Paul Krugman: That 30's Feeling

[Warpy]

Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.

Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.

But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
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How bad will it be? Will it really be 1937 all over again? I don’t know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.

More at http://www.nytimes.com/2010/06/18/opinion/18krugman.html?nl=opinion&emc=tyb1

[DJ13]

1. "In America, many self-described deficit hawks are hypocrites,

pure and simple: They’re eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy."

:thumbsup:

[AndyA]

3. Tax breaks for the wealthy, AND WAR.

They does loves themselves some war.

[econoclast]

2. A differing opinion ...

it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits. 

 ... we're looking at a fiscal crisis that will drive interest rates sky-high.

A leading economist recently summed up one reason why: "When the government reduces saving by running a budget deficit, the interest rate rises."

But what's really scary ? what makes a fixed-rate mortgage seem like such a good idea ? is the looming threat to the federal government's solvency.

That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 ? make that 3, O.K., maybe 4 ? percent of G.D.P. But that misses the point. "Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen." So says the Treasury under secretary;  his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.


How will the train wreck play itself out?  ... my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

And as that temptation becomes obvious, interest rates will soar. It won't happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.
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Care to guess who wrote this?

[girl gone mad]

4. Interest rates are not under any pressure right now.

We've been hearing the same dire warning for years, just like the deficit hawks have been screaming and shouting about Japan for over two decades now.

If you understand how monetary policy works under fiat currency regimes, and what the real causes of inflation are, you won't have to be so terrified all the time.

[northernlights]

6. "unless we slide into Japanese-style deflation"

um, we're pretty much already there.

Much higher rates are very far in our future. Assuming we have a future.

[econoclast]

7. FYI ....

The screaming crazy stupid deficit hawk I quoted above is none other than .....

Paul Krugman

he wrote the above in ( I think ) 2002 when deficit was 4% of GDP

[fasttense]

8. I don't see interest rates going up in the US because we are the world's reserve

currency. The real economic condition Paul of 2002 needs to be fearful of is another crash. This 2nd crash will be worse than the 1st and it has nothing to do with deficits. (By the way with over $2.5 Trillion in the Social Security trust fund Social Security wont strain our deficit. But uber wealthy people will.)

It has to do with a weak economy taking another big hit which will make the poor and middle class even more desperate. Desperate people take desperate actions.

Just a note to let you know what life in the trenches is like. My neighbor has been laid off for 2 years and he is trying to farm his land to make a living. His far field all planted in crook neck squash was looking real good. You can see it as you drive by on the public road. He kept it weeded and mulched. It was nice and healthy without pesticides. When he went out to pick it, it was all gone, every last squash. No, bugs and animals hadn't eaten it, people had. There were unfamiliar shoe prints all over the damp earth around the edge of the field and leading to the road. Now, we are talking about taking turns guarding our gardens from hungry people.

[econoclast]

9. Clearly, you don't understand the SS Trust Fund

The SS Trust Fund isn't a bank account with 2.5trillion dollars of cash in it.

By law, whenever the annual receipts of SS exceed the annual outlays, the excess is put in the Trust Fund. Also by law, the TF is required to invest that excess cash in special issue US Treasury securities. The proceeds of those sales of US Treasuries go right into the Federal budget. The excess cash collected by SS Reduced the deficit in the years the excess was collected. In the years when SS has a shortfall - that is receipts less than outlays ..... And those years have begun and will be many ... the SS Trust Fund redeems those US Treasuries to get the extra cash it needs. Redemption of those treasuries INCREASES the deficit.

So the SS Trust Fund's 2.5 trillion dollar balance represents 2.5 trillion in cash money the US treasury OWES to SS!!!!!

[amandabeech]

11. A field of squash disappeared in the night!

Things are getting much worse than any government statistic could tell us. This is the kind of thing that "the world is ending--head for the hills" types have been talking about for a few years now. Frightening.

Have there been any other similar incidents in your area?

I don't blame you and your neighbor for guarding against this, but I hope that if you have any things that you can't eat, sell or preserve, you will find some folks who need help who could use it.

[Birthmark]

5. It is almost beyond belief...

...how stupid this obsession with deficits is at this point. Plenty of time to address deficits when the jobs start coming back. But I agree with Krugman. They are making a huge mistake.

[groovedaddy]

10. Now that the extremely wealthy have sucked up a good chunk of our national wealth, they tell us it's

time for pain! Time for OUR government to suck some of that wealth back and stimulate the economy.
Besides a huge portion of our debt is directly related to how the wealthy were sucking the wealth up.
Yet our tax dollars were used to bail out wall street, G.M., et al, funding endless wars, etc.
The rich need to cough up NOW! Otherwise, we continue to pay for their greedy ways.