A brief and grim interview with Paul Krugman on CNBC (hat tip reader Dwight). Some key points:
The indicators are worse than any point during Japan’s contraction
Spending is in free fall
Unemployment could exceed 10%, meaningful employment recovery may not occur before 2011
Click here to view.
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Clearly, swapping the Treasury’s fixed liabilities for floaters through quantitative easing, placing the government implicitly or explicitly behind every liability in the country, and running a large fiscal deficit on top of that is the only way to halt this decline.
Krugman pointed out in his most recent column that fiscal stimulus could’ve worked on the two occasions where it didn’t if it had just… been… huge… enough.
Here’s our chance to find out if they’re right. I still don’t believe this is a liquidity trap as classically defined. It arose in totally different circumstances, through an economy collapsing under the weight of its own debt rather than its own prudence.
I’d be more enthusiastic if we had the right environment for stimulus, but with China just devaluing their yuan further, the same pressures that got us into this mess remain unaltered.
Oh well. It’ll be very interesting to watch.
Maybe Krugman will get sane again when George Bush leaves office, but I doubt it.
So, why are we going to allow in another 1 million immigrants + 400,000 on temp visas . We’re creating 1 million unemployed + displacing 400,000 Americans from their jobs.
Shows you the great thinkers in this country have a blind-spot.
Keep labor as cheap as possible at all costs!
Good Plan!
Krugman looks like the worst of three influences in this piece:
1. Barney Frank (talking down the economy to push his agenda, but without applying any salve to his constintuency)
2. Norielle Roubini (It is sure bad out there! But without the long list of evidence.)
3. Ben Stein (Hey look at me! me! me! I am smart! rich! populist! – but without the gravitas.)
With so much on the line, why does he persist in expending his good will for so little?
Too bad we never developed models for this kind of situation.
What are we paying those economists to do? Sit around and pray to the invisible hand?
Too bad we never developed models for this kind of situation.
What are we paying those economists to do? Sit around and pray to the invisible hand?
Earlier, they argued about whether liquidity traps are even possible. I still don’t believe this is a liquidity trap at its core, just like the all the other freezes turned out to be solvency problems rather than liquidity problems. But let’s assume it is.
We do have models and liquidity traps were extensively studied after the close brush of 2003 that, of course, only made for a much worse situation in 2008. The pretty consistent consensus is:
Step 1: Avoid deflation if at all possible;
Step 2: If in deflation, convince people there will be inflation through your powers of persuasion.
Monetarism has its own additional step 3: secretly give money to needy people and corporations. Keynesianism has step 3: have the government soak up and employ all the excess savings and resources.
I think both those fixes would make the disease, which is collective insolvency raising risk premiums and real interest rates, worse, but that’s purely my own thinking, and not that of serious economists.
I should further mention that we’ve been doing both of those step 3’s already, though the secret donations have been public, and our fiscal stimulus so far has been not-colossal. I contend this has made things worse. We’re in the process of trying more of both right now, though.
There’s my falsifiable hypothesis. Let’s see how wrong I am.
Those calling for a huge bailout may be correct that that is the only way to avoid the worst case scenario, but the near unanimity of it, before unemployment is above even 7%, does not bode well for anything useful coming of it.
People are calling for $500B-$1T in spending with only vague notions of where it will go. Every slime lobbyist and semi-crooked legislator is almost certainly already maneuvering and leveraging their way into this before the rest of us even hear of an actual plan.
If this turns into one big pork-fest and then fails to help the economy anyways, expect a populous even more cynical and disgusted.
~We need Medicare for All …Medicare for All would help re-capitalize business (especially manufacturing), school districts, state and local government, individual payers and the under and uninsured. The states could use any excess of savings for unemployment and pension funds. Overall this could save hundreds of thousands if not millions of jobs while putting money quickly and directly into the system in the most efficient, fairest way … taking care of people’s medical bills.
~We need to Nationalize the banking system and clean up those balance sheets. Nothing is too big to fail.
~We need to nationalize the privately owned and operated Federal Reserve and operate it in the public interest.Operational income should be used for public purposes not private gain. It is our right under the Constitution to benefit from the creation of currency and credit. The Fed should be operated as a public utility.
