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The Impotence Of Drill, Baby, Drill: Why Oil Prices Soar Despite Domestic Supply

The Impotence Of Drill, Baby, Drill: Why Oil Prices Soar Despite Domestic Supply

Donald Trump talked a lot of nonsense about energy during the 2024 campaign. But in fairness, some of the underlying premises behind “drill, baby, drill” were accepted by many people. At the very least, it was widely presumed that U.S. self-sufficiency in oil would protect America from disruptions in oil supplies overseas.

But that presumption was wrong. America produces a lot of oil, substantially more than we consume. Although we import some oil, mainly from Canada and Mexico, while exporting even more oil, mainly from Texas, we buy hardly any oil from the Persian Gulf. Yet the closure of the Strait of Hormuz has caused U.S. prices of oil products to soar. Self-sufficiency in oil has done nothing at all to insulate the U.S. economy from Middle East chaos.

Now, we should have expected that. Oil is traded on world markets, so the price is more or less the same everywhere. The two most widely watched barometers of oil prices are the West Texas Intermediate price in the United States and Brent crude in Europe. America exports more oil than it imports, while Europe is a massive net importer. Yet the two prices have moved in tandem over the years:


Some people have been shocked at the way U.S. gasoline, diesel and heating oil prices have soared over the past few days. But they shouldn’t have been surprised.

So does U.S. oil production give Americans no insulation at all from world market events? Not under the current rules of the game.

It could be different. In the 1970s the U.S. imposed price controls on domestically produced oil and partially insulated consumers from global oil shocks. Over time, however, these price controls led to shortages — the infamous gasoline lines. When price controls were lifted, they were replaced by a windfall profits tax intended to capture part of the gains experienced by oil companies. This tax was repealed after prices plunged in the mid-1980s.

Whatever you think of these past policies, however, they took place in a political environment in which corporations and moneyed interests in general had far less power than they do now. It’s almost inconceivable that 1970s-type price controls or excess profits taxes would be imposed today. So US prices of gasoline and other oil products reflect world crude prices, and the fact that America produces a lot of oil doesn’t matter at all.

If anything, US families are more exposed to Middle East chaos than their counterparts in, say, Europe or Japan, mainly because we drive bigger, less fuel-efficient cars.

The people who decided to begin this war should have seen this coming. All the evidence, however, suggests that they didn’t.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

War's Oil Shock May Not Sink Economy, But Trump Policy Still Perilous

War's Oil Shock May Not Sink Economy, But Trump Policy Still Perilous

On Monday, the market reaction to the Trump/Netanyahu war with Iran was surprisingly muted. Stocks were roughly flat. Prices of oil and gas futures were up, but only moderately.

Yesterday reality apparently began to set in, although stocks made up most of their initial losses.

This will be a brief post, with some bad news and some good news.

The bad news comes in two parts.

First, any hopes that this war might be extremely brief are fading. The Trump administration may have imagined that decapitating the Iranian government would bring swift regime change, but the Islamic State isn’t a government of mere thugs — yes, they’re evil thugs, but they’re also serious religious fanatics facing what for them is an existential threat, and their grip on power isn’t that easy to break. Furthermore, it’s painfully obvious that Trump and co. had no plan beyond bombing Iran, killing its current leaders, and hoping that something good would happen.

Second, war in the middle of the world’s most important oil-producing region — which is also a key source of liquefied natural gas — inevitably has major consequences for energy prices. Once upon a time US and Israeli air superiority might have contained Iran’s ability to harm its neighbors. But in an age in which even third-rate powers have the ability to launch missiles and drones, Iran has a huge stockpile of drones and also has ballistic missiles that are destructive, hard to intercept, and have a 1200 mile range.

The U.S. embassy in Saudi Arabia has been hit by two drone strikes. Airports in Dubai, Abu Dhabi and Doha and the U.S. consulate in Dubai have also been hit.

U.S. officials have urged all Americans in the region to leave, but they did so after almost all flights had been canceled. Only now are they saying that they’re going to arrange flights on military aircraft and charter flights — an airlift that will have to be immense given that there are surely tens of thousands of Americans currently stranded. Did I mention that Trump and co. clearly went to war without a plan?

The potential targets at risk include key parts of the region’s energy infrastructure. Above all, the war threatens tanker traffic through the Strait of Hormuz, which is how the bulk of Middle Eastern oil and gas normally reaches world markets. And the risk of Iranian attacks has effectively closed the Strait.

Yesterday Trump, obviously scrambling to limit the damage, declared that he is ordering the U.S. International Development Finance Corporation to provide “guarantees for the Financial Security of ALL Maritime Trade, especially Energy, traveling through the Gulf,” as well as telling the Navy to provide security. Do we have the resources to do all of that?

Oil prices are up around $15 per barrel since mid-February.

In case you’re wondering, there are 42 gallons in a barrel.

Indeed, it’s hard to understand why oil prices haven’t risen even more. “Why has oil not hit $100 a barrel?”, asks the Financial Times. The best answer seems to be that even now traders are betting that the Strait of Hormuz won’t stay closed for more than a few days. I hope I’m wrong, but I expect the strait to remain closed for weeks despite Trump’s assurances.

Now the good news: Even if oil prices go much higher, to $100 a barrel and beyond, it won’t necessarily trigger an economic crisis. I explained why on Monday: The United States and other advanced nations are far less oil-dependent than they were in the 1970s, when oil shocks did cause major economic disruption.

It’s true that Europe, which depends heavily on imported LNG from both the Middle East and the United States, will be hit harder than we will. However, even with a sustained closure of the Strait of Hormuz Europe will face a smaller shock than it did following the Russian invasion of Ukraine in 2022.

My back of the envelope calculations say that a $15 a barrel rise in oil prices, which is what has happened so far, will raise overall U.S. consumer prices by about 0.3 percent. A $50 a barrel rise from the pre-bombing level, which would take the price to more than $120, would raise consumer prices by about 1 percent. For perspective, that’s roughly what Trump’s tariffs have done. Yet those tariffs, while they have hurt, have caused neither runaway inflation nor a recession. Neither will rising oil prices on their own even if they go well above $100 a barrel.

However, the key point is that this latest economic shock isn’t happening on its own. The tariffs — and the huge uncertainty they create for the future — haven’t gone away. Neither have draconian anti-immigrant policies and their growing economic drag. There are widespread concerns about AI — both as a bubble that might burst and as a force driving job losses. And many people, myself included, are worried about financial stability: In many ways we have recreated the “shadow banking” risks that made the 2008 crisis possible.

Now we’ve added a fresh level of massive uncertainty. Bear in mind that this isn’t even a war of choice; it’s a war of whim, marked by a near-total lack of planning.

One shouldn’t exaggerate the economic fallout from this war. But it isn’t occurring in isolation: There are many stresses on our economy, and this could be the straw that breaks the camel’s back — a straw that becomes heavier the longer the war goes on. Furthermore, if Trump is this erratic now, what will he do as the midterms get even closer?

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

So Much Time, So Little Truth: Trump's Longest-Ever, Utterly Hollow Speech

So Much Time, So Little Truth: Trump's Longest-Ever, Utterly Hollow Speech

Well, that was exhausting — or would have been, if I had watched it. But I am not a masochist. I waited to read the transcript.

Trump’s State of the Union was historic in at least one respect: It was the longest SOTU ever. Was the plan to turn public opinion around by boring America into submission?

The address may also have been historic in another way, although it would be hard to quantify. Did any previous SOTU contain so many lies?

For the most part they weren’t Big Lies, lies that are persuasive because people can’t believe that anyone “could have the impudence to distort the truth so infamously”. They were, instead, small lies that added up to a false — and completely unpersuasive — portrayal of where we are.

On economics, Trump has catastrophic ratings even though the economy isn’t a catastrophe. Things aren’t great, but by most metrics they are about the same or a little bit worse than they were when he took office:

The last measure, the labor market differential, is the spread between people saying that jobs are “plentiful” versus “hard to get,” which has deteriorated substantially.

Why are people so negative when the economy isn’t that bad by conventional measures? Affordability, especially with regard to housing and health care, is a real problem, not fully captured by standard measures. And it’s a problem Trump didn’t address at all — instead, he’s doubling down on his massively unpopular tariffs, which make the problem worse.

Also, there are two big disconnects. First is the gap between what Trump promised — he was going to bring grocery prices down, cut energy prices in half — and what he has actually delivered. Second is the gap between his wild boasts about how great things are and the reality of a K-shaped economy that is leaving many Americans behind.

One other lie that struck me, although it may not matter much to voters, was Trump’s insistence that the world admires what he’s doing: “America is respected again, perhaps like never before.”

Trump’s desire for external validation is, frankly, pathetic. And the truth is that we are despised like never before. You can see this in surveys:

Source: Pew Survey

And foreign leaders have completely lost faith in America: We’ve become a country whose word can’t be trusted, a country that betrays its allies:

Source: Kiel Institute

It’s true that in some ways the world fears us in a way it didn’t before — in the same way that one steps carefully around a belligerent drunk in a bar. But we haven’t been this weak on the world stage since before World War II.

Anyway, that speech won’t pull Trump out of his downward spiral. Time to attack Iran?

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.


How The Ultra-Rich Are Different From You And Me (And The One Percent)

How The Ultra-Rich Are Different From You And Me (And The One Percent)

On Wednesday the Wall Street Journal published an article with the headline “Billionaires’ low taxes are becoming a problem for the economy.” Hey, what do you expect from a woke, left-wing rag?

