Ivory Tower Thinking Again

Paul Krugman is expounding brilliantly on the European economic crisis again, quite properly decrying the process of bailing out banks while leaving unemployment basically untouched, but calling for cuts in the interest rates to stimulate “modest inflation.”

Krugman continues to illustrate the vast gulf between theory and practicality every time he sits down at his computer in his ivory tower at Princeton.

Inflation, the theory goes, decreases the relative value of debt and is therefor a “good thing.” Put a theory in one hand and a pile of dog poop in the other and see which one you can smell. The theoretical diminishment of the value of your home mortgage, for instance, does little good when inflation is driving up the cost of food, gas, heating oil, clothing and medical insurance and making you unable to make your house payments.

He also believes that the solution to excess debt is to borrow more money and let inflation devalue the debt because, presumably, inflation is devaluing the debt faster than new borrowing is increasing it. The problem with that is that the inflationary devaluation is theory while borrowing is real numbers, so the debt may be getting theoretically smaller but the numbers attached to it keep getting bigger, and bankers and financiers don’t look at theories, they look at numbers.