~We need Bankruptcy Reform, in particular, legalizing house price reductions in bankruptcy court could solve many foreclosures almost immediately. They are also necessary because so many mortgages have several owners with different ” pieces” of the mortgage. Chris Dodd already proposed this but was rebuffed by the banking interests. Bankruptcy reform could also be extended to the “cramdown” of valuations on cars and credit cards. This bankruptcy will not be a giveaway but a severe chastisement for credit abuse. The 2005 Bankruptcy Act was a travesty of justice.
Trying to “save” an aggregate of 50 trillion dollars in US debt is a recipe for a Depression worse than the 30’s.
Yeah, where is the news in this? When is the other shoe going to fall? I want all these stupid bailout people to get bounced back to where ever they cralled out from.
Until killing the derivatves becomes thinkable and returning the rule of law (including bankrupty) to financial transactions the ship will continue to sink.
Great, the nobel laureate, who still sees the Clinton years as nirvana, unabashed corporate globalist(he wouldnt have gotten the nobel otherwise), supported all the bernanke and paulson moves, and now thinks spending 600 billion is going to turn the corner.
We’re witnessing the death of modern economics, lets hope something a little less subservient to power and a little more real replaces it.
“Maybe Krugman will get sane again when George Bush leaves office, but I doubt it.”
Maybe the Hannity and Limpbaugh dittoheads will grow up someday, but I doubt it.
weinerdog43
Just a couple of comments…
Regarding employment recovery in 2011 — In which Industry ??? We sent all the industries to China.
Regarding a comment about immigrants — My take is that it is just more food for nationalist jingoism. The problem is TRADE IMBALANCE and NO INDUSTRY here in the USA — not immigrants.
The devalued foreign currencies of JAPAN and CHINA(or the over valued Dollar) are THE problem.
Wonder when the public at large will realize this.
Ven
For your antidotes:
http://www.zveryshki.ru/
Here's Paulson
Does this bozo inpire confidence?
He reads someone else's speeches badly.
He hasn't a clue.
http://www.cnbc.com/id/15840232?video=946447058&play=1
“My take is that it is just more food for nationalist jingoism. The problem is TRADE IMBALANCE and NO INDUSTRY here in the USA — not immigrants.”
No. You’ve succumbed to the Brainwashing put out by Washington. Yes, you’re correct in that if we had more industry and growth there would be no problem with regular immigration.
We Don’t!
“IMMIGRATION IS BEING USED TO KILL OFF AMERICAN CITIZENS IN THIS ECONOMIC CLIMATE. YES, OVER A MILLION AMERICANS WILL HAVE THEIR FINANCIAL LIVES SNUFFED OUT BECAUSE OF TEMP VISAS AND LEGAL IMMIGRATION THIS YEAR.”
The globalists are using the old slogan of “supply makes its own demand” to justify this murderous onslaught of salary diluting labor.
It continues because the IVY elite do not live in the same competitive world as Joe-citizen.
Joe citizen is p-ssed!
Jeez, when will you folks just admit that Keynes was wrong and the Austrians were right? Is it going to take an all out currency crash before you understand that Keynesianism DOESN’T WORK.
http://mises.org/rothbard/agd.pdf
Here is THE definitive work on the Great Depression laying out what brought it on and what was done to exacerbate it. Statism is NOT the answer people.
Bob_in_MA said…
People are calling for $500B-$1T in spending with only vague notions of where it will go. Every slime lobbyist and semi-crooked legislator is almost certainly already maneuvering and leveraging their way into this before the rest of us even hear of an actual plan.
Hopefully some small portion of that will have some lasting value for future generations since they will be on the spending hook.
These programs will cause a GDP spike but doubt it will do much for the real economy or impact employment beyond the politically connected as Bob has pointed out.
Unemployment benefits can help feed the family but do nothing when you have a >250K mortgage, 2 cars along with the normal range of daily bills. Prior stimulus programs during the Clinton years occured within a economic environment with far less debt overhand not to mention the housing cost a fraction of today's.
We seem to have at least two basic problems: a trade deficit that is unsustainable in the long term, and tens of trillions of dollars of debt that have to be somehow erased before our economy can grow again.
The trade deficit could be solved by telling other nations that they must stop buying Treasuries with their surplus dollars, and must instead use the money to buy our goods and services. Or else we will reduce the trade deficit with some type of barrier. I think they would prefer to buy our goods than face a trade barrier. Half a trillion dollars per year of new buying stimulus should give our economy a good kick start with long-term value.
But then who buys our Treasuries, which will soon increase in quantity due to new needed infrastructure spending? No problem, the Fed buys them. The resulting inflation then effectively reduces our overhang of debt.
