Paul Singer Blasts "Krugmanization" of Economics

Paul Singer Blasts "Krugmanization" of Economics
By World Economic Forum (Flickr: The Global Financial Context: Paul Singer) [CC BY-SA 2.0], via Wikimedia Commons

Paul Singer didn’t intend to bash the U.S. Federal Reserve… again.  But then he heard Fed Chair Janet Yellen give a speech about income inequality, “sounding like a presidential candidate,” and he had to address what he considers the “Krugmanization” of a large portion of the economics profession.

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See other Q3 letter highlights – Paul Singer vows to hunt for Argentinian assets, George Soros And Kyle Bass Battle It Out With Paul Singer In London Court and Singer sees strength in commercial RE but weakness in residential

Paul Singer says quantitative easing that created income inequality

Under the heading of “Faking It,” an Elliott Management investor letter reviewed by ValueWalk noted that it was the policy of quantitative easing that created income inequality. The letter says that during the 2008 financial crisis, central bankers appropriately flooded the system with liquidity and reduced interest rates to stabilize the system and “truncated the crisis.” The problem was they didn’t address the root cause of the crisis. “Central bankers do not understand that it was their tinkering, manipulation, bailouts and false confidence that encouraged and enabled the insanity that led to the fragility and collapse.” As a result, the Fed has doubled down on the same policies and political leaders, rather than deal with the problem, allow central bankers to work their magic that is more a game of three card Monte than anything mystical.

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Furthermore, Singer states:

Partially as a result of that misunderstanding, the  developed world has doubled down on the same policies, feeding the central bankers’ supreme self-confidence. Political leaders have been content to stand aside and watch the  central bankers do their seemingly magical and magnificent work.

The believers in the wisdom of this central-banker-centric economic world have been  crowing and gloating that those (like us) who have raised concerns about the risks posed  by the post-crisis, monetary-dominated policy mix (inflation, distortions, growing  inequality, lower growth) are just “wrong” and should apologize for a “massive error.”

This, shall we say, “Krugmanization” of a substantial portion of the economics profession  and punditocracy is in its triumphalist phase, and whether its smug non-stop “victory lap” ultimately represents an embarrassing high-water mark is for subsequent events to reveal.

What does Paul Singer believe? He says:

At present, the situation in developed countries can be characterized as follows: Asset  inflation is roaring, but it is sectoral and skewed. Consumer inflation is understated, and  thus growth is overstated. Employment data is misleading. This combination of factors  means that ordinary citizens are not doing well, but the owners of high-end everything  are doing just fine, with few concerns for the middle-class people who know things are  not “all right,” but cannot put their finger on why.

At or near this stage, either because of citizen resentment and distrust or (in the case of  Europe) a pronounced weakening of economic activity despite all their efforts and  experimentation, monetary authorities may decide that the real problem is that they just haven’t done enough. Historically, this is the point at which the risk rises that central  bankers will take monetary actions that destroy their societies. Once the “tiger by the tail”  phase of monetary debasement has gotten started, there has never been a good exit. Past  that point of no return, the collapse of money and/or asset prices becomes the inevitable  denouement, with the only questions being the timing and the severity of the collapse.

Our views are formed by an examination of historical episodes of societal monetary  collapse. The script is not “baked,” but the common elements are clear and present.  Given that the authorities are so far behind the curve in their understanding of the modern  financial system, we have little hope that they can revert in time to the correct mix of  policies, preserve the fiat money regime and also get the developed world growing again  while whipping into shape the long-term entitlement obligations which are obviously  unpayable in their present form. We wish we could report that a counter-movement is  afoot, with some cadre of truth-tellers who are making the case for marching in a different direction, but sadly we cannot. The argument for “doing more” or “doing more  of the same” is universal. The “risk” case is only being made circumspectly by people  who are being ridiculed as clueless Cassandras.

Cassandra was proven right, of course, but we have no need or desire to be right about  these views. Societal stability is a good thing for all, including skeptics and pessimists.  Societal breakdown and uncontrollable inflation or financial crises are massively  destructive, and typically accompanied by very bad policies. No disciplined investment  approach can “work” in such an environment, in which preserving the real value of  capital becomes difficult if not impossible. In extremis, political governance drifts toward  totalitarianism, scapegoating and violence. Let us hope that leaders emerge who  understand these realities and have the courage and political skills to reorient their  societies toward growth, stability and soundness.

Our belief is that the global economy and financial system are in a kind of artificial  stupor in which nobody (including ourselves) has a good picture of what the next  environment will look like. The difference between “them” and “us” is that they mostly  think that policymakers will muddle through, but we assume that a very surprising and  scary environment lies in wait.


