More Establishment Blather From Krugman
Paul Krugman can be a remarkable dumb fuck when he wants to be. You see as a classical economist, he has been trained to interpret markets in terms of supply and demand. Speculation when it occurs only happens at the margins. It is either transient or insignificant to larger forces.
This time around Krugman invokes global scarcity and global recovery to explain why commodity prices have been surging. He tells us we live in a finite world, sounding a lot like that other Times airhead Thom Friedman when he does. It all sounds so plausible, at least if you don't look at it too closely. If you do, it comes across as the dimwittery that it is.
I started writing on speculation in oil markets more than 3 years ago. The speculation I was talking about was driven not by supply and demand or greedy Big Oil but by the likes of Goldman and Barclays. This kind of speculation by big financial players dates back to 2004 nearly 7 years ago. You can see how it played out here either by looking at the chart or by eyeballing the table. What made this kind of speculation different from ordinary speculation is that bore no relationship either to supply and demand or to externalities, such as war, threats of war, or hurricanes. You see normal speculation bets on these factors, but as war fears wane or the hurricane veers away from the Gulf oil fields, the price should revert to the pre-crisis norms. What goes up should come down. But beginning in 2004, it really doesn't. Year over year, with the exception of 2006, prices increased regardless of what was happening with supply or external factors. This is the hallmark of this new and very different type of speculation. The huge price spike in 2008 was not an aberration. It was based on a phenomenon that had been around already for 4 years.
Unlike today, back then the speculative flows went back and forth between stocks and oil. If oil was up, stocks were down, and vice versa. Well, after the housing bubble blew up in August 2007, stocks became increasingly shaky so a lot of the speculative action moved into oil setting up the 2008 oil spike. The spike wasn't sustainable. There was a building concern among the players that it might cause a regulatory backlash and prices began to decline, but what is important to note is that they only nosedived below pre-spike levels in October after the meltdown.
Since stocks began their rally in early 2009, oil and stock prices have pretty much moved together. What's important to realize here is that stock prices rose not because our economy was in recovery but because of the bailouts and ZIRP policies primarily of the Fed. Oil prices went along for the ride.
Krugman is wrong about this being about supply and demand. If you look here and compare to the previous link on futures prices, you can see say, in the first quarter of 2010, oil supply exceeded demand but prices went up. In the second quarter, this was reversed. Demand exceeded supply but prices went down during the quarter.
Now I've been talking about oil, but you can extend a lot of this to commodities generally. And precisely because you can, it undercuts Krugman's whole contention that we are living on a finite planet with finite resources. Don't get me wrong. That statement is absolutely true. It's just not terribly interesting. It was true a hundred years ago. It will be true a hundred years from now. By itself, it is meaningless. It does not explain why, for instance, commodities across the board should all be supply constrained at the same time. If oil is supply constrained, fine, but why should copper or nickel or rice be? The price of oil can affect the price of these, but marginally, unless its cost explodes again. However, just looking at oil, if it were so constrained, then its pricing should not trade within a range as it has for the last year and a half but it should always be contango, that is trading up and be much higher than it currently is. So why isn't it?
As it is, the most recent price surge dates back a month. That's not much to hang a global recovery or finite planet hypothesis on. That's another point that bothers me. Peak oil is real. We likely began hitting the peak area 4-5 years ago but it has yet to significantly affect oil prices. Again when we begin experiencing peak effects in pricing, it should be contango all the way.
What I find so aggravating about Krugman is how he generalizes and cherrypicks his data to fit his conclusions. To understand the game he is playing here, you really need to work backward from his end purpose. He wants to absolve his mentor and buddy Ben Bernanke and by extension the Fed from commodity price inflation. Ergo he must downplay the effects of speculation because such speculation would be based on the Fed's easy money policies. So he evokes finite planet and world markets, etc. But that's asking a lot. Because if the Fed isn't providing the wherewithal to blow a bubble in commodities, then Krugman really needs to argue that it isn't blowing one in stocks as well. Yet do any of us really think that the year and nine month old stock rally actually reflects anything in the fundamentals? If it's not a bubble, what is it?
Krugman also doesn't explain why if we are experiencing inflation in commodity pricing why we aren't seeing inflation more generally. This is where I think Krugman is being stupid, dishonest, or both. There have been a lot of us out here writing for some time how Fed and Treasury policies have not been directed toward helping the real economy but have instead financed and facilitated bubbles in stocks and commodities. The result is exactly what we see. The overall economy is going deflationary at the very same time we see inflation in stock and commodity pricing. The real economy continues to deflate as reflected in the fundamentals: housing, debt, unemployment, state budgets, etc., but not in the financial sector which is being kept pumped up by the Fed. For ordinary Americans, this is the worst of both worlds. We see our economic prospects deteriorate, houses lose value, pensions go bust, even as we have to pay more for basics, that is commodities, like gasoline and groceries.
I just get so freaking tired of Krugman playing these dumbass games, protecting his friends, defending the kleptocratic Establishment to which he belongs, and selling this tripe as some kind of fair and objective analysis. When push comes to shove, Krugman stands with the kleptocrats. That's all we really need to know.