To be honest, the article didn’t make a very compelling case for its ostensible point, that the growing concentration of wealth at the very top may lead to economic instability. But it did offer a good discussion of both the soaring concentration of wealth in the hands of a tiny elite and of the extent to which this elite is able to avoid paying taxes.

Many discussions of inequality in America fail to grapple with the way we have become an oligarchy, with a large share of income, an even larger share of wealth, and a huge amount of political power accruing to a very small number of people. One still sees discussions of the “elite” that focus on the top 20 percent or the top 10 percent, when the real action is much further up the scale. Never mind the one percent. To understand what’s happening to us, we need to focus on the 0.1 percent, the 0.01 percent, even the 0.00001 percent.

True, even the economic position of the top one percent is widely misunderstood. The Journal article misleadingly suggested that Americans in the top 1 percent as a whole are heavily taxed, because they pay 40 percent of income taxes. But the income tax isn’t the only tax! In particular, the federal government also collects a lot of revenue from payroll taxes, which fall much more heavily on low- and middle-income Americans than on the upper class. As a result, the top 1 percent only pays 27 percent of total federal taxes:

Furthermore, state and local taxes are strongly regressive:

Overall, the top one percent as a group pay at most a slightly larger share of U.S. taxes than their share of pretax income.

Furthermore, most people within the top one percent are what Leona Helmsley called “little people,” as in “Only the little people pay taxes.” The ultra-rich — the 0.1 percent, the 0.01 percent, the 0.00001 percent — pay much lower tax rates than the merely rich. I’ll explain how they pull this off shortly. First, let me make the point that it’s the ultra-rich, who account for only a tiny fraction of the one percent, who have been pulling away from the rest of the nation.

The data from the Federal Reserve’s Distributional Financial Accounts are startling. It turns out that the share of total wealth held by the merely rich — those in the top 1 percent but not in the top 0.1 percent — has actually declined since the 2010s:

At the same time, the wealth share of the top 0.1 percent, the ultra-rich, has soared:

In 2022, the minimum wealth required to be in this category was $46 million. It’s more now.

And much of the rise in wealth of the 0.1 percent is accounted for by the super-billionaire class, a tiny sub-group of almost inconceivably wealthy individuals. Reposting a chart from Wednesday’s post:

Why are the ultra-rich pulling away from everyone else? Partly because they pay much lower taxes than the little people. Some manage a full Leona Helmsley, paying no taxes at all. On average, according to recent estimates by Balkin, Saez, Yagan and Zucman, they pay a total tax rate — federal, state, and local — of only 24 percent. That’s less than the average for the whole population, around 30 percent. And it’s much less than the tax rate for “top labor income earners.” That means people who receive big paychecks — but who do receive paychecks. In contrast, the incomes of the ultra-rich flows largely from or through businesses they own.

Put it this way: The “$400,000 a year working Wall Street stiff, flying first class, and being comfortable,” mocked by Gordon Gekko in the movie Wall Street, pays around 40 percent of his income in taxes. The modern equivalents of Gekko — who make orders of magnitude more money than the financial predators Gekko was modeled on — typically pay only around half as much.

How do the ultra-rich pull this off? Most of their success at tax-dodging presumably reflects tax avoidance rather than tax evasion. Avoidance, as opposed to evasion, involves strategies that are legal, although they shouldn’t be. Balkin et al emphasize the way the ultra-rich arrange to ensure that most of their income accrues not directly to themselves but to businesses they control, and are able to benefit from their wealth without ever turning that wealth into taxable income.

The Journal notes one example:

Amassing assets like stocks, borrowing against them rather than selling during the owner’s lifetime, and passing them to the next generation after death is sometimes called the “buy borrow die” tax-avoidance strategy.

It’s clear that by any reasonable standard the extremely rich pay much less than their share in taxes.

Why doesn’t the U.S. government try to close the loopholes that allow the extremely rich to pay so little? Don’t say that it would be technically difficult or that it would hurt the economy. We were able to tax the rich for a generation after World War II, a generation during which the U.S. achieved the best growth in its history. In general, governments in advanced nations have enormous ability to achieve their goals, if they want to.

The problem, of course, is that too many politicians don’t want to collect taxes on the superrich, because the ultra-wealthy have used their wealth to achieve immense political power. And the failure to tax them effectively is reinforcing the vast accumulation of wealth at the top.

It’s a vicious circle. And whatever you think of specific proposals for wealth taxes and other approaches toward reining in America’s billionaire class, we had better take action before it’s too late.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

Howard Lutnick And The Buffoonish Banality Of MAGA Evil

Howard Lutnick And The Buffoonish Banality Of MAGA Evil

There’s a longstanding tradition in American politics of what Richard Hofstadter famously called the paranoid style – a way of thinking that sees conspiracies lurking everywhere. MAGA-world is particularly riddled with conspiracy thinking – from George Soros and Jewish space lasers, QAnon and the Great Replacement Theory, to Italian satellites hacking into voting machines to deliver the 2020 election to Joe Biden.

But these are far-fetched fantasies. The truth is far more banal and shocking.

There are people in positions of great power in the U.S. government engaged in evil conspiracies against everything that is good and decent. Their conspiracies are far more extensive and damaging than almost anyone imagined. But there are no evil masterminds behind this. Only amoral, stupid grifters like Howard Lutnick.

During Trump 47’s first year, Lutnick, the Commerce secretary, was an omnipresent spokesman for Donald Trump’s policies, a constant presence on TV, especially the Sunday talk shows.

He was not impressive in that role. Unlike Scott Bessent, he lacked any hint of gravitas. He doesn’t have Pete Hegseth’s hair. Moreover, Lutnick’s Trump boosterism has been consistently and embarrassingly incompetent.

The only waves he has made are a result of his exceptional combination of stupidity and offensive tone-deafness.

Thus he promised to revive U.S. manufacturing by bringing back “the work of millions and millions of human beings screwing in little, little screws.” Lutnick, a billionaire, dismissed concerns about chaos at the Social Security Administration by saying that his mother-in-law wouldn’t complain about a missed check. He gave a Europe-bashing speech to a private dinner at Davos so offensive that Christine Lagarde, president of the European Central Bank, walked out.

And in Congressional testimony today, Lutnick admitted that he visited Epstein Island, but said that he did so with his wife, nannies and children, and asserted that “We left with all of my children.”

It would be tempting to dismiss Lutnick as a buffoon. Yet despite his intelligence deficit, he sits at the intersection of not one but at least two ugly conspiracies.

Before joining Trump’s cabinet, Lutnick ran the Wall Street firm Cantor Fitzgerald — presenting a huge potential conflict of interest that he claims to have ended by turning the business over to … his sons. Cantor Fitzgerald, in turn, is intimately linked to Tether, a cryptocurrency that is highly profitable because it has become a favorite channel for money-laundering by international criminals.

Nor was money-laundering through cryptocurrency the only criminal conspiracy to which Lutnick was, at the very least, adjacent. Lutnick has in the past vehemently denied having any association with Jeffrey Epstein, insisting that he severed all contact with the pedophile ringleader in 2005. But even the highly limited, extremely redacted release of the Epstein files — everything we’ve seen reeks of a major coverup — shows that he was flat-out lying. Not only did he stay in close contact with Epstein, the two men appear to have gone into business together.

But, at this point, who could possibly be surprised? The more we learn, the more pedophilia and criminal use of cryptocurrency look related, even like different aspects of a single conspiracy. Epstein, it turns out, was a major early investor in the crypto industry. In the backrooms of MAGA-land, passing around under-age girls is a lot like passing around insider crypto deals.

In any previous administration, Lutnick’s naked conflicts of interest and his Epstein lies would have led to his immediate departure. But Trump 47 is using his position to massively enrich himself, and whatever the Justice department is hiding, what we already know about Trump’s personal history is damning — “Grab ‘em by the pussy. You can do anything.”

Lutnick may be under wraps for a while, but don’t expect him to resign. Pushing him out would be a tacit admission that huge conflicts of interest, family business that enables crime and association with sexual predators are bad. Oh, and let’s not forget jaw-dropping stupidity. Not going to happen.

While MAGA-world’s fantasy villains like George Soros are brilliant and subtle, MAGA’s real villains are uncouth and dim-witted. Yet they carry out their sinister schemes in broad daylight. For all they need to flourish is utter shamelessness, along with the backing of a corrupt administration and a corrupt political party.

So it’s worth remembering Hannah Arendt’s observations about the architects of Hitler’s genocide, which led her to coin the phrase “the banality of evil”. As Arendt noted, the horrors of Nazism were not inflicted by brilliant geniuses, but through the normalization of thoughtless, amoral behavior that eventually turned into evil. Thus while Lutnick appears on the surface like a dim-witted backroom grifter, he is a warning of something far more sinister and malign lurking below.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

Warsh Case Scenario: A Bad Heir Day For The Federal Reserve System

Warsh Case Scenario: A Bad Heir Day For The Federal Reserve System


So Kevin Warsh will be the next Fed chair. The silver lining to his appointment is that he shouldn’t be able to do much damage, although with one big caveat (see below). The Fed is a republic, not a dictatorship; key decisions are made by a committee in which the chairperson has only one vote. Fed chairs can only drive policy through persuasion — and Warsh lacks the intellectual and moral credibility to be effective on that score. But God help us if we enter a crisis that requires decisive Fed leadership, the kind Fed chair Ben Bernanke showed during the financial crisis, or Jay Powell is now showing against Trump’s attacks.

Absent a crisis, my prediction is that the majority of Warsh’s colleagues will largely ignore him, albeit without expressing their contempt openly. Even a coalition among the Trump appointees to the Board of Governors – Warsh, Bowman and Miran – won’t be enough to overturn the responsible monetary policy stewardship of the other governors.

But that’s a low bar, and it may be lower than is generally appreciated. For while I don’t think Warsh will do too much damage to monetary policy, he, along with his fellow Trumper Michelle Bowman, the vice chair for financial supervision, may well eviscerate the Fed’s role as a financial regulator.

As I write this, many media reports are describing Warsh as a monetary hawk. That’s a category error. Warsh is a political animal. He calls for tight money and opposes any attempt to boost the economy when Democrats hold the White House. Like all Trumpers, he has been all for lower interest rates since November 2024.

Depressingly, some Democratic-leaning economists are stepping up to reassure us about Warsh’s qualifications. This is reminiscent of the way many economists rallied around the selection of Kevin Hassett as chair of the Council of Economic Advisers in 2017, although he was an obviously ludicrous hack. Since then Hassett has outperformed my expectations, revealing himself to be such an outrageous sycophant that even Trump realized that it would be a PR and financial disaster to nominate him as Fed chair.

Independent economists who don’t feel the need to maintain good relations with the corridors of power are being quite forthright on the Warsh nomination. Here are a couple of reactions from my feed:

A screenshot of a social media post AI-generated content may be incorrect.A screenshot of a social media post AI-generated content may be incorrect.

What lies behind this contempt? Warsh’s most notable role in policy debate came in the years immediately following the global financial crisis, when he was a member of the Federal Reserve Board who argued strenuously against the Fed’s efforts to boost the economy. As I noted at the time, his arguments were confused and incoherent, but he implied (without saying so in clear language) that the Fed’s actions would be inflationary despite the depressed state of the economy.

He was completely wrong about that. Now, everyone makes bad predictions. But when you do, you’re supposed to admit your mistakes and learn from them. Warsh never did that. Instead, he kept inventing new reasons to call for higher interest rates — notably a bizarre claim that low rates were hurting business investment — as long as a Democrat was president.

So how does someone with that record end up in what is normally the most important economic post in the world (although I suspect that Warsh will be one of the least influential Fed chairs in history)? I would list five reasons, in no particular order.

First, Warsh married into great wealth. Specifically, he married the daughter of Ronald Lauder, the cosmetics billionaire — who, bizarrely, is a key figure behind Donald Trump’s obsession with Greenland.

Second, he has always been very good at ingratiating himself with influential people.

Third, he’s an effective bullshitter. Sorry for the technical language, but I can’t find another way to say it. Listen to Warsh on economic policy, and he throws around a lot of big words that presumably sound impressive to people who don’t know anything about the subject. But there’s no coherent argument behind the verbiage.

Fourth, he’s a Republican loyalist, who always wants to slam the economic brakes when Democrats are in power and step on the gas when Republicans rule.

Fifth, as I highlighted in the Truth Social post screenshotted at the top of this piece, Donald Trump thinks he looks the part.

It’s a humiliating day for the Federal Reserve, which has always prided itself on its professionalism and has been hugely respected around the world. But even the Fed can’t insulate itself from the derangement sweeping America.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

Courageous Carney, Demented Donald And The Shameful End Of Pax Americana

Courageous Carney, Demented Donald And The Shameful End Of Pax Americana

On Tuesday Mark Carney, Canada’s Prime Minister, gave a remarkable speech at the World Economic Forum in Davos. In effect he announced, calmly and lucidly, that Canada is filing for divorce from the Pax Americana:

Let me be direct. We are in the midst of a rupture, not a transition.
Over the past two decades, a series of crises in finance, health, energy and geopolitics have laid bare the risks of extreme global integration. But more recently, great powers have begun using economic integration as weapons, tariffs as leverage, financial infrastructure as coercion, supply chains as vulnerabilities to be exploited.
You cannot live within the lie of mutual benefit through integration, when integration becomes the source of your subordination.

And he urged other nations — implicitly, although he didn’t say it in so many words, the nations of Europe in particular — to join Canada in a new alliance of democracies no longer willing to take orders from an abusive hegemon:

[T]he middle powers must act together, because if we’re not at the table, we’re on the menu.

It was a brave stand to take. Canada sits right next to the United States, whose economy is a dozen times larger. Moreover, as the map below shows, Canada’s population lies almost entirely within a narrow band on top of the U.S. Back when I was writing a lot about economic geography, I used to joke that Canada was closer to the United States than it was to itself. Nature wants Canada and the United States to be closely intertwined. And for this reason Canada is arguably more exposed to the consequences of Trumpian wrath than any other nation.

Courageous www.nationalmemo.com

But democracies can no longer maintain close ties with the U.S. The day after Carney spoke, Donald Trump showed why.

I listened to Trump’s Davos speech with fear: How much damage will this demented, vindictive individual do to America and the world? I also felt a deep sense of shame: What is wrong with my country, that we put someone like this in a position of unprecedented power?

As the whole world watched, the president of the United States (God help us) repeatedly referred to Greenland, which he is willing to blow up NATO to acquire, as Iceland. Don’t dismiss this as trivial: if any previous president had been that befuddled, the whole press corps would have been howling about senility and demanding that he step down.

And of course Trump’s press secretary insisted that he didn’t say what we all saw and heard him say.

Trump also repeatedly displayed his trademark willful ignorance, for example when talking about renewable energy. While berating Europe for using wind energy, he admitted that China also has big wind farms — someone must have showed him pictures — but declared that

They put up a couple of big wind farms, but they don’t use them. They just put them up to show people what they could look like. They don’t spin, they don’t do anything.

In reality, China accounts for almost 40 percent of total world generation of electricity from wind power, substantially more than Europe.

Beyond confusion and ignorance, Trump delivered menace:

The horrifying details of Trump’s rant aside, what strikes me about the Trump administration’s performance at Davos — not just Trump himself but his minions — was the utter lack of purpose. The whole Trump team seems to have gone to Europe with no goal other than to belittle and insult their hosts.

On Tuesday evening Howard Lutnick, the Commerce secretary, spoke to a private dinner at Davos — at which he belittled European economies and their lack of competitiveness. He was reportedly booed, and Christine Lagarde, the president of the European Central Bank, walked out.

On Wednesday morning Scott Bessent, the Treasury secretary, dismissed reports that one major Danish pension fund has decided to divest itself of U.S. bonds by declaring that “Denmark’s investment in U.S. Treasury bonds, like Denmark itself, is irrelevant.”

And Trump devoted much of his speech to portraying Europe as a hellhole, its economy destroyed by renewable energy and its society destroyed by immigration.

Never mind whether any of this is true. (It isn’t.) What was the point of saying such things? Do Trump and his Mini-Mes imagine that they can convince European leaders that they, their economies, and their societies are all pathetic losers?

To say what should be obvious but apparently isn’t, we don’t need top government officials playing at being shock-jock podcasters, getting clicks by being outrageous. God knows, MAGA has plenty of those already. Official speeches aren’t supposed to be rants that provide red meat to your political base. They’re supposed to influence people who aren’t your supporters, in ways that serve the national interest.

This doesn’t mean that official speeches must be mealy-mouthed and boring. Mark Carney’s speech definitely wasn’t. But Carney had a clear purpose: To rally other nations into solidarity against U.S. economic blackmail.

Trump, on the other hand, just wanted to swagger, whine, and mostly hear himself talk. And all he accomplished was to turn suspicions that he’s gone off the deep end into certainty.

We’re already seeing some consequences of Trump’s ranting:

There will be much more of this. American power and influence have always rested, much more than many people realize, on the perception of American trustworthiness. We didn’t always do the right thing, but we honored our agreements and were the least greedy imperial power in history.

That’s all over. At Davos, Mark Carney called for giving up hope that the Pax Americana can be restored, and Donald Trump proved him right.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

'Venezuelifying' America: Don't Cross The Dictator Or He Will Destroy You

'Venezuelifying' America: Don't Cross The Dictator Or He Will Destroy You

So federal prosecutors have opened a criminal investigation into Jerome Powell, the Federal Reserve chair. In his statement in response, Powell, to his credit, didn’t dignify the obviously spurious accusations by protesting his innocence. Instead, he went right to the heart of the matter:

This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress’s oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.
This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.

Indeed. Surely nobody at the now completely corrupt Department of Justice really believes that Powell has committed any crimes, other than the crime of not doing Donald Trump’s bidding. This is all about intimidation, not just of Powell, but of everyone at the Fed.

I’ll get to the implications for the Fed and the economy in a minute, but let me first say what Powell can’t: This isn’t just about the Fed. It’s part of a broader assault on anyone who doesn’t go along with Trump’s agenda. At the top of this post I’ve put Powell’s picture next to that of Renee Nicole Good, who was killed by ICE last week, because the attack on Powell and Good’s murder are part of the same story: Trump and his minions have zero tolerance for dissent. No matter who you are, if you stand up to them they will try to ruin your life any way they can, up to and including shooting you in the face.

Given this horrifying reality, it almost feels wrong to talk about the economic consequences of an attack on Fed independence. But these consequences are part of the picture.

So, what does the Fed do, and why is it quasi-independent? I published a primer about that last summer, but here’s the short version:

The Fed is America’s “central bank,” which means, roughly speaking, that it controls the U.S. money supply. This control in turn allows the Fed to set the level of short-term interest rates, a powerful tool for managing the economy.

Why put this tool in the hands of technocrats rather than directly under the control of the president? Because cutting interest rates is easy and pleasant — too easy and too pleasant. Unlike stimulating the economy with higher spending or lower taxes, expansionary monetary policy doesn’t require drafting and passing legislation. All it takes is a phone call to the open market desk in New York, which buys Treasury bills from banks to push market interest rates down. And lower interest rates feel good for a while.