Does this scenario solve both of our problems?
Know what else is a little scary, something else that Krugman highlighted in his column?
Keynes said there would be pushback from deficit worriers, and it’s obvious the damage those deficit hawks did to the potential of the fiscal stimulus the other times it was tried. The arguments of those deficit hawks in times like this are fundamentally dangerous and wrong, lest it persuade someone in power that any other path should even be considered.
He sounded a little different about fiscal policy here in section 5, nine years ago, emotionally distanced from the problem when it was happening in Japan. I happen to think his insights in this writing are brilliant, and I’m a big fan of Krugman overall. The man’s an incredible economist.
He’s a bit prone to partisanship at times, though.
The trade deficit could be solved by telling other nations that they must stop buying Treasuries with their surplus dollars, and must instead use the money to buy our goods and services. Or else we will reduce the trade deficit with some type of barrier. I think they would prefer to buy our goods than face a trade barrier. Half a trillion dollars per year of new buying stimulus should give our economy a good kick start with long-term value.
Our trading partners are going through their own small bit of adjustment right now, to say the least, and they’ve indicated they’re not interested in the revaluation this would require. For example, it would bankrupt the PBoC overnight and put more pressure on China’s domestic economy. They’ve actually weakened the yuan during this crisis.
If they wanted what we produce at current prices, they’d already be buying it instead of reinvesting their mercantilistic gains.
A large downward revaluation of the dollar would increase the global pain in the medium term, as we lost capital and foreigners lost their markets, but it’d be beneficial in the long run. It’s a pretty steep hump to get over, though.
But then who buys our Treasuries, which will soon increase in quantity due to new needed infrastructure spending? No problem, the Fed buys them. The resulting inflation then effectively reduces our overhang of debt.
Buying Treasuries back does nothing to reduce or increase our debt overhang. It converts a fixed liability into a floating, current liability. That exposes the government to interest rate changes in either direction.
Inflation right now is a difficult process to stop, particularly given the government’s balance sheet, and at this point, a difficult process to get started, too.
A moderate burst of inflation would harm those who hold long-dated fixed-coupon securities, which are things like banks and pension funds, who are not in great shape as it stands. They would probably need more help.
A serious burst of inflation would help to wipe the slate clean for both debtors and creditors, though anything with indexed liabilities would get destroyed. That would also be very difficult to rein in once it got started and it inflicts a lot of damage on the underlying economy to boot.
Not such an easy out here, I’m afraid.
Unemployment at 10% sounds about right. We may already be there considering how the Dept. of Labor undercounts unemployment.
bg said…
With so much on the line, why does he (Krugman) persist in expending his good will for so little?
______
Perhaps the K-man has an agenda e.g. BBs job once he sets sail for Tol Eressëa, aprox. 24 months from now.
Call it “Keynesianism” if you will, but at least massive government spending to renew infrastructure (roads, bridges – around half of which are ageing and unsafe, ports, hospitals and schools, airports, telecommunications / fibre backbones etc) would serve to actually create something of enduring value for the American people, as well as the trickle-down economic effects that such spending would have on the household balance sheet of Joe (and Jen?) Citizen.
This is more than can be said for any so-called economic effects that you might hope to obtain from yet another “No Banker Left Behind” bailout, or commercial paper “liquidity” (read: solvency) bailout, or direct purchases of treasuries by the Fed, or, God-forbid direct meddling in equity markets by the Fed en masse (the PPT is already having a shot here, and coming up empty-handed).
Spending on infrastructure isn’t Keynsianism any more than spending money on Wall St banker bonuses is Friedman-esque monetarism. However spending money on infrastructure *will* lead to tangible benefits to the American economy. Can the same be said for the alternative?
Anony: “Here is THE definitive work on the Great Depression laying out what brought it on and what was done to exacerbate it. Statism is NOT the answer people.”
Why doesn’t some Mises guy please tell us what it is you think will get us out of this mess?? I don’t hear anything I can even conceptualize. At least the Keynes people are proposing things as definite as stimulus spending on a huge scale to both invest in the future (infrastructure, new energies,etc), which is an idea I can understand, its rational – you investment just as a business does for the future efficiencies-. In the meantime you work on fixing the trade deficit with Asia which creates more jobs too, etc, etc. These are ideas the average person can understand, sure no one wants to debt spend another $5T to get out of this mess, but I don’t hear any real ideas on the other side of the argument…do you just want a major depression, blood in the streets, chaos?? Seriously, what are these Mises people arguing for?? What does the future look like under this theory? Quit bitching and start being a part of the solution.
All the puppets strings were tied in one big knot, to pull one or cut one, would entice a reaction in all of its parts, whether that was the desired reaction or not.
skippy
The biggest issue next year in the American economy will be jobs. Not credit, not consumer credit. Our economy doesn’t rest on consumer spending. No! It rests on jobs. We’ve been careless and shipped them overseas. We’ve let the CEOs follow their bliss (profits) and they’ve managed to drag our economy over a cliff.
We face a huge problem: there is no future source of growth for the American job market. Our heathy domestic job markets were in bubble sectors (real estate, construction, finance) or they were low wage or they were in health care. Bubble jobs are gone, period. Health care will be rationalized in some manner, made more rational and less wasteful, making that jobs market less buoyant.
Technology, white collar, manufacturing: offshore, outsourced. Hello poverty!!
Anonymous (above) is right … job creation is what matters rigth now. You can park your neo-Keynsian, neo-monetaist, neo-Misesian models where you like. America has exported, outsourced and abrogated its economic futurre. Until this is turned around in a significant way, not much else matters.
Ranting aside, the idea that the economy rests on jobs is a very good point.
Strictly from a psychological standpoint, you are considerably less inclined to spend if you are unemployed- even if you have a million dollars in the bank, if you are unemployed or even grossly underemployed you’re going to hoard whatever cash you have because you have no idea whether it will be enough for you to survive on in the future.
What’s worse, for the average consumer, its going to take a handout of much greater size and duration than unemployment insurance to restore sufficient confidence to spend on anything other than necessities.
“Technology, white collar, manufacturing: offshore, outsourced. Hello poverty!!”
It seems we should suspend all immigration.
Half a trillion for new jobs buildng “infrastucture”. Uh-huh. My 60-year-old aunt who just got laid off from her white-collar banking job will be happy to lay asphalt on 95 degree summer days. And I’m sure the laid off escrow officers will rush right out and grab those jobs installing new rebar for bridges. Yup.
It’s good to see, by some of the comments posted here, that more readers are becoming critical of Krugman’s grandstanding pronouncements and underlying status quo values.
Krugman said in his interview ‘mortgage interest rates are not where they should be’.
His concern for mortgage interest rates seems a bit misplaced to me. Krugman, like the rest of his contempories, want to reinflate the housing bubble.
He is continuing to fiddle while the country goes down in flames.
Anonymous (above) is right … job creation is what matters right now.
You’ve forgotten one important point. Americans don’t like to work.
Krugman said in his interview ‘mortgage interest rates are not where they should be’.
Krugman is right… rates are way too low.
Most immigrants coming into the country right now (on visas) are going through a de facto skills test. So they are bringing in expertise in some area. That doesn’t mean we shouldn’t invest in our own crumbling education system, however.
@alexblack said “Half a trillion for new jobs buildng “infrastucture”. Uh-huh. My 60-year-old aunt who just got laid off from her white-collar banking job will be happy to lay asphalt on 95 degree summer days. And I’m sure the laid off escrow officers will rush right out and grab those jobs installing new rebar for bridges. Yup.”
This has been exactly my thought also.
Building new bridges or repairing roads is desirable and necessary over time. While it will give work to blue-collar construction workers and white-collar civil engineering firms, who will hopefully spend some of their income, I don’t see the long-term economic benefit of doing this. Eventually the infrastructure will be brought up-to-date. Then what? The people doing the infrastructure rebuilding will be out of work and we will back where we were. Does a newly paved road or stronger bridge encourage the formation of new industries? I think not.
Instead, we should be putting monies into training people for roles in new technology, such as alternative energy, technology security, space exploration, etc. And we should be limiting immigration and reducing H1-B’s so as not to take any potential work away from USA citizens. If limiting H1-B’s causes Microsoft or others to relocate to another country, then I say c’est la vie…
What is missing today is a cherent, systematic analysis of the world economy as a whole. It includes free work, cost of ecosystem services, corruption, unnecessary depletion of resources, non-market price setting, behind-the-door banking, and many more.
I think that the so called economics science is of huge debt to us all, because we choose policies based on murky arguments and simplified solutions (e.g. the interest and utility theory has been badly shaken in recent years).
Without free enterprise, it will be difficult for the US to move ahead. Does free enterprise exist? If the gov said it was OK to cut trees again, we would have a logging industry. If the gov said it was OK to mine again we could have a mining industry. Give permission to build a dam and we have surplus electricity and lower generation costs. Build a water pipeline and a poorer state with water can sell it to a richer state without water. Excavate a new harbor and ships will come. Unfortunately, almost every scheme I can come up with to actually produce something is confounded by endless restrictions, regulations, delays, defacto impossibility, or is outlawed. So, I must content myself with passing a dollar across the kitchen table, back and forth with my wife, so we can be a dollar richer each time it comes around. We become like children in a sandbox building castles and proclaiming ourselves rulers of an imaginary empire- while the real world moves on around us.
@Anonymous at 5:33AM said “Without free enterprise, it will be difficult for the US to move ahead. Does free enterprise exist? If the gov said it was OK to cut trees again, we would have a logging industry. If the gov said it was OK to mine again we could have a mining industry. Give permission to build a dam and we have surplus electricity and lower generation costs. Build a water pipeline and a poorer state with water can sell it to a richer state without water. Excavate a new harbor and ships will come. Unfortunately, almost every scheme I can come up with to actually produce something is confounded by endless restrictions, regulations, delays, defacto impossibility, or is outlawed.”
You need to think up some new “schemes”. A lot of what you propose has real and potential environmental, health, ecological, quality of life and other issues. If we destroy everything around us, will the resulting world be worth living in? Look up slash and burn logging in 3rd world countries such as Madagascar. Look at unregulated mining and the level of pollution in China.
It is still OK to log or mine in the USA, in non-protected areas and as long as you follow the rules, which have been generally enacted for a purpose. Furthermore, these regulations protect not only the environment but also the people who work in industry. Yet even with existing regulations, which while you claim are too onerous but may in fact, NOT be strong enough, we get UGLY STORIES THIS THIS.
But a bigger question is – does mankind have the right to displace or destroy the the lives of creatures around us in our quest for “progress”? Dams impact all the natural life around the rivers they are built on. Take the decline of the salmon for instance (see: Link (PDF). In Calif there is a strong movement to remove the dams that are impacting salmon ability to swim up-river to where they were born and reproduce. The natural world was built over billions of years. Mankind has done more damage in the last 300 years than in all of mankind’s previous history.
45 minute interview with Krugman here.
http://www.onpointradio.org/shows/2008/12/paul-krugman/
It sure looks like a Depression but even Krugman has been softpedaling the upper one percenter’s viewpoint that it’s just another garden-variety recession. Krugman said two weeks ago it’d only be 8 percent unemployment. (Translation to reality: double any number he and Goldman/Saks puts out there. Now, it’ll be closer to 20 percent…when the effluent finally hit the fan. )
Kenneth Galbraith’s classic: the Great Crash (of 1929) is being reinacted: Leverage, hubris and especially income inequality are the causes of this one too.
The is No Demand as the Middle Class hasn’t enough income because the Conservatives have been pushing for lower wages ever since President Reagan pushed his low wage Reaganomics and wealthy Democrats (Nancy Palosi, Chuck Schumer, Obamas, and very wealthy Kerry’s, et al) have gone along with “innovation” in Financialization.
On the Mises/Rothbard query.
And, on the need to have the grand discourse on what economy “is”.
I see an under-pinning in both Friedman and Mises for a 100 percent reserve banking system.
Banks don’t create money, they lend it.
Friedman advocated government-based quantitative increases in the money supply –
tied to increases in the productive/consumptive balance of the REAL (non-money) economy.
Mises folks mostly ignore the need for new money, positing that price stability is a central government planning tool.
I would like to see progressives and libertarians move forward on a least-agreement basis.
At least we agree that banks should NOT create money, and that banks should be limited to lending real money, a la the 100 percent reserves.
On an interim basis we use the treasury system to create new money, a la Friedman, and we argue whether we would prefer to abandon that policy and just let prices continue to fall back to some-age-ago period.
And then we argue over whether we need to tie the money value to a metal-base or resort to a cooperative international exchange basis rather than today’s money-trading forex.
Like others, just looking for a little progress.
Ah yes, deflation. Gas, house prices, cars, and stock went down.
Going up: food, rent, taxes, parking, insurance, college, utility bills, credit transaction costs, parking fees, health care, etc. