The Paul Krugman show

Like most liberals, I'm a fan of Paul Krugman. However, I think he is a bit over-rated on some issues and investors shouldn't blindly follow any economist. He is very good with international macroeconomics but I'm not so sure about his opinion of capital markets. He called the housing bubble but his concern for high commodity prices in 2008 turned out to be incorrect. He is one of the few true Keynesians around (contrary to some mistaken views, Keynesianism is not about high government spending and, no, George Bush is not a Keynesian.)

Paul Krugman visited the London School of Economics last week and gave three lectures. Here are the videos of those lectures, along with some related articles.

Lecture - The Return of Depression Economics

Part 1: The sum of all fears Slides
Part 2: The eschatology of lost decades Slides
Part 3: The night they reread Minsky Slides

For the videos, visit this link and check out the June 8th, 2009 to June 10th, 2009 lectures by Paul Krugman.

If you are not economics-oriented but just want to know Krugman's opinions, check out this exclusive interview with Britain's Guardian newspaper: Paul Krugman's fear for lost decade.

I haven't watched the lectures yet. Given my lack of time, it's very low on my list. However, I did read that Guardian interview and it's pretty good.

One thing you have to keep in mind is that Paul Krugman, like many liberals, thinks more about the economic impact on the average citizen than on businesses or capital markets. For instance, Krugman is gloomy about the economy because he thinks unemployment won't decline for a while. He is concerned about the masses of unemployed so his view is more gloomy than capital-market-oriented (generally right-leaning) economists. For these latter economists, raw numbers and impact on capital markets matter a great deal more. For instance, many of the latter considered the growth period in the early 2000's to be quite good. The GDP numbers, stock market performance, corporate profits, and so forth, were signalling good things. But someone like Krugman was very skeptical at that time and rightly so. If you looked at employment, wage growth, consumer balance sheet, and so forth, it was not a pretty sight. After all, there was a reason the word "jobless recovery" entered common usage. Similarly, the economy may be very poor but the stock market can do well, and vice versa.

Great Britain - Better Than It Seems

Coming back to the interview, I find it interesting that Krugman is quite bullish on Britain (at least relative to mainland Europe and America) and is supportive of the government, even though citizens of Britain want Brown's head on a platter. Krugman suggests that Britain is doing much better than most European countries partly because their currency plummetted.

Paul Krugman: Well, the UK has achieved a lot of monetary traction in the way that no one else has through the depreciation of the pound. In effect, you've carried out a successful beggar-my-neighbour devaluation.

Will Hutton: So, the United Kingdom might actually get through this in reasonably good shape?

PK: Yeah. That's why I've been watching with an outsider's slight puzzlement, your bizarre political circus.

WH: Darling and Brown deserve more credit than they're given?

PK: If the government can hold off having an election until next year, Labour might well be able to run as "we're the people who brought Britain out of the slump".

WH: So your advice to the Labour Party is: hold steady.

PK: Probably.

WH: Probably?

PK: I don't know enough about the other aspects of politics, but I would guess that the option value is quite high that the economy might actually have turned a corner. That's unique. That's a uniquely British thing. None of the other G7 countries has anything like that.

WH: And that's a combination of our big beggar-our-neighbour devaluation, aggressive monetary policy, successfully recapitalising our banks and our fiscal policy.

PK: There hasn't been very much discretionary fiscal expansion when all's said and done.

WH: Well, there was a £20bn temporary cut in VAT.

PK: Yeah.

WH: Which is non-trivial.

PK: Non-trivial. But not much [other spending], as I understand.

WH: Well, there was bringing forward £3-4bn of capital spending. Perhaps together in a full year the stimulus was 1.5% GDP. Maybe 2% at the outside

I'm concerned about Britain because their real estate bubble was far larger than in America and their economy is more dependent on financial services (financial services aren't as big of the economy in America as many believe) and less flexible than America. It remains to be seen what happens in Britain. Certainly there are some wild stuff unfolding in Britain (including the rise of the fascist British National Party--admittedly only 2 seats in the somewhat weak European parliament but still shocking to me.)

Germany - Worse Than I thought!

The other surprising thing to me is that Germany, at least according to Krugman, is far worse off than I thought. As Krugman points out, their internal demand isn't sufficient and they actually contracted more in the last few quarters than many others, including America:

Will Hutton: So, which countries look closest to being Nipponised - combining balance-sheet problems and ageing populations?

Paul Krugman: Well, the US doesn't have the same combination. But in Europe, Germany and Italy look comparable. France is better and Europe as a whole is considerably better.

WH: Germany matches Japan to an uncanny degree. You talk about the Nipponisation of the world economy: I'm not so sure. But I would talk about the Nipponisation of Europe via a German economy at its centre in the grip of the same problem - and that starts to be a global problem.

PK: Germany has huge inadequacy of domestic demand. Their economic recovery in the first seven years of this decade rested on the emergence of gigantic current account surplus.

How is it possible that Germany, which did not have a house price bubble, is having a steeper GDP fall than anyone else in the major economies?

The answer is that they depended upon exporting to the bubble regions of Europe, so they actually got side-swiped by the loss of those exports worse than the bubble regions themselves got hit.

It's Germany on a global scale that is the concern. We worry about the drag on world demand from the global savings coming out of east Asia and the Middle East, but within Europe there's a European savings glut which is coming out of Germany. And it's much bigger relative to the size of the economy.

WH: And on top there is an unique and unaddressed huge potential banking crisis. The Germans pride themselves on their three-legged banking system, but it is incredibly interlinked. The IMF warns that Germany could have to take at least $500bn of writedowns, which its banks have not begun to recognise. German banks hold a trillion dollars - maybe more - of maturing collateralised debt obligations that can only be refinanced by crystallising the losses. We've had RBS and you've had Citigroup. Germany's GDP will fall 6% this year - before the banking crisis has hit it.

Some readers may recall how I, after being influenced by Michael Pettis, have considered China as playing USA's Great Depression role (in the sense of having overcapacity, trade surplus, etc.) Well, Germany seems to be a minor version of that in the Euro-zone. I didn't realize, until I read the above note by Will Hutton, that German banks hold over a trillion of CDOs and hadn't marked down their assets appropriately (note that this seems more speculation and who knows if there are massive unrecognized losses over there.) I was always aware of the vulnerability of Germany to exports—this is a serious problem if there is overcapacity in manufacturing in China as I believe because Germany tends to export capital goods used in manufacturing—but didn't realize their banking system may have unrecognized losses. There was obviously the huge blow-up with Hypo Real Estate but what is being suggested here seems that the problems aren't isolated.

Anyway, interesting times...


Popular Posts

Warren Buffett's Evolution and his Three Investment Styles

Thoughts on the stock market - March 2020

Ten classic investing myths from Peter Lynch