This creates an obvious temptation for the White House to push interest rates down, especially when an election is looming. Yet excessively easy money can lead to inflation. That’s a lesson the United States learned after 1972, when a compliant Fed kept rates low to help Richard Nixon win reelection, setting the stage for years of stagflation.

Recent experience in Turkey offers an even stronger lesson. Recep Tayyip Erdoğan, Turkey’s authoritarian, Trump-like president, forced Turkey’s central bank to keep rates down in the face of rising inflation. The result was that inflation (the solid blue line in the chart below) eventually rose above 80 percent:



Before the Great Depression, many countries avoided inflationary monetary policy by pegging their currencies to gold. The gold standard, however, was too inflexible. In fact, the “golden fetters” it imposed played a major role in deepening the Depression.

How, then, can nations limit the temptations of easy money while preserving the flexibility to deal with crises? The answer, adopted by the United States and many other nations, is to put the central bank under the direct control of technocrats, not politicians. Such “independent” central banks are ultimately accountable to elected officials, but they’re insulated from short-run political pressure.

This system doesn’t work perfectly, because even technocrats are human and sometimes get it wrong. But experience shows that central bank independence works much better than letting monetary policy be politicized, especially when the politicians in question are greedy and don’t understand economics — in other words, when they’re like Donald Trump.

Yesterday a who’s who of former Fed chairs and other former top economic officials issued a statement denouncing the weaponization of the Justice Department against Powell, saying that

This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly. It has no place in the United States whose greatest strength is the rule of law, which is at the foundation of our economic success.

I wish they had been able, just this once, to put aside Fedspeak and use plain language, but let me translate: “emerging markets with weak institutions” means Third World nations like, for example, Venezuela — or, as Trump would say, shithole countries.

Over the weekend, as it happens, Trump declared himself the “acting president of Venezuela,” which he definitely is not. But he is Venezuelifying the United States.

May I say, by the way, that every investor and businessperson who backed Trump or tried to accommodate him once he won should be looking in the mirror and asking why they helped enable this catastrophe. For none of what Trump is doing now is a surprise to people who paid attention.

The irony here is that the effort to intimidate the Fed is likely to backfire on Trump, in three ways.

First, in the near term the Fed will be especially reluctant to cut rates, even if doing so might make sense, lest it seem as if intimidation is working. This reluctance will persist even after Trump chooses a new Fed chair, because interest rates are set by a committee, not an individual, and most of the relevant committee aren’t Trump appointees.

Second, even a politicized central bank can only reduce short-term interest rates temporarily. As inflation rises, the bank will eventually be forced to raise rates higher than they were at the beginning. Look back at the chart for Turkey, above: Erdogan initially pushed the short-term interest rate (the green dotted line) down, but in the face of exploding inflation rate the bank was eventually forced to raise rates to more than 50 percent.

Finally, attacking the Fed’s independence could push long-term interest rates — which are the rates that matter for the economy — higher, not lower, even in the short run. Why? Because bond investors understand that political pressure on the Fed will eventually mean higher short-term interest rates. And long-term rates mostly reflect expectations about the future rather than current short-term rates.

Indeed, although long-term rates didn’t move much after the attack on Powell was revealed, they actually rose slightly.

However, even if Trump understood that his attack on the Fed’s independence will backfire, he would still be going after Powell, because he is less interested in achieving policy results than he is in punishing anyone who crosses him. Powell had the temerity to insist on doing his job rather than prostrating himself at Trump’s feet. So he must suffer — personally.

If top Trump officials like Scott Bessent and Kevin Hassett had any integrity, they would have threatened to resign en masse as soon as the criminal investigation of Powell was revealed. But they don’t and they didn’t.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

Federal Reserve's Rate Cut Won't Do Harm, But Its Next Chair May Be Ruinous

Federal Reserve's Rate Cut Won't Do Harm, But Its Next Chair May Be Ruinous

Yesterday the Federal Reserve cut the federal funds rate — the interest rate on overnight loans between banks, which the Fed effectively controls — by a quarter point. There are four things you should know about that cut:

· Although Donald Trump has been screaming at the Fed, demanding big rate cuts, there isn’t actually a compelling case for cuts right now

· On the other hand, this cut is unlikely to do any harm

· In fact, Fed policy over the next few months barely matters

· The important questions now are political: Will Trump destroy the Fed’s independence, and do to monetary policy what he has done to health policy — put it in the hands of charlatans and cranks?

Why do I say that there isn’t a compelling case for a rate cut? The Fed has a “dual mandate”: It’s supposed to seek both price stability and full employment. To fulfil this mandate as best it can, the Fed normally cuts interest rates when the job market is weak, raises rates when inflation is running hot.

Right now, however, the job market and the inflation rate are giving conflicting signals. Unemployment is somewhat elevated — 4.4 percent compared with an average of four percent last year — and other indicators, like the time it takes workers to find jobs, are showing weakness. On the other hand, inflation is running at around three percent, above the Fed’s target of two percent. So you can make the case either for or against yesterday’s cut.

Indeed, the Fed’s official statement about the interest rate decision highlighted the ambiguity, noting the risks on both sides and justifying its move with a guarded reference to rising “downside risks to employment.”

For the wonkishly inclined: We can get more specific about the dual mandate by invoking the Taylor Rule, devised by the economist John Taylor in the 1990s, which offers a formula for setting the fed funds rate based on unemployment and inflation. Or actually I should say Taylor Rules, plural, since there are a number of variants. The Atlanta Fed offers a “Taylor rule utility,” which lets you pick among the variants or roll your own. But most versions say that the current level of rates is more or less right. Here’s what one comparison looks like:

Source: Version FOMCTaylor93UR

On the other hand, nobody thinks these estimates are precise, and as the Fed statement suggested, there are hints in the data that the labor market is weakening. So a 25 basis point cut is defensible too.

And none of this matters very much. Short-term interest rates, like the fed funds rate, have very little impact on the real economy.

And long-term rates, which matter a lot more than short-term rates, especially for housing, mostly reflect market expectations of Fed policy over the next few years, not the next few months. As a result, long-term rates and short-term rates can diverge. They can even move in opposite directions. The Fed began its current cycle of rate-cutting in September 2024. Since then the fed funds rate has come down significantly but the benchmark 10-year interest rate has gone up from a low of 3.6 percent to the current level of just under 4.2 percent:

Sources: Board of Governors of the Federal Reserve System, New York Federal Reserve, St. Louis Federal Reserve

What’s that about? Because the Fed tries to fulfil its dual mandate, it normally tries to set interest rates neither too high, which can lead to unnecessary unemployment, nor too low, which can lead to excessive inflation. If you ask me, the Fed should call its target the “Goldilocks rate.” Sadly, however, it’s usually referred to, unpoetically, as r* or r-star.

R-star can’t be observed directly, only estimated. And what has happened since last year is that many estimates of r-star have been marked up, for at least two reasons. First, the tax cuts in the One Big Beautiful Bill will lead to larger budget deficits — no, tariff revenues won’t make up the difference, even if the Supreme Court lets Trump’s clearly illegal tariffs stand. And these deficits will put upward pressure on long-term rates. Second, the AI boom has led to huge spending by tech companies, especially on data centers, which also puts upward pressure on long rates.

So if the Fed continues to operate normally – that is, without political interference -- movements in r-star will be the main driver of future interest rates. In particular, long rates will come down if AI is a bubble and that bubble bursts.

But will the Fed continue to operate normally? Or will monetary policy, like so much else in America these days, end up being ruled by Donald Trump’s whims?

I wrote last week about Kevin Hassett, Trump’s likely pick as the next Federal Reserve chairman, whom I described as an “ideological DEI hire” who is intellectually and morally unqualified for the job. It turns out that I’m not alone in that assessment, although I may be using unusually blunt language. CNBC regularly surveys financial experts for their views on Fed-related matters. According to their latest survey, featured in the chart below, almost all their experts believe that Hassett will get the job, but almost none of them think he should.

And even if Hassett doesn’t get the job, whoever does is almost certain to be totally subservient to Trump. And this will be a negative for the economy. First, if Trump succeeds in controlling monetary policy, he can exact a policy according to his whims, which are both incoherent and dangerous. He is demanding massive interest rate cuts even as he insists that the economy is A+++++ — in which case why does it need these cuts? Nor can we expect him to show proper concern about the inflationary consequences of big rate cuts given that he keeps claiming that overall prices are falling, which is simply false.

And second, even if Trump isn’t able to capture full control over monetary policy through his pick for Fed chair, the effects will still be negative. Because as I pointed out in my critique of Hassett, in times of crisis the Fed chair has to be capable of showing leadership and gravitas, as well as garnering trust. Given that the Fed’s future task has been made especially difficult by Trump’s chaotic policies, higher-than-desired inflation, a weakening job market, very high future deficits, and a falling dollar, installing a Trump sycophant as Fed chair would mean facing any future crisis without any of the reserves of credibility that got us through the global financial crisis in 2008 and the COVID crisis in 2020.

So however this turns out, politics is now what matters for the future of the Fed — not whether we have one or two rate cuts in 2026.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

Is Donald Trump Pro-Crypto Or Pro-Crime? (Is There Really A Difference?)

Is Donald Trump Pro-Crypto Or Pro-Crime? (Is There Really A Difference?)

