In this New York Times commentary, Paul Krugman leads what will soon be a veritable gaggle of economists in lamenting the coming lost decade, one that could have been avoided if the government and central bank had only borrowed and printed more money.
For the past few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. Greece is held up as a cautionary tale, and every uptick in the interest rate on U.S. government bonds is treated as an indication that markets are turning on America over its deficits. Meanwhile, there are continual warnings that inflation is just around the corner, and that the Fed needs to pull back from its efforts to support the economy and get started on its “exit strategy,” tightening credit by selling off assets and raising interest rates.
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But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.
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It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.
It really is a brilliant approach to defending Keynesian economics – if the stimulus doesn’t work, call for an even bigger one, and, if that doesn’t work, repeat the process until you get the desired result, regardless of whether the desired result is even achievable.
The idea that there may be fundamental flaws in what passes for contemporary economic thought (e.g., the unhealthy focus on consumer prices to the exclusion of nearly everything else as an indications of when to stop stimulating and the misplaced thinking that it’s never a solvency problem, only a liquidity problem) gets nary a consideration and today’s “cream of the crop” economists just shake their head at how policymakers are screwing it up again.
![[Most Recent USD from www.kitco.com]](http://www.weblinks247.com/indexes/idx24_usd_en_2.gif)
Before the tech stock bubble burst, I was telling anyone who would listen how crazy stock prices were and how the ‘new metrics’ (‘hits’ and ‘eyeballs’) developed by stock cheerleaders to justify the wild prices for worthless companies were ridiculous. I sold all my stocks at inflated prices.
Then, it crashed and I was furious that Greenspan lowered rates so far and for so long to try to avoid the necessary recession and proper reallocation of assets.
Before the real estate bubble burst, I was telling anyone who would listen how crazy prices were and how the ‘real estate never goes down’ crowd were insane and these prices were only possible because people weren’t actually paying for the houses they were ‘buying.’ I sold my overpriced houses.
Then, it crashed and I was furious that both Bush and Obama just wanted to avoid the pain by bail outs and stimulus funds and BB re-lowered rates to RECORD lows in an effort to keep real estate prices artificially high and avoid the necessary corrections.
Now, before the US Dollar crashes, I’m telling anyone who will listen that the US fiscal policy is crazy and the US will pay dearly for the kind of thinking that brought us the tech bubble (new metrics) and the housing bubble (real estate never goes down) and the moronic responses from people like Krugman and our central planners (lower rates to zero and print and borrow your A$$ off like there’s no tomorrow).
BTW, I bought precious metals this time. I really don’t want to keep making money this way. I have kids.
Tim,
You’re a smart guy. Can you explain to me why Congress passed a law that gives the Federal Reserve even more power without any checks or accountability provisions other than that watered down “audit” clause that will most likely be stripped from the bill during the conference committee talks?
There will be some thoughts on that in the next post….
>It really is a brilliant approach to defending Keynesian economics – if the stimulus doesn’t work, call for an even bigger one, and, if that doesn’t work, repeat the process until you get the desired result
Reminds me of that great line from Automatic Earth,
It may all rinse, but it will soon no longer repeat.
Last two month visits in grocery stores, and at the gas pump have left me wondering about the people, who say that there is no inflation. Despite the price of oil falling the last two weeks, there is no sign of gas prices going down. I see lines of cat food being discontinued and replaced by new lines, which are 30% smaller and at the moment correspondingly less expensive. I have no doubt the prices will be going up to levels of the old packaging soon. Vegetables seem more costly then they were a year ago, and so on.
So I ask: “Who are those there-is-no-inflation people, and which part of the universe they live?” I would like to live in that world, too.
Tim – Krugman always argued that the stimulus was not enough. He also argued about the solvency problem. He is being consistent.
Austrians say let the markets decide and let things crash. Yet as I have already argued foreclosure and bankruptcy and unemployment insurance are all government programs not market processes. There is no market process for recession.
Right now America and Europe are in zombie land. Not enough stimulus to let demand grow and not enough crashing to become a Depression.
This is the essence of his article. We are going towards a zombie economy and a Lost Decade.
Foreclosure and Bankruptcy are market processes. These type of transactions may be processed by the courts, but they are very much a market process.
The market process for recession is to reallocate misallocated resources. It is part of the price discovery function. How do you see “no process” for recession?
“May be processed by the courts” does not help your argument. May be is the only way it can work. Hence it is literally and absolutely not a market process.
Also the Bankruptcy Clause is in the Constitution. How can something that comes from the Government be a market process?
“To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States;”
Inclusion in the Constitution is not exclusion from market processes. Market participants win, market participants lose. In losing, as opposed to just throwing your assets up in the air and walking away (a presumably market process), we relinquish our assets in an organized fashion; receivership. If, by the time the Constitution was written, market participants agreed on an orderly unwind of excess liabilities, then being part of a gov’t document does not preclude it being a market process/phenomena/etc. In the same way that market participants had decided on gold and silver as money which also made it into the Constitution. Perhaps there’s another way a market can decide to deal with misallocations, etc while maintaining private property rights?
If you want a healthy, growing, sustainable economy, DO NOT ask economists on how to do it.
If you want to invest in an economy or currency, DO NOT ask traders on advise.
However, if your economy is screwed up by monetary policy, DO ask the culprit, the central bank, on how to fix it. The Fed position indeed has been strengthened by the financial ‘reform’ bill. Because it is needed to do two things in the coming years:
1) Pump and retrieve the massive amount of fiat dollars – like a blood transfusion machine used in deep surgery to stabilize a very sick patient.
2) To orchestrate currency wars. The purpose is to hit foreign vulnerable currencies and economies, so as to elevate domestic one. In fact this war has already started – against the Euro. You don’t hit your own general in the middle of a war don’t you.
Good one. If your general keeps screwing up, let’s give him more authority. It’s well past time to shoot the general.
I know your a pretty smart guy that can actually do math, so pull out Okun’s law and see that the stimulus was 1/2 of the size needed to pull us out of recession.
Then note that Krugman and this mickslam guy said this in December of 2008. The stimulus was too small.
http://www.dailykos.com/storyonly/2008/12/19/670412/-How-much-Stimulus-is-Needed-Estimate:-$1T-to-$1.6T
Yes, of course.
If, in addition to the Fed printing up $1.5 trillion to buy MBSes and GSE debt and government borrowing $700 billion for the TARP program, the stimulus would have been $1.5 trillion instead of $800 billion, happy days would already be here again….
The problem is that stimulus puts you deeper into recession (you are feeding the disease while preventing the healing) and the more you do, the worse things will get.