Dr. (Oh) No

I used to rail regularly against Paul Krugman, our “liberal conscience,” but I became bored. His ideas are so silly and wrong that it was like the proverbial shooting fish in a barrel. Or is it shooting monkeys? Whatever. But a column of his on March 14 really had me concerned because the fellow is so dangerous.

This will just amaze you: In the middle of the Great Recession he is calling for retaliatory trade tariffs against China to force them to revalue the yuan.

Here’s how he frames the question:

China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done. …

To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive …

And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.

The foundation of his idea is based on Keynesian fundamentalism. What Keynesians suggest as a cure-all of the world’s malinvestment created during the fake money credit boom is to inflate our way out of the problem. This hasn’t worked. The last thing they think we should do is to actually liquidate the bad debt and overvalued assets on the books of financial institutions which are tying up credit. Yet until that happens, we’ll be stuck in the “liquidity trap” that government policies created in the first place. (See my articles, “It’s Supposed To Work,” parts I and II.)

It boggles the mind.

Krugman says that arguing with the Chinese will no doubt be futile because they won’t revalue. His solution, referring to a policy of the Nixon Administration in 1971 to erect trade barriers against trade partners:

At this point, it’s hard to see China changing its policies unless faced with the threat of similar action [as in 1971]— except that this time the surcharge would have to be much larger, say 25 percent.

Yikes! What he is saying is that we should erect a trade barrier against Chinese goods.

Our government did this in 1930 and it was one of the causes of the Great Depression as international trade collapsed because of retaliation by other governments. … Continue reading Paul “Smoot Hawley” Krugman