On one side, the Trump administration is sinking small boats that it claims, without evidence, are smuggling drugs — and according to the Washington Post, Pete Hegseth, the self-styled Secretary of War, has personally ordered at least one follow-up strike to kill the survivors. A working group of former JAGs, that is, members of the military’s legal branch, issued a statement declaring that it

unanimously considers both the giving and the execution of these orders, if true, to constitute war crimes, murder, or both.

On the other side, Donald Trump has declared his intention to grant “a Full and Complete Pardon” to Juan Orlando Hernández, a former president of Honduras who has been convicted of conspiring to import cocaine into the United States. In fact, Hernandez was part of a cartel, including his brother, that smuggled hundreds of tons of cocaine into this country.

At first glance, the juxtaposition seems bizarre – Trump is either murdering or committing war crimes against people who are at worst small-time drug smugglers, and may be innocent fishermen, while pardoning a drug lord who was responsible for thousands of American deaths while savaging his own country, Honduras. But there is a pattern to this murderous madness, once one connects the dots between Trump’s mob-boss persona and the billionaire crypto/tech broligarchy.

First, understand that Trump’s vendetta against purported penny-ante drug smugglers is all about dominance display, an exhibition of his ability to order violence. The real object may be to set the stage for invadingVenezuela.

Second, while Trump is clearly willing to inflict gratuitous suffering on the little people, he positively revels in his association with big-time criminals, whether it’s Putin; or Saudi Crown Prince Mohammed bin Salman, who had a critical journalist dismembered with a bone saw; or Ross Ulbricht, creator of Silk Road, an underground e-marketplace known for drug trafficking, whom Trump pardoned immediately after assuming office; or Larry Hoover, a Chicago crime boss, who was sentenced to several lifetimes in prison for leading the Gangster Disciples, also pardoned by Trump. Yes, Trump really and truly cares about crime in Chicago.

Still, why would Trump, whose poll numbers are cratering, generate even more negative headlines by pardoning Hernández, who was duly convicted of conspiring to send more than 400 tons (!) of cocaine to America?

The answer is the influence of the crypto/tech broligarchy. In fact, many of Trump’s pardons of the most egregious criminals are closely linked to their influence.

A case in point is Ulbricht, whose Silk Road was an early example of what is still the main non-speculative use of Bitcoin: facilitating criminal activity. Ross Ulbricht was a darling of the tech-libertarian crowd, which includes Peter Thiel, arguably the godfather of Silicon Valley and whose financial backing was critical to JD Vance’s senate win. Trump first promised to pardon Ulbricht in 2024, as part of a pitch to win the votes of libertarians:

Whatever libertarians were in the past, they are now an extremist party, opposed to laws against drug smuggling, money laundering, any type of prudential government regulation, and – in the case of Thiel – opposed to democracy itself. It should not go unnoticed that Trump saluted a party that proclaims “Become Ungovernable” as its guiding principle, written with the anarchy a-symbol.

Next, Trump’s pardon of Changpeng Zhao, aka CZ, the former CEO of the cryptocurrency exchange Binance, fits the same pattern. CZ pled guilty to charges of violating U.S. laws against money-laundering and was fined $50 million, in addition to a fine of $4.3 billion against Binance. Under CZ, Binance was a major channel of worldwide money laundering. As one report put it, prosecutors charged that Binance

intentionally and purposefully ignored the transfer of money from countries and areas that are subject to sanctions -- including Syria, Iran, Cuba, Russia-occupied Crimea and the Donbas region in Ukraine. There was also trading that involved the criminal dark-web market Hydra.

And the story continues. Last week,

The families of 300 U.S. citizens hurt or killed in the Oct. 7 attack on Israel sued Binance, claiming the cryptocurrency exchange aided Hamas and other terrorist groups by transferring more than $1 billion among accounts they controlled.

However, in the world of radical libertarians, of the crypto/tech broligarchy, CZ’s crimes weren’t real crimes because crypto is designed to “free” us from the pernicious oversight of government. Yes, Trump really cares about stopping terrorism.

Finally, why pardon Hernández? What’s the connection to the crypto/tech broligarchy? It’s called Próspera.

Próspera is a for-profit city being built off Honduras’s coast. Its charter largely exempts the island from Honduran law. Instead, the city is run by a governing structure that for the most part gives control to a corporation, Honduras Próspera Inc., which is in turn funded by a familiar list of Silicon Valley billionaires including Thiel, Sam Altman and Marc Andreesen.

So while the city is being marketed as a libertarian paradise, it’s best seen as an autonomous oligarchy, government of, by and for billionaires. And you won’t be surprised to learn that within Próspera, Bitcoin is legal tender.

The 2013 Honduran law that made the creation of Próspera possible was initially ruled unconstitutional by the Honduran Supreme Court. But that ruling was reversed after Juan Orlando Hernández’s predecessor, Porfirio Lobo Sosa, managed to dismiss four of the court’s justices. Like Hernández, Sosa was a right-winger, who became president after a populist president, Manuel Zelaya, was overthrown by a military coup. Under both Hernández and Sosa, chaos reigned – corruption, criminal gangs, and drugs overran the country. The current president, Zelaya’s wife, has tried to claw back some sovereignty over Próspera, which has struck back with a mammoth lawsuit that could bankrupt the country.

Yesterday Honduras held an election in which Trump backed Nasry Asfura, a member of the same right-wing party as Hernández. Early results show the governing left-wing party well behind, but Asfura in a virtual tie with another right-wing candidate.

In any case, the point is that while Trump threatens and fulminates against Maduro in Venezuela, he is openly backing the Honduran political party that has allowed massive drug smuggling into the U.S. Why? The only logical answer is because of the influence of the crypto/tech broligarchy and their interests in Próspera.

So the announced pardon of Hernández for drug smuggling isn’t really a departure from the pardons of Binance’s Changpeng Zhao for money laundering or Silk Road’s Ross Ulbricht for facilitating illicit drug sales. In each case what’s being upheld is the principle that lawlessness in the pursuit of tech billionaires’ interests is no vice. In fact, it’s to be encouraged.

And Trump, whose only principles appear to be self-enrichment and vindictiveness, is happy to go along.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.


Warning: Here's Why The Fed Can't Rescue Markets From AI Bubble

Warning: Here's Why The Fed Can't Rescue Markets From AI Bubble

While everything feels political now – a kind of fin de siècle chaos politics – I want to take a brief break from the political today. Instead I want to talk about asset markets and the Fed.

We could say that the US economy in 2025 was schizoid. On the one hand Donald Trump abruptly reversed 90 years of U.S. trade policy, breaking all our international agreements, and pushed tariffs to levels not seen since the 1930s. Worse, the tariffs keep changing unpredictably. This uncertainty is clearly bad for business and is depressing the economy. On the other hand, there has simultaneously been a huge boom in AI-related investment, which is boosting the economy.

As many people have already noted, the AI boom bears an unmistakable resemblance to the tech boom of the late 1990s — a boom that turned out to be a huge bubble. The Nasdaq didn’t regain its 2000 peak until 2014.There’s intense debate about whether AI investment is similarly a bubble, which I would summarize as a shoving match: “Is not!” “Is too!” “Is not!” “Is too!”

While my personal guess is that AI is indeed in the midst of a bubble, I won’t devote today’s post to that debate. Instead, I want to talk about one recent aspect of market behavior that is very striking and carries strong echoes of the tech bubble a generation ago. Namely, AI-related stocks, like tech stocks back then, are reacting very strongly to perceptions about the Fed’s short-term interest rate policy.

Now as then, these strong reactions don’t make sense.

To see what I’m talking about, consider recent moves in stock prices closely related to AI. This chart shows movement over the last month of Bloomberg’s “Magnificent 7” stock index:

bloomberg magnificent 7 Source: Bloomberg News

During most of that month, these stocks were falling, as concerns that AI is a bubble increased. But on Monday the Mag7 index surged, erasing a large fraction of the losses. Why? Analyst chatter about supposed causes of stock market swings should always be taken with many grains of salt. But it’s clear that this surge was catalyzed by remarks by Fed officials which the market interpreted as making a cut in the Fed Funds rate next month more likely.

Some of us have seen this movie before. For those who haven’t, there is a pervasive view that the deflation of the 90s tech bubble was something that happened all at once — a Wile E. Coyote moment in which investors looked down, realized that there was nothing supporting those high valuations, and the market plunged. In reality, however, it was a long, drawn-out process, punctuated with some significant dead cat bounces along the way. Here’s the Nasdaq 100 over the relevant period (the gray bar represents the 2001 recession):

FRED NASDAQ 100 index Source: NASDAQ via FRED/St.Louis Federal Reserve (stlouisfed.org)

Measured against the awesome scale of the ultimate tech-stock decline, the temporary rallies along the way don’t look that big. But they were actually huge compared with normal stock movements. Let’s look at a closeup:


FRED NASDAQ 100 Index tech bubble Source: NASDAQ via FRED/St.Louis Federal Reserve

What drove these temporary bouts of optimism? At the time the conventional wisdom was that they were the result of Fed interest rate reductions and the prospect of further cuts. In fact, many observers used to argue that the stock market was underpinned by the “Greenspan put”: Don’t worry about a crash, Uncle Alan will ride to the rescue.

And after Monday’s stock price spurt, it’s clear that belief in a “Fed put” has made a modest comeback.

Indeed, the graph below shows the numerous rate cuts as the tech bubble burst:

But while these rate cuts did create brief bouts of, well, irrational exuberance, they did nothing to prevent the tech bubble from eventually deflating.

Why couldn’t Greenspan rescue tech stocks? To answer that question, think about why interest rates matter for asset prices: Lower interest rates reduce the rate at which investors discount expected future returns. A dollar delivered to you X years from now has a higher “present value” (that is, a higher current value) if interest rates are one percent than if they’re six percent. How much higher depends on X, the number of years until you receive it.

