Monday, June 15, 2009
In his latest commentary, Paul Krugman starts to sound a little whiny about the possibility of policymakers spraying Roundup on all the "green shoots" that have popped up lately.
The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it’s déjà vu all over again — literally.You'd think he'd play the "deflation" card early and often, but the word is only mentioned once toward the end, almost in passing. Maybe, "liquidity trap" is deemed to be a more threatening phrase to counter the common sense thinking that even more easy money can't cure the problems caused by too much easy money a few years ago.
For this is the third time in history that a major economy has found itself in a liquidity trap, a situation in which interest-rate cuts, the conventional way to perk up the economy, have reached their limit. When this happens, unconventional measures are the only way to fight recession.
Yet such unconventional measures make the conventionally minded uncomfortable, and they keep pushing for a return to normalcy.
After one more in a long and growing line of comparisons to the mid-1930s period when the U.S. government and central bank squashed an economic recovery by tightening lending and attempting to restore fiscal prudence, the Nobel Prize winner cites unwarranted fear of inflation as something that could take the economy back down.
Naturally, a rising stock market and rising bond yields are viewed as clear signs that policymakers should keep doing what they've been doing, perhaps more of it, including record government spending.
It's pretty neat how he can speak for the entire bond market.
Well then, what about all that government borrowing? All it’s doing is offsetting a plunge in private borrowing — total borrowing is down, not up. Indeed, if the government weren’t running a big deficit right now, the economy would probably be well on its way to a full-fledged depression.You'd think he'd at least mention a "debilitating downward price spiral" or something along those lines to stoke a little fear.
Oh, and investors’ growing confidence that we’ll manage to avoid a full-fledged depression — not the pressure of government borrowing — explains the recent rise in long-term interest rates. These rates, by the way, are still low by historical standards. They’re just not as low as they were at the peak of the panic, earlier this year.
To sum up: A few months ago the U.S. economy was in danger of falling into depression. Aggressive monetary policy and deficit spending have, for the time being, averted that danger. And suddenly critics are demanding that we call the whole thing off, and revert to business as usual.
Those demands should be ignored. It’s much too soon to give up on policies that have, at most, pulled us a few inches back from the edge of the abyss.
He sounds much more whiny than he does threatening, and threats of another financial market melt-down may be required to stop people from clamoring for the government to rein in spending.