Krugman: "We are now, I fear, in the early stages of a third depression."

[flintlock]

http://www.nytimes.com/2010/06/28/op...28krugman.html

governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

Inadequate spending!!?

[jk]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

yes, inadequate spending relative to all the excess capacity we have. john hussman, otoh, would say we don't have inadequate demand, but a qualitative [not quantitative] supply/demand mismatch that needs to be remedied. i'd support krugman's proposal of more government/fiscal stimulus if i had any faith that the deficits would actually be addressed. but that's not how it works. there has to be a crisis, unfortunately.

[GRG55]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

http://www.nytimes.com/2010/06/28/op...28krugman.html



Inadequate spending!!?

Krugman is lamenting the fact that continued expansion of fiscal stimulus expenditures is becoming politically difficult in all of the developed economies, including the last holdout, the USA.

It seems entirely probable that fiscal stimulus in all of these countries is going to be somewhat restrained compared to the past couple of years, and that would seem to put all the Central Banks in the position of having to offset the inevitable deflationary effects with expanded "unconventional" monetary policies [given that the conventional policy of reducing interest rates is no longer an option in a ZIRP world]. The ECB's recent capitulation and subsequent "QE" bond purchases is but more evidence supporting this outcome...

[ViC78]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

It seems entirely probable that fiscal stimulus in all of these countries is going to be somewhat restrained compared to the past couple of years, and that would seem to put all the Central Banks in the position of having to offset the inevitable deflationary effects with expanded "unconventional" monetary policies [given that the conventional policy of reducing interest rates is no longer an option in a ZIRP world]. The ECB's recent capitulation and subsequent "QE" bond purchases is but more evidence supporting this outcome...

However, if the intention is to create demand by creating jobs, how does monetary policy play into this? We have already seen that even though rates are zero, the private sector is not willing to borrow and fund productive activities. They are just hoarding money, buying T-bonds/bills and repairing their balance sheets. Didn't Richard Koo say that this was what happened in Japan? Looks like we are doomed to repeat the same experiment again.

[flintlock]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

yes, inadequate spending relative to all the excess capacity we have. john hussman, otoh, would say we don't have inadequate demand, but a qualitative [not quantitative] supply/demand mismatch that needs to be remedied. i'd support krugman's proposal of more government/fiscal stimulus if i had any faith that the deficits would actually be addressed. but that's not how it works. there has to be a crisis, unfortunately.

I'm a bit lost. How does fiscal stimulus end up addressing deficits? Or do you mean, address deficits after the stimulus works?

I could go along with those that say that now is not the best time for belt tightening, but frankly, can we survive any more stimulus plans like the last round? There has to be a negative impact, long term.

[jk]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

However, if the intention is to create demand by creating jobs, how does monetary policy play into this? We have already seen that even though rates are zero, the private sector is not willing to borrow and fund productive activities. They are just hoarding money, buying T-bonds/bills and repairing their balance sheets. Didn't Richard Koo say that this was what happened in Japan? Looks like we are doomed to repeat the same experiment again.

i think the idea is that sufficient qe can allow the "savings", i.e. balance sheet repair, to proceed without exacerbating deflationary stresses on the economy. qe means monetizing bonds, whether more mbs via the gse's or euro-periphery sovereign bonds. this keeps things wheezing along. we'll be lucky to do as well as japan, however, given our lack of domestic savings and thus our reliance on the kindness of strangers.

[flintlock]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

Let's face it. The jig is up. No matter how we slice it, there is going to be some pain. All this talk is like slicing your leg off then arguing about how to tie the bandage. Regardless you'll never walk the same again.

[sunskyfan]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

The problem is that we have an excess capacity for contracting money in the economy in a vein attempt to secure the unsecurable risk of the future. We are unwilling to reduce it since it would put everyone's retirement in jeopardy and the be a threat to the financial industry which is a very entrenched and dominant political force. They will continue the firehouse of money anyway they can and it will be contracted faster and faster until this dynamic is broken. The boomer phenomena is world wide in a way but my guess is this dynamic will only be broken when the American boomers let go of their idea of retirement and that may only happen when they are all dead which will be in about 20 years.

[Ghent12]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

However, if the intention is to create demand by creating jobs, how does monetary policy play into this? We have already seen that even though rates are zero, the private sector is not willing to borrow and fund productive activities. They are just hoarding money, buying T-bonds/bills and repairing their balance sheets. Didn't Richard Koo say that this was what happened in Japan? Looks like we are doomed to repeat the same experiment again.

Sounds like this is where tax policy comes into play. You know, the friction that penalizes productivity. Also, it sounds like the perpetual issuance of more and more debt is allowing for plenty of opportunity for the public sector to soak up all that "excess capital" the private sector has. Why be a taxed, productive, and at-risk-of-loss type of person at all when you can just invest in the government and not be taxed nearly as much for it?

[Munger]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

Didn't Richard Koo say that this was what happened in Japan? Looks like we are doomed to repeat the same experiment again.