For example, a house can last for generations, and it delivers value to its owner in the form of a place to live over the years. That stream of housing consumption over the years is worth more – has a higher present value -- when the interest rate is one percent than when it is six percent. Or to put it another way, if you can make six percent on your money in a bank deposit, you may be better off renting rather than buying. That’s why the demand for houses is strongly affected by mortgage rates.

Interest rates matter much more for the value of assets that will still be yielding returns 10 or 20 years from now than they do for assets that will only yield returns for a few years.

That is, the value of assets that have a short economic life is much less affected by interest rates. Not surprisingly, economists have consistently had a hard time finding evidence for any effect of interest rates on business investment.

Moreover, investments in digital technology tend to have an especially short half-life, precisely because rapid technological progress quickly makes equipment and software obsolete. How valuable will data centers currently under construction be 5 years from now? Will they be worth anything 10 years from now? A realistic answer to these questions surely implies that the Fed’s interest policy should have little to no impact on Mag 7 valuations, or the sustainability of the tech boom.

As we saw on Monday, however, Fed policy and rumors about future Fed policy can sometimes affect AI-stock prices in the short run. But by the straight economics, these movements are more the result of market psychology than of any objective assessment of future returns.

So as doubts about AI creep in, I’m hearing growing chatter to the effect that the Fed can and should save the industry. But the lesson from the last big tech bubble is that it can’t. In fact, I have doubts about whether the Fed can head off a broader recession if the tech boom collapses — but that’s a topic for a future post.

For now, my point is that if you’re worried about an AI bubble, don’t expect Jerome Powell or his Trump-appointed successor — rumors are not encouraging — to come to the rescue. They can’t.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

Going Nowhere, Or Learning To Ignore The Plutocrats Who Cried 'Commie!'

Going Nowhere, Or Learning To Ignore The Plutocrats Who Cried 'Commie!'


The reaction of plutocrats to the Zohran Mamdani campaign — histrionic freakout before the mayoral election, with promises to flee New York City if he won, followed by a big “never mind” when he did — can teach us a couple of things.


First, ignore billionaires when they threaten to take their marbles and go home. The big money always responds to threats of tax hikes, or even mere verbal criticism, by threatening to go all Ayn Rand and move to Galt’s Gulch. In reality, they won’t even move to Florida.

You may recall that a couple of years ago there was a lot of talk about how the financial industry was going to flee blue-state taxes and wokeness and move to Miami. And to be fair, some companies did move. Notably, Ken Griffin, a hedge-fund billionaire and a big Trump backer, made a splash when he did indeed move the global headquarters of Citadel and Citadel Securities from Chicago to Miami.

But the second headline above comes from a CNBC report on remarks from top commercial real estate executives, who see Mamdani having little impact on booming demand for offices in New York. This includes plans by Griffin to rent substantial space in a new building at 350 Park Avenue. “Ken is committed and will have more employees at 350 Park than in Miami,” said one executive.

Why won’t plutocrats flee New York? For one thing, they’re not stupid (although they were hoping that voters were.) Mamdani might — might — be able to raise their taxes a bit. But they don’t really believe that free buses and city-run grocery stores will turn one of America’s safest cities into a post-apocalyptic landscape. And New York will retain formidable advantages thanks to agglomeration economies — the advantages of locating a business where many other related businesses are concentrated.

As Bloomberg put it,

For workers in finance and a range of other industries, no technology has so far replaced New York’s longstanding specialty, the face-to-face chat. In-person meetings remain essential for sniffing out who you can trust, what deals might be brewing and which rumors to believe. And from Wall Street to the United Nations, nowhere pulls together more gossip and more elite decision-makers.

This isn’t just a New York strength. There was a West Coast analog to the hype about Miami becoming the new Wall Street: For a while there was a lot of chatter about Silicon Valley fleeing California’s taxes and regulations by decamping to Austin. But the Austin boom has fizzled as companies that moved there found that not being located in a giant tech hub put them at a disadvantage compared with their competitors.

New York also happens to be a great place to live if you can afford housing — which the wealthy can. The central city has much higher effective population density than any other city in America, which in turn supports a range of amenities — restaurants, shops, museums, shows and concerts, and more — that you can’t find anywhere else. This doesn’t matter to the ultrawealthy who use their wealth to wall themselves off in a private universe. But for the merely very, very rich, there’s no place like it. Bloomberg again:

For all the angst about New York City these days, it’s remarkable how well things are going. Broadway houses are fuller than ever. The subways are getting busier and safer. The population is rising again, and the city’s economy seems to have held up well this year as Wall Street pay soars and tax revenue comes in strong.

Now, New York isn’t such a great place to live if you aren’t very affluent. Why? The problem isn’t crime, which is historically low. Nor is it the large number of immigrants, who clearly make the city better in many ways. No, it’s all about affordability, especially the cost of housing.

Mamdani won his remarkable victory largely by promising to address affordability. Whether he can do much to improve it remains to be seen: A New York mayor has very limited power, and the obstacles to doing what needs to be done, above all building a lot more housing, are formidable.

But one problem Mamdani won’t face is a mass exodus of the people who yelled “Commie!” before the election. When will we learn not to take plutocratic whining seriously?

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

Blocking SNAP, Republicans Let Kids Go Hungry To Protect Pedophiles

Blocking SNAP, Republicans Let Kids Go Hungry To Protect Pedophiles

There’s a bodega around the corner from my apartment where I often make small purchases, especially fruit, vegetables and bread. No, I’m not afraid to cross the street to buy bread.

While in in the check-out line, I often see some patrons, typically elderly and/or disabled, paying with EBT cards. EBT cards are the way the government delivers food aid under the Supplemental Nutritional Assistance Program, formerly known as food stamps. SNAP has become a crucial part of America’s social safety net, with more than 40 million Americans relying on those EBT cards to put food on the table.

And unless the government shutdown ends this week, which seems basically impossible, federal support for SNAP will be cut off this Saturday.

Here are four things you should know about the imminent hunger games.

This is a political decision — specifically, a Republican decision

Despite the government shutdown, the SNAP program isn’t out of money. In fact, it has $5 billion in contingency funds, intended as a reserve to be tapped in emergencies. And if the imminent cutoff of crucial food aid for 40 million people isn’t an emergency, what is? The Department of Agriculture, which runs the program, also has the ability to maintain funding for a while by shifting other funds around. But Donald Trump has — quite possibly illegally — told the department not to tap those funds.

Furthermore, the Republican majority in the Senate could maintain aid by waiving the filibuster on this issue. They have done this on other issues — for example, to roll back California’s electric vehicle standard. But for today’s Republican Party, blocking green energy is more important than keeping 40 million Americans from going hungry.

Furthermore, passing legislation to keep food aid flowing would require that Mike Johnson, the speaker, call the House back into session – something which he refuses to do. While we don’t know for sure the reason behind Johnson’s refusal, there is widespread speculation that it’s to avoid swearing in the newly elected Arizona congresswoman Adelina Grijalva, who would supply the crucial vote needed to force an overall vote on releasing the Epstein files. It sounds crazy to say that Republicans are making children go hungry to protect pedophiles, but it’s actually a reasonable interpretation of the situation.

The pain from lost food aid will, if anything, hurt Republican voters worse than Democrats

Republican strategy on the shutdown has rested on the premise that Democrats will eventually cave, based on several assumptions. First, G.O.P. strategists expected the public to blame Democrats for the impasse. Second, they thought that Democrats, who favor big government, would be anxious to resume federal spending. Lastly, I suspect that many Republicans simply assumed that SNAP beneficiaries are disproportionately Democrats.

So far, however, the shutdown impasse has developed not necessarily to the G.O.P.’s advantage. A plurality of Americans place more blame on Republicans than on Democrats. Moreover, given that Democrats have been more unified in their stance than the Republicans, it’s not at all obvious that Democrats will capitulate over the issue of reduced government spending.

What about the partisan affiliation of SNAP recipients? I’d be curious to see a survey of Republican legislators and activists on who they think the typical food aid recipient is. My bet is that they’re still under the influence of Ronald Reagan’s 1970s stereotypes, in which a “strapping young buck” buys T-bone steaks with food stamps. That is, MAGA probably views food stamps as a welfare program for urban nonwhites, including illegal immigrants.

Yet the evidence suggests that the program is most important to overwhelmingly white rural counties that strongly supported Trump. This is shown by the map below, in which darker colors correspond to greater SNAP use.

SNAP participation raes by county Source: FRAC analysis of 5-year American Community Survey (ACS) data, 2017-2021.

Consider, for example, Owsley County in Kentucky. The county is 96 percent white, and last year it cast 88 percent of its votes for Trump. Also, 37 percent of residents are on SNAP.

So by refusing to maintain food aid, Republicans are hurting many of their own supporters.

The fact that Trump-supporting communities rely heavily on federal food aid raises another, even larger question: Why does the GOP want to cut food assistance generally? Apart from refusing to fund SNAP during the government shutdown, Republicans want to drastically cut back on food stamps over the long term. Indeed, savage cuts to SNAP are a key feature of the One Big Beautiful Bill passed earlier this year – cuts that were scheduled to happen after the midterm elections, not a few days from now.

Despite what Republicans believe, SNAP recipients aren’t malingerers

Why are Republicans hostile to a program that benefits tens of millions of Americans? Pay attention to right-wing rhetoric about food stamps and you’ll hear again and again assertions that SNAP beneficiaries are lazy malingerers — the “bums on welfare” who should be forced to go out and get jobs.