The problems and solutions are easy to understand, its a matter of will:

Either out of ideology or incompetence, all major developed governments have given up (did they ever really try?) attempting to use solid, fundamental policies to create sustainable, strong growth in output, incomes, innovation, entrepreneurship and good jobs. The policies that are needed (in the areas of tax, regulatory, labor, education and training, energy, rule of law, and trade) are not unknown, nor are they too complicated for even the most simple-minded politician to understand. But in most developed countries, there is and has been complete policy paralysis on the growth-generation side, as elected officials have delegated the entirety of the task to central bankers.

 Paul Singer: Risk of monetary manipulation

Elliott then notes a wing of the economic system that thinks they should now be taking a victory lap. They crow and gloat when addressing those who have raised concerns about the risk of monetary manipulation that range from inflation, market distortions, growing inequality and lower real growth.  These people, looking for an apology that includes acknowledgement from those who criticized the post-crisis monetary policy that they were “wrong” and committed a “massive error” in judgment. This apology is demanded by a group of economists who are smug in taking a “non-stop victory lap.” This behavior Elliott calls the “Krugmanization” of a large portion of the economics profession. This triumphalist phase, however, could ultimately represent “an embarrassing high-water mark” as subsequent market events have yet to play themselves out.

In other words, the jury is still out on the impact of stimulus and quantitative magic tricks.  The tangible results of the distortions are yet to be felt as the impact of withdrawal of stimulus has not hit the economic numbers and might not do so for months and the big crash might not come for years. But the distortions that typically correct themselves are more than apparent.

As one example, a zero interest rate policy, Singer notes, has enabled insolvent corporations to issue debt at almost no premium to government bond rates.  Such market distortions will come home to roost. “Companies that should be shuttered or taken over and chopped up are instead able to pursue projects that should never have seen the light of day, and to create fake demand that essentially borrows growth (and jobs) from the future.”

In other news, President Obama met with Yellen recently to receive an update on economic progress.

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  1. Not just “Gold Standard”. He says “The policies that are needed (in the areas of tax, regulatory, labor,
    education and training, energy, rule of law, and trade) are not unknown.:

    Right. In other words, tax cuts, cuts to environmental and financial regulation, union busting, Oh, and of course, re-training all those out-of-work 55 year old factory workers so they can become, let’s see, burger flippers with electronic-tech training. Everything you might hear from the same people that hated FDR’s powerful and effective programs.

    What’s left out of this discussion is Fiscal Policy. Yes, inequality is rearing its ugly head, but that’s only because the necessary monetary policies put in place have not been complimented with the necessary fiscal policies – government spending to put people back to work.

    Now, let’s watch all the austerians go into histrionics over someone bringing up the necessity of deficit spending as a tool to bring the country out of a slump…

  2. The answers are asset prices are skewed because those who have assets are able to reap the subsidy QE provides. Asset allocation models in ZIRP favor riskier assets = stocks. It was all part of the playbook after the banks got bailed out. Singer of course knows this. The guy is so full of himself and BS its obvious.

  3. WTF? This man goes on and on about how stupid and incompetent everyone
    else is and yet gives not a single solution to what is ailing us.

    “At present, the situation in developed countries can be characterized as
    follows: Asset inflation is roaring, but it is sectoral and skewed.
    Consumer inflation is understated, and thus growth is overstated.
    Employment data is misleading. This combination of factors means that
    ordinary citizens are not doing well, but the owners of high-end
    everything are doing just fine, with few concerns for the middle-class
    people who know things are not “all right,” but cannot put their finger
    on why.”

    Assets values are sectoral and skewed? WTF does that
    mean? Skewed in which direction and why? Consumer inflation is
    understated? Really? By how much and why?

    And if there is any
    reason why middle class people cannot put their finger on why they are
    working harder and harder, and yet their median incomes are still
    declining, all one has to do is listen to the nonsense they are being
    shoveled by the main stream media, especially Fox News.

    And why
    all this is the fault of Paul Krugman is utterly beyond me, other than
    the fact that people like Paul Singer have been going on and on about
    inflation now for nearly six years, and yet inflation is nowhere in
    sight. In fact, in Europe, instead of inflation, they are teetering on
    the edge of DE-flation, which would be a complete disaster if it ever
    took hold there.

    I suspect that the other commenter here, Eddie
    Munster is right. He wants us all to go back to the gold standard so
    that we can totally protect the rentier class for ever.

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