Krugman, who is one of the foremost scholars on Japan's bubble and aftermath, has long been saying that Japan's stimulus was too little too late: Japan went through a series of cycles involving: small stimulus -> tepid recovery -> backlash/deficit reduction -> recession/dip/market crash -> small stimulus -> etc etc

Krugman argues they should have a stimulus big enough to break out of the cycle up front, along with a credible inflation pledge from the central bank to curb cash-hoarding.

[Serge_Tomiko]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

Let's face it. The jig is up. No matter how we slice it, there is going to be some pain. All this talk is like slicing your leg off then arguing about how to tie the bandage. Regardless you'll never walk the same again.

This also has the opportunity to free the middle class from the parasitic usurious class and their political agents that make up the welfare and bureaucratic classes.

Slicing a massive parasitic leech from your back is far more rewarding than chopping off your leg.

This will happen inevitably however. The question is what will the parasites do when they can no longer find a host?

[ViC78]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

i think the idea is that sufficient qe can allow the "savings", i.e. balance sheet repair, to proceed without exacerbating deflationary stresses on the economy. qe means monetizing bonds, whether more mbs via the gse's or euro-periphery sovereign bonds.

Buying MBS via GSEs is helping the banks repair their balance sheets (a pseudo TARP, if you will). What I am having a hard time to understand is, how does quantitative easing in this fashion help lessen the deflationary stress in the economy? In order to do that, you would need to create demand for goods in the economy and that is done by creating jobs, aka fiscal stimulus (in the right fashion). Hence, QE in order to monetize bonds which fund the fiscal deficit, makes sense. Any other approach does not cure anything, in my humble opinion. There is no political apetite for this. Not sure how this ends well.

[touchring]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

Buying MBS via GSEs is helping the banks repair their balance sheets (a pseudo TARP, if you will). What I am having a hard time to understand is, how does quantitative easing in this fashion help lessen the deflationary stress in the economy? In order to do that, you would need to create demand for goods in the economy and that is done by creating jobs, aka fiscal stimulus (in the right fashion). Hence, QE in order to monetize bonds which fund the fiscal deficit, makes sense. Any other approach does not cure anything, in my humble opinion. There is no political apetite for this. Not sure how this ends well.

Demand for goods is already close to all time high. The problem is that the people creating the goods are not in the USA.

This is a chicken and egg situation. In order to have real economic recovery, you must have jobs. In other words, jobs have to be created before the real economy recovers.

American economists should study how Asian governments conduct their stimulus, they are highly targeted and focused on creating employment instead of consumption.

In Singapore, there are schemes for manufacturers and banks, even foreign banks such as Citibank in which the government pays for the salary of new hires for an entire year. This has got to be the most direct way of creating jobs.


Record 1.7 Million iPhones Sold in Three Days
http://www.dailytech.com/Record+17+M...ticle18866.htm

China's May exports up 48.5%
http://news.xinhuanet.com/english201...c_13343032.htm

[Aetius Romulous]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

Krugman has become dangerous.

With the premier soap box in the world of economic policy Krugman long ago slipped off any pretence for unbiased observation. Millions read his column and take their only understanding of the economic world from its easily understood layman's vernacular. Some of those millions are highly placed decision makers. Others, they just take the que to panic.

At the end of the day one need not be an economist to understand this. It is impossible to tell the future - despite the best efforts of well placed Nobel laureates. Times were that you could handicap future events, and a well cut slice of any particular time scale was enough to build a crib sheet on. Over decades and centuries, all men are proven correct and incorrect at the same time. But that was then, and this is now.

The planet and its veins, sinews, vessels, strings, wires, and electronically controlled "systems" have become - and are becoming - exponentially complex. This is a matter of simple, intuitive observation. The fact is, we have no idea what is going on beneath our feet and our futures, and have virtually no way to understand the places this complexity is leading us towards. In this situation, defending an ideology rooted in another century is beyond stupid. Coupled with a weekly broadside in the New York Times, it is criminal.

EDIT: Someday, I will learn how to attach these comments to their proper thread. Someday.

[we_are_toast]

Re: Krugman: "We are now, I fear, in the early stages of a third depression."

yes, inadequate spending relative to all the excess capacity we have. john hussman, otoh, would say we don't have inadequate demand, but a qualitative [not quantitative] supply/demand mismatch that needs to be remedied. i'd support krugman's proposal of more government/fiscal stimulus if i had any faith that the deficits would actually be addressed. but that's not how it works. there has to be a crisis, unfortunately.

Krugman is half right. Deficit spending could be very helpful at this time. BUT, it has to be highly targeted! If you're going to waste the money on highways (just before P.C.O.), or house subsidies for people who were going to buy anyway, or car subsidies, or tax breaks for hiring people, then forget it. You haven't at all invested in the future that America most certainly faces.

The stimulus should go to Alt-e/conservation with an emphasis on transportation. The payback starts immediately, and continuously puts money in an individuals pocket. Once it's demonstrated that the country is truly making a commitment to pull the oil needle out of it's arm, it will be like the dot com boom, only with a twist. Building solar panels and wind generators and electric/NG/H cars and putting insulation in a home is real production. It's not like sending bits down a wire and hoping and praying there's and idea behind those bits that's actually going to make money.

Krugman is right that cutting back on spending NOW, is probably going to lead to a depression, but wasting stimulus on a dieing fossil fuel economy only makes matters worse.