But that myth is punctured by a quick look at who gets SNAP. The fact is, the great majority of SNAP recipients can’t work: 40 percent are children; 18 percent are elderly; 11 percent are disabled. Furthermore, a majority of recipients who are capable of working do work. They are the working poor: their jobs just don’t pay enough, or offer sufficiently stable employment, to make ends meet without aid.

So efforts to force food stamp recipients to get jobs via work requirements or simply by cutting funding are doomed to failure. While it may be possible to push a handful of food stamp recipients into the labor force, any positive economic effects from such a push will be swamped by the negative effects of denying adequate nutrition and financial resources to children during a crucial part of their lives.

Food stamps are an investment in the future

Young children need adequate nutrition and in general need to grow up in households with adequate resources if they are to grow into healthy, productive adults.

In saying this I’m not making a vague assertion in line with liberal pieties. We have overwhelming empirical, statistical evidence that SNAP, by improving the lives of young children, is an extraordinarily effective way of investing in the future.

Where does this evidence come from? A pilot version of the modern food stamp program began in 1961, when an unemployed coal miner and his wife used food stamps to buy a can of pork and beans. The program was rolled out in earnest in 1964, as part of Lyndon Johnson’s War on Poverty. But the program didn’t immediately go into effect nationwide. Instead, it was gradually rolled out geographically over the course of a decade.

This gradual rollout provided a series of “natural experiments.” Economists can and have compared the life trajectories of Americans who, as children, benefited from food stamps with those of children with similar class and demographic characteristics whose families didn’t receive food aid.

The results are stunning. Children whose families received SNAP benefits grew up to become healthier, more productive adults than children whose families didn’t receive benefits. Spending money to help families with children is an extremely high-return investment in the nation’s future.

In fact, the evidence for large economic benefits from food stamps is far stronger than the evidence for payoffs from investment in physical infrastructure like roads, bridges and the power grid, although I favor those investments too. And the evidence that helping families with children is good for economic growth is infinitely better than the evidence for the efficacy of tax cuts for the rich, a central plank of conservative dogma — because there is no evidence that tax cuts boost growth.

Which brings us back to the impending cutoff of SNAP. It’s gratuitous: Republicans could easily avoid this cutoff if they wanted to. It’s cruel: Millions of Americans will suffer severely from the loss of food aid. And it’s destructive: Depriving children, in particular, of aid will cast a shadow on America’s economy and society for decades to come.

So of course the cutoff is going to happen. At this late date it’s hard to see how it can be avoided.

Waking Up? Argentina Bailout Bares Trump's Contempt For Rural America

Waking Up? Argentina Bailout Bares Trump's Contempt For Rural America

Is rural America starting to fall out of love with Donald Trump?

Policy wonks like me have spent decades pointing out that if rural Americans voted based on their informed self-interest, they would be supporting Democrats, not Republicans. Republicans are constantly trying to eviscerate Democrat-supported programs that benefited rural states like Medicaid spending, SNAP (the supplementary nutrition program formerly known as food stamps), and school lunches. Trump is also cutting subsidies for green energy programs like solar farms and wind turbines – subsidies that disproportionately went to red states. Iowa gets 63 percent of its electricity from wind!

Moreover, these programs in effect subsidize rural areas with dollars earned in urban areas: because rural areas have lower incomes than urban areas, rural Americans pay relatively little of the taxes that finance these programs. So Democratic “big government” is highly beneficial to the heartland.

Yet economic self-interest has been swamped by “rural consciousness.” This consciousness rests on a belief that highly educated urban elites don’t understand or value rural culture and rural lives. And I will admit that this belief contains a grain of truth. Urban elites are unlikely to fully understand the attachment of rural Americans to a particular place and its time-worn rhythms of life. Ensconced in salaried jobs, urban dwellers are unfamiliar with the constant anxiety of being a farmer or a small business owner in the heartland.

Decades of being battered by the economic changes -- deindustrialization, farm consolidation and corporatization, depopulation, loss of community ties, along with the loss of jobs, particularly “male-coded” jobs – have left rural Americans feeling adrift, marginalized and resentful.

And this created an opening to be exploited by the right wing. Much like how Trump peddled fantasies of a manufacturing resurgence or the return of coal-mining jobs, MAGA leveraged the deep discontent within rural America to inculcate the belief that only Republicans, and Trump in particular, respect rural voters. But this is false: MAGA actually holds its most loyal voters in contempt.

And the reality of this contempt is starting to show through — not, at least so far, via the One Big Beautiful Bill’s savage cuts to health care, which will be especially devastating to rural areas, but via the Trump administration’s bizarre fixation on aiding President Javier Milei of Argentina.

The truth is that rural America is even more dependent than urban America on the programs now on the chopping block. The nonpartisan Economic Innovation Group has mapped out where in America people depend for a large share of their income on government transfers: the counties where a lot of income comes from government programs, indicated in yellow, are overwhelmingly in rural areas, while the places where such aid plays a relatively small role (light blue) mainly correspond to major metropolitan areas:

Why has rural America become increasingly dependent on government aid? The main answer is declining economic opportunity, which has led to an exodus of young people, leaving behind an older population that relies on Social Security and Medicare. Even younger rural residents have low incomes that make them eligible for mean-tested programs, above all Medicaid and food stamps.

There shouldn’t be any shame about the fact that rural America is subsidized by more affluent parts of the nation. That is, after all, what a national social safety net is supposed to do. But it should make rural voters oppose politicians who support Project 2025-type plans to rip up that safety net, which will deeply impoverish already poor regions and degrade life even for those not personally receiving aid — for example, by leading to the closure of many rural hospitals, making health care inaccessible even to those who still have health insurance.

Yet rural voters went overwhelmingly for Trump last year. Why?

Many clearly felt that educated urban elites don’t understand their lives and values — which is true. Most people in New York or Los Angeles don’t have a good sense of what life is like in rural America. But the reverse is also true: Many, perhaps most rural Americans imagine that the surprisingly safe and livable city where I’m writing this is a crime-ridden hellscape, that Chicago and Portland are “war zones,” and so on.

Rural voters may also have imagined that they would be protected from the harsh treatment being meted out to blue cities. After all, our political system gives rural voters disproportionate influence. Wyoming and the two Dakotas combined have roughly the same population as Brooklyn, yet they have six senators while Brooklyn has to share two senators with 16 million other New Yorkers.

For both reasons, rural voters either tuned out or refused to believe warnings that a Trump victory in 2024 would be catastrophic for the heartland, that crucial programs would be eviscerated and the agricultural economy would be devastated by Trump’s trade wars.

I thought that rural voters might finally start to realize that they have been taken for a ride when the cuts began kicking in. This will begin to happen next month, when the 22 million Americans, many of them in rural areas, who receive subsidies to help buy health insurance under the Affordable Care Act will see their premiums soar, on average by more than 100 percent. It will happen even more dramatically late next year (after the midterms), when the big cuts to Medicaid and food stamps kick in.

An aside: When I went to the relevant government page to look up food stamp data, I was confronted by this banner:

This is not how government for the people is supposed to work, and we shouldn’t lose our sense of outrage.

But back to a possible rural awakening: It may be starting ahead of schedule, thanks to, of all things, the Trump administration’s efforts to bail out Argentina’s Javier Milei.

The attempt by Trump and Scott Bessent, the Treasury secretary, to rush $20 billion to Argentina isn’t a big deal compared with the planned savage cuts to crucial programs. But it’s a graphic demonstration of the administration’s hypocrisy. After all the America First rhetoric, all the insistence that spending must be slashed, suddenly we’re sending lots of money to a foreign nation in which we have no real interest except for the fact that its president is a MAGA favorite. I don’t know how many voters are aware that these moves are in large part an attempt to bail out Bessent’s hedge-fund buddies, but I think the sense of something wrong and corrupt is leaking through.

Furthermore, from farmers’ point of view, Argentina is a rival — a big soybean exporter at a time when Trump’s trade war has locked our own farmers out of China’s market.

And as emphasized in a recent conversation between Greg Sargent and a rural Democratic activist, farmers have been shocked and outraged by Trump’s casual suggestion that he might start buying Argentine beef to sell in the U.S. market. That conveys the impression that Trump doesn’t care at all about his most loyal followers — an impression that is completely correct.

We shouldn’t expect rural America to suddenly do a 180 and abandon Trump. Sargent sends us to a lament from one rancher who calls the idea of buying Argentine beef an “absolute betrayal” — but begins by saying to Trump, “We love you and support you.” The sheer extent to which rural Americans have been hoodwinked will make it hard for them to admit their error.

But there are at least hints of a rural awakening. And for the sake of the nation urban and rural Americans share, it can’t come fast enough.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

How Criminals' Most Favored Currency Became A 'Trump Trade'

How Criminals' Most Favored Currency Became A 'Trump Trade'

By now it’s obvious that Donald Trump suffers from CBS — Cowardly Bully Syndrome.

On Friday, Trump blasted China’s new export controls on rare earths, declaring them a “moral disgrace” which were “obviously a plan devised by them years ago.” And he threatened to impose 100 percent tariffs on China, on top of the already high existing tariffs.

Less than a day later he was groveling:

A screenshot of a social media post AI-generated content may be incorrect.

So it only took a few hours to go from “a plan devised by them years ago” to they “just had a bad moment,” from “moral disgrace” to “highly respected President Xi.” The Chinese must be having a good laugh: They took Trump’s measure and he came out looking very, very small.

But what caused this quick, abject retreat? I’d like to believe that economic experts within the administration took a sober look at the situation and concluded that China would have the upper hand in a trade war. But there are no economic experts in this administration, and anyway, who would dare to tell Trump anything he doesn’t want to hear?

No, Trump was almost certainly reacting to the markets. Stocks fell sharply Friday, but the really striking action came in crypto, where Bitcoin fell 20 percent and smaller, less liquid tokens fell even more. Here, to take an arbitrary example, is what happened to the value of the official Trump coin:

A graph of a stock market AI-generated content may be incorrect.


Also, it just so happens that Trump himself holds an estimated $870 million worth of Bitcoin, so he suffered large personal financial losses from the crypto crash.

This was the largest one-day crash crypto has experienced so far. My question, however, is why the prospect of an intensified trade war caused a crypto crash.

Oddly, I’ve seen almost no reporting about this issue. There has been a lot about the way the crypto crash was magnified by forced sales: Many crypto investors are highly leveraged, and there were many forced liquidations — with widespread speculation that one or more “whales,” that is, major players, may have imploded. But why did a threatened trade war cause crypto to fall in the first place?

The answer, I believe, has little to do with economics and everything to do with politics. These days crypto derives its value largely from the support of politicians and government officials — in particular, officials who can be bribed. As a result, at this point crypto is largely a Trump trade. And crypto fell because the backlash against the potential trade war threatened to weaken Trump politically.

A brief history of crypto: When Bitcoin, the original crypto asset, was introduced, enthusiasts predicted that it would displace conventional fiat money, that is, currency issued by governments. The blockchain, they claimed, would make transactions using cryptocurrency easier and cheaper than transactions using dollars. And cryptocurrencies would be safe from the ravages of the printing press: governments couldn’t debase your money through inflation.

That was more than 15 years ago, and crypto has completely failed to deliver on those promises. Almost nobody uses cryptocurrency as a means of payment. A recent research paper from the Federal Reserve Bank of Kansas City notes that

The share of U.S. consumers who report using cryptocurrency for payments—purchases, money transfers, or both—has been very small and has declined slightly in recent years.

Here’s the chart. The blue line at the top shows the percentage of consumers using crypto for any kind of payment:

A graph of a graph of the rate of payment AI-generated content may be incorrect.


Yet the public holds roughly $4 trillion in crypto assets. Why? Largely as a pure speculative investment. In addition, however, crypto has found real-world use as a convenient tool for criminal activity and money-laundering. In fact, that Kansas City Fed paper noted that the most important reason people gave for paying in crypto was “person or business receiving the money preferred cryptocurrency.” It’s not a stretch to imagine that the reason for that preference was often the desire to hide the payment from the authorities.

As for the vision of a private currency insulated from government, at this point the biggest factor supporting the prices of Bitcoin and other cryptocurrencies has become the belief that Donald Trump — whose family has made billions from crypto sales, and whose party received hundreds of millions in crypto campaign contributions — will promote the industry. No pesky regulations that might limit the financial risks from stablecoins. No serious efforts to limit the use of crypto to facilitate criminal activity.

And Trump has declared his intention to create a “strategic crypto reserve.” True, this reserve will supposedly come out of crypto seized from criminals. But it would still support crypto by keeping those tokens off the market.

The prospect of high-level political support is why the prices of Bitcoin and other tokens surged when Trump won in November. As I said, at this point Bitcoin is basically a Trump trade, since it’s hard to imagine Democrats being remotely as favorable to the industry.

In the past I’ve described the case for Bitcoin as being a combination of technobabble and libertarian derp. My view about the technobabble hasn’t changed. But I will amend the case against crypto by adding that the crypto industry is one of the prime beneficiaries from a new regime of crony capitalism, in which an industry’s success depends on its ability and willingness to bribe the right people.

So why did Trump’s threat of all-out trade war with China cause crypto prices to plunge? Not because the economic damage from such a war would reduce the use of crypto, because crypto basically doesn’t have any legitimate uses. But an intensified trade war, especially a trade war America would almost surely lose, would drive Trump’s public support into an even deeper hole. And this would reduce the ability of history’s most corrupt administration to keep showering favors on the industry that made Trump rich.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.

Ken Griffin Says Soaring Gold Is A Key Signal -- And He May Even Be Right

Ken Griffin Says Soaring Gold Is A Key Signal -- And He May Even Be Right

Here are two sentences I never expected to write:

1. Ken Griffin may be right.

2. The price of gold may be telling us something important.

Ken Griffin, for those who don’t know, is a hedge fund billionaire who was a big supporter of Donald Trump in the last election. That is, he was one of those ultra-rich Trump backers for whom being an insurrectionist-criminal convict-Epstein pal-scammer-serial bankrupt with clear autocratic tendencies didn’t matter. What mattered was “TAX CUTS!”, “DEREGULATION!”. But you often find that kind of self-serving myopia in wealthy and powerful men, who inhabit a gilded bubble that leaves them unable to see what is right in front of their faces.

A few weeks ago, however, Ken Griffin pronounced that he was shocked, shocked to discover that Trump isn’t a champion of free enterprise after all, and that he’s actually building a system of crony capitalism in which business success depends on your political connections. Well, I could have told Griffin that this was coming. In fact, I did.

Still, better late than never. Griffin deserves some credit for being willing to speak publicly about his current misgivings over Trump, rather than joining the nauseating chorus of praise for Dear Leader. So I found it interesting that he sees the soaring price of gold as an economic warning sign, an indication that Trump is causing the world to lose faith in America.

Here’s the price of gold over the past year. The price of gold is currently $4,037 per troy ounce, a record-setting price as it has skyrocketed in the past two months. It has risen over 54 percent since mid-November 2024:

Source: Macrotends Gold Price Last Ten Years

Normally I pay little attention to gold prices, but in this case I think Griffin has a point.

On gold: In general I’m with John Maynard Keynes, who called the fixation on gold a “barbarous relic.” You can’t use gold to make payments (other than the occasional bribe): Try buying a house with ingots. Some people seem to believe that gold will offer a refuge if society descends into chaos, but let’s be real: Do you really think gold bars would help you navigate a Fallout-type post-apocalyptic landscape?

Still, people continue to hold a lot of gold — around $27 trillion dollars’ worth. That’s more than 6 times the value of all crypto, despite the recent runup in Bitcoin etc. So in the words of Fallout’s Lucy MacLean, “okey dokey.”

So what drives gold’s price, and what do movements in that price tell us?

Some people believe that the price of gold reflects expectations of future inflation. There were many assertions to that effect in the early Obama years. Conservatives who insisted that Obama’s policies were inflationary pointed to the rising price of gold for support. Indeed, the real price of gold — the gold price divided by the overall level of consumer prices — rose significantly during Obama’s first few years in office:

Source: Macrotrends Gold Pirce 100 Year Historical Chart

These claims prompted me to write a wonky blog post — basically a short paper, but I hope fairly readable — arguing, in essence, that holding gold isn’t an alternative to holding currency. It is, instead, an alternative to holding bonds, which pay interest. And the driver of rising gold prices after the financial crisis was, I argued, a sharp fall in the real rate of interest — the interest rate minus expected inflation – due to the bursting of the housing bubble and the economy’s deep recession.

We can observe the real rate of interest directly, because the U.S. government issues TIPS, “Treasury inflation protected securities” — bonds whose future payouts are linked to the Consumer Price Index. The interest rate on TIPS basically is the real rate, while the spread between rates on TIPS and ordinary bonds measures market expectations of future inflation. And TIPS rates plunged after the global financial crisis, explaining the rise in gold prices even though inflation was low, not high:

A side issue that has been worrying me: TIPS are linked to the official Consumer Price Index. But the Bureau of Labor Statistics won’t be issuing new reports during the government shutdown, which means that it’s highly likely that the next CPI report, due Oct. 15, won’t come out on time if at all, and it’s anyone’s guess when we’ll get fresh data. How will Treasury handle that?

More broadly, if the Trump administration succeeds in politicizing the BLS, TIPS won’t be protected against inflation. They’ll only be protected against inflation the administration is willing to admit is happening. Have investors thought through the implications?

Back to my main theme. As Griffin says, gold prices have soared recently. Yet as you can see from my second chart, real interest rates are up, not down. What’s driving interest rates? Probably a combination of big budget deficits, made bigger by the One Big Beautiful Bill, and the AI boom, as well as the fear that Trump will politicize the Fed and stoke persistent inflation. But these higher real interest rates should drive gold prices down, not up.

So what’s happening? The most likely story, which seems consistent with what Griffin is saying, is that a growing number of investors — including, in particular, foreign central banks — are moving into gold because they no longer consider U.S. debt a safe asset.

Now it’s hard to pin down exactly what investors fear, perhaps because they aren’t sure themselves. But many previously inconceivable possibilities are now quite conceivable given the Trump administration’s radicalism. Runaway inflation hidden by rigged official statistics? Expropriation of the reserves of governments Trump doesn’t like? Forced conversion of foreign assets into 100-year bonds? Given the administration’s record so far, how confident are you that none of these things could possibly happen?

As I said at the top of this piece, I normally pay don’t pay much attention to gold, which doesn’t play an important role in the modern economy. But I believe that the recent runup in gold prices is telling us something — namely, that the world is losing faith in America.

And perhaps Ken Griffin’s warnings are also telling us that even ultra-rich hedge fund titans are starting to worry about the monster they helped create.

Paul Krugman is a Nobel Prize-winning economist and former professor at MIT and Princeton who now teaches at the City University of New York's Graduate Center. From 2000 to 2024, he wrote a column for The New York Times. Please consider subscribing to his Substack.

Reprinted with permission from Paul Krugman.