.S. Current Account Deficit,” offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.

In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world.

The result was a world awash in cheap money, looking for somewhere to go.

[efoods]Most of that money went to the United States — hence our giant trade deficit, because a trade deficit is the flip side of capital inflows. But as Mr. Bernanke correctly pointed out, money surged into other nations as well. In particular, a number of smaller European economies experienced capital inflows that, while much smaller in dollar terms than the flows into the United States, were much larger compared with the size of their economies.

Still, much of the global saving glut did end up in America. Why?

Mr. Bernanke cited “the depth and sophistication of the country’s financial markets (which, among other things, have allowed households easy access to housing wealth).” Depth, yes. But sophistication? Well, you could say that American bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors.

And wide-open, loosely regulated financial systems characterized many of the other recipients of large capital inflows. This may explain the almost eerie correlation between conservative praise two or three years ago and economic disaster today. “Reforms have made Iceland a Nordic tiger,” declared a paper from the Cato Institute. “How Ireland Became the Celtic Tiger” was the title of one Heritage Foundation article; “The Estonian Economic Miracle” was the title of another. All three nations are in deep crisis now.

So, Detective Krugman zeroes in on the source of the crisis: saving money!

If you want to know where the global crisis came from, then, think of it this way: we’re looking at the revenge of the glut.

And the saving glut is still out there. In fact, it’s bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust.

One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.

So that’s how we got into this mess. And we’re still looking for the way out.

What is unstated here is that Krugman sees our salvation in unleashing inflation. The best way to destroy savings is to inflate the currency to where savings are obliterated in a mass of paper. People are forced either to "buy now" or to purchase assets like gold which will hold or increase their value relative to rapidly-devaluing paper.

Of course, whenever Krugman wants to score a point or two, he channels John Maynard Keynes. He does not mention his idol by name, but here we have it: inflate, inflate, inflate!

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