Krugman: Revenge of the Unforgiven

[eridani]

http://www.nytimes.com/2014/10/13/opinion/paul-krugman-how-righteousness-killed-the-world-economy.html?_r=0

So what can be done? Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. Sometimes this happens explicitly: In the 1930s F.D.R. helped borrowers refinance with much cheaper mortgages, while in this crisis Iceland is outright canceling a significant part of the debt households ran up during the bubble years. More often, debt relief takes place implicitly, through “financial repression”: government policies hold interest rates down, while inflation erodes the real value of debt.

What’s striking about the past few years, however, is how little debt relief has actually taken place. Yes, there’s Iceland — but it’s tiny. Yes, Greek creditors took a significant “haircut” — but Greece is still a small player (and still hopelessly in debt). In major economies, very few debtors have received a break. And far from being inflated away, the burden of debt has been aggravated by falling inflation, which is running well below target in America and near zero in Europe.

Why are debtors receiving so little relief? As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.

So the policy response to a crisis of excessive debt has, in effect, been a demand that debtors pay off their debts in full. What does history say about that strategy? That’s easy: It doesn’t work. Whatever progress debtors make through suffering and saving is more than offset through depression and deflation. That is, for example, what happened to Britain after World War I, when it tried to pay off its debt with huge budget surpluses while returning to the gold standard: Despite years of sacrifice, it made almost no progress in bringing down the ratio of debt to G.D.P.

[loudsue]

1. Inflation is NOT "falling" in the US!!! Inflation is KILLING the middle & lower class!

Sure, as long as you eliminate food, rent, insurance, health care, cars, gas, heating fuel, electricity, school "extras" and internet services....did I mention FOOD???? ... maybe inflation isn't so bad. But everything I buy costs more... even really cheaply made Chinese clothes with little or no fabric in them. And there aren't any good-paying jobs around, so income goes down while costs go up.

And Krugman says inflation is "running well below target" in America? pfft

[Demeter]

2. Krugman always looks at how the top 20% is doing

we are less than the cockroaches.

[Fumesucker]

3. I wonder if Krugman ever does his own shopping or cooking?

Because if he does he would have noticed that package contents are shrinking while price is holding steady or increasing.

There are a lot of little things like that which seem to escape the "official" numbers on inflation.

[pscot]

5. Grocery store adds make depressing reading

[starroute]

4. The question of inflation is really about wages, not the cost of goods

If both wages and prices are going up, that's good for debtors because the amount of their student loans or credit card debts is staying constant and is therefore easier to pay off.

Creditors hate this situation, and since at least the Reagan years, the fed has been deliberately cranking up the unemployment rate to a point where there is no upward pressure on wages. That policy is now coming back to bite them in the ass by increasing both unemployment and crippling debt to the point where it crashes the economy, but they still can't let go of it.

That's what Krugman is pointing to. He's well aware of the fact that the low official inflation rates don't reflect the fact that necessities are getting more expensive while luxuries are getting cheaper. But the old-fashioned kind of inflation, where everything goes up in concert, is far better for the poor than for the rich.

[Fumesucker]

6. If he's aware of it he did a miserable job explaining it

[Doctor_J]

8. That's the point

the BLS may show that the cost of living is increasing "below target", but wages and incomes in general are dropping for >80% of us, so the "minimal" inflation looks a lot bigger to us.

[1StrongBlackMan]

7. I would hazard to guess ...

But it has been very hard to get either the policy elite or the public to understand that sometimes debt relief is in everyone’s interest. Instead, the response to poor economic performance has essentially been that the beatings will continue until morale improves.

That the reason for staying the course into the Iceberg is that debt has all been sold, several times over, and any debt forgiveness will mean a write down in that quarter's "earning" (and the following, market beating) and the investor class (including pension funds) can't have that ... so for the policy elites (read: the employees of the investor class), the choice is easy, Iceberg Hooo!