Economy
Related: About this forumNobody Understands Debt. Krugman
Many economists, including Janet Yellen, view global economic troubles since 2008 largely as a story about deleveraging a simultaneous attempt by debtors almost everywhere to reduce their liabilities. Why is deleveraging a problem? Because my spending is your income, and your spending is my income, so if everyone slashes spending at the same time, incomes go down around the world.
Or as Ms. Yellen put it in 2009, Precautions that may be smart for individuals and firms and indeed essential to return the economy to a normal state nevertheless magnify the distress of the economy as a whole.
So how much progress have we made in returning the economy to that normal state? None at all. You see, policy makers have been basing their actions on a false view of what debt is all about, and their attempts to reduce the problem have actually made it worse.
First, the facts: Last week, the McKinsey Global Institute issued a report titled Debt and (Not Much) Deleveraging, which found, basically, that no nation has reduced its ratio of total debt to G.D.P. Household debt is down in some countries, especially in the United States. But its up in others, and even where there has been significant private deleveraging, government debt has risen by more than private debt has fallen.
You might think our failure to reduce debt ratios shows that we arent trying hard enough that families and governments havent been making a serious effort to tighten their belts, and that what the world needs is, yes, more austerity. But we have, in fact, had unprecedented austerity. As the International Monetary Fund has pointed out, real government spending excluding interest has fallen across wealthy nations there have been deep cuts by the troubled debtors of Southern Europe, but there have also been cuts in countries, like Germany and the United States, that can borrow at some of the lowest interest rates in history.
All this austerity has, however, only made things worse and predictably so, because demands that everyone tighten their belts were based on a misunderstanding of the role debt plays in the economy. . .
Which brings us to current events, for there is a direct connection between the overall failure to deleverage and the emerging political crisis in Europe.
European leaders completely bought into the notion that the economic crisis was brought on by too much spending, by nations living beyond their means. The way forward, Chancellor Angela Merkel of Germany insisted, was a return to frugality. Europe, she declared, should emulate the famously thrifty Swabian housewife.
This was a prescription for slow-motion disaster. European debtors did, in fact, need to tighten their belts but the austerity they were actually forced to impose was incredibly savage. Meanwhile, Germany and other core economies which needed to spend more, to offset belt-tightening in the periphery also tried to spend less. The result was to create an environment in which reducing debt ratios was impossible: Real growth slowed to a crawl, inflation fell to almost nothing and outright deflation has taken hold in the worst-hit nations. . .
Nobody knows what happens next, although bookmakers are now giving better than even odds that Greece will exit the euro. Maybe the damage would stop there, but I dont believe it a Greek exit is all too likely to threaten the whole currency project. And if the euro does fail, heres what should be written on its tombstone: Died of a bad analogy.
http://www.nytimes.com/2015/02/09/opinion/paul-krugman-nobody-understands-debt.html?ref=opinion&_r=1
Warpy
(111,359 posts)People are living poorly so they can pay off their debts because they know inflation will continue to eat away at bad pay that will only get worse.
If economists want to prop up the demand side, they need to look at what their policies have been doing to labor for over 40 years, all in the name of stopping inflation. Those policies haven't stopped inflation. They've only beggared the average American citizen.
These ivory tower wonks don't realize that wage depression has had us all living with austerity for decades. Austerity doesn't work.
They need to raise wages and repair the safety net. Now that will work.
abelenkpe
(9,933 posts)They've convinced themselves a new new deal won't work. But that is what's needed. Anything else is just baloney.
azmom
(5,208 posts)Saying that European leaders "completely bought in to the notion that the economic crisis was brought on by too much spending" is an astonishing misrepresentation of the facts. Those leaders were forced by the banking cartel and their minions in government (led by U.S. Treasury secretary Geithner), upon threat of total financial armageddon, to make the people absorb bank gambling losses and to collude in the re-writing of history and blame those same people, and the social programs they voted for and relied on, for an economic collapse brought on by bank shenanigans with unregulated debt-related securities; securities that nobody, not even the bankers who created them or the institutions who bought and hedged against them, seemed to fully understand.