KRUGMAN AND ROGOFF: America's Financial Terrorists Go on Tour

By David Stockman

Here are a couple of reasons why Keynesian economists are truly a menace in today’s bubble ridden and debt-impaled world. It seems that both Harvard’s Kenneth Rogoff and Princeton’s Paul Krugman are on the global advice circuit, peddling what amounts to sheer snake oil to desperate politicians and policy-makers who have already buried themselves—-so far to no avail—-in unprecedented waves of fiscal and monetary “stimulus”.

But never mind. The professors have a three part solution, and its more, more……and moar! To make room for more monetary stimulus after six-years at the zero bound, therefore, Professor Rogoff has a truly juvenile solution. Namely, to abolish cash. That’s right, this Harvard windbag proposes to confiscate your kids’ piggy bank and any green stuff that may be left in your wallet.

Meanwhile, Krugman has made a quick circuit through Tokyo, where he apparently was instrumental in convincing Japan’s prime minister to cancel the next installment of the consumption tax increase—a move that was utterly necessary in order to stem the nation’s massive flow of red ink. But why not spend a few more years adding to Japan’s staggering debt burden, which is already at 230% of GDP and rising inexorably in a nation that is fast becoming the world’s foremost retirement colony? After all, Professor Rogoff has now perfected a scheme which will allow central banks to monetize all the debt that even the most profligate government can possibly issue.

So start with Professor Rogoff ‘s incredible assault on the peoples’ cash and coins—a necessary prelude to even more fantastic rates of central bank monetary expansion. Here is exactly what he recently advocated at a “prestigious” international policy forum:

“Harvard economist Kenneth Rogoff even argues in the daily paper FAZ that cash currency should be banned altogether. Central banks could impose negative interest rates more easily that way, he explained. Tax evaders and criminals would also find life more difficult. From this perspective, banknotes and coins appear superfluous, he said at a presentation at the IFO institute in Munich. Measures to spur the economy could be implemented more easily that way.”

In short, central banks would like to escalate their devastating war on savers by driving interest rates even deeper into negative nominal and real territory. But they are now stymied for two reasons.

In the case of their preferred route of driving “real” interest rates more deeply into negative returns by cranking up consumer inflation, they are blocked by economic reality. Households are still buried in debt and can no longer borrow, spend and ratchet-up their balance sheet leverage ratios as they did in the 40 years preceding the 2008 financial crisis. Likewise, a deflationary global economy—–drowning in the excess industrial capacity and malinvestments that have been generated by nearly two decades of worldwide financial repression—– keeps a tight lid on the price of consumer goods. So the tried and true route of inflating governments out of their debt obligations has been precluded.

At the same time, interest rates are already at the zero bound in nominal rate terms, meaning that only significantly negative nominal rates can further reduce the burden of public debt. However, even central bankers are smart enough to realize that if the monetary and fiscal authorities of the state go too far in imposing negative rates on bank deposits or in threatening to “bail-in” depositors, they could incite a run on the bank. Yes, in this age of awesome technology in which people fuel-up at Starbucks by waving their smart phones at the cashier, our Keynesian masters are now worried about erupting stacks of fresh Ben Franklin’s.

And well they should be. Behind all the gee whiz technology of electronic payment systems there is still “deposit money”. That is, there are digital credits somewhere in the system at banks and money funds against which electronic payments are deducted.

Stated differently, here we are a century after paper checks drastically reduced the need for hand-to-hand money, and a half-century after the rise of credit cards nearly finished the jobs. Yet Keynesian central bankers are worried about bulging billfolds and safes and deposit boxes filled to the brim with greenbacks.

Well, charge 4% for the privilege of storing deposit money at a regulated bank or money fund, for example, and the demand for hand-to-hand money will indeed soar. In that context, cash would be the peoples’ last resort against the arbitrary confiscation of their wealth by the financial authorities of the state. Odd as it may sound, in a world where Keynesian money printers have literally gone berserk squashing honest price discovery in the market for money deposits and debt, crisp greenbacks may be the last barrier against central bank destruction of liquid savers.

So, yes, in the year 2014 we have a Harvard professor running around trying to do Franklin Roosevelt one better. FDR took the people’s gold in 1933. Now Professor Rogoff wants their cash—–the last refuge where citizens can anonymously safeguard their wealth from the depredations of the state.

The entire Rogoff plan, therefore, contains an ominous warning. The leading lights of the Keynesian mafia realize that the massive debt that their policies have created around the world can only be managed by a permanent regime of financial repression and enslavement of savers. Yet if carried far enough, the latter would result in growing flight from “deposit money” that the state can control to “hand-to-hand money” that would circulate and function outside its dictates.

And that gets us to Professor Krugman’s regrettable trip to Japan. They very last thing that the mad men of Abenomics need is another spurious Keynesian justification for even more deficit spending.

Honda, 59, an academic who’s known Abe, 60, for three decades and serves as an economic adviser to the prime minister, had opposed the April move and was telling him to delay the next one. Enter Krugman, the Nobel laureate who had been writing columns on why a postponement was needed. ‘That nailed Abe’s decision — Krugman was Krugman, he was so powerful’ Honda said… ‘I call it a historic meeting.’ It was in a limousine ride from the Imperial Hotel — the property near the emperor’s palace… that Honda told Krugman, 61, what was at stake for the meeting. The economist… had the chance to help convince the prime minister that he had to put off the 2015 increase.”

Let’s see. Since its original financial crisis in 1989, Japan has made deficit spending a way of life. During the last 10 years, for example, its budget has been in deficit continuously and has averaged new borrowings of nearly 7% of GDP annually.

All of these giant deficits, however, surely did not “stimulate” Japan’s GDP in the slightest. In fact, its nominal GDP today is the same as it was two decades ago.

Accordingly, Japan is now in a debt trap: year upon year of giant fiscal deficits in the face of a static nominal GDP have caused its government leverage ratio to soar. Relative to national income, it’s public debt is now 7X bigger than in was in 1980, and is 2X greater than any other DM nation.

Indeed, since the mid-1990s Japan’s general government revenues have been stuck in the range of 45 trillion yen annually while it spending for highways and bridges to nowhere and support of an aging population has steadily climbed toward 100 trillion yen annually. Consequently, until its recent increase in consumption tax from 5% to 8%, it was actually collecting in taxes only 50 cents on every dollar spent.

So of course it needed to implement at least this token revenue raising gesture. Even then, the April consumption tax increase that Krugman remonstrated against will only raise about 4 trillion yen on an annual basis, leaving a fiscal gap which has which festered for more than two decades now largely in tact.

Yes, the April’s consumption tax increase did take money out of consumers pockets and the second installment from 8% to 10% would have extracted even more. Once upon a time that was called paying your bills; and, in light of the fiscal lunacy portrayed in the graph above, it would have been hailed as a long overdue step toward fiscal sanity.

But government everywhere in the world have lost their fiscal bearings; Japan is only the leading edge case. Having postponed the second installment of its long over-due consumption tax increase until 2017, Japan is now entering the Keynesian end game.

For all practical purposes, it has chosen to permanently finance more than half of its government budget by borrowing, and then to monetize 100% of the incremental annual debt. That will surely lead to a thundering crash of the yen and the destruction of what remains of Japan’s once vaunted savers. It will mean that the world first national retirement colony will spend its days in fiscal crisis and economic penury.

Some day it will be said that on this archipelago lies the work of financial mad men and terrorists. If the survivors could mount a plaque, they would list Professor Rogoff and Krugman on the very top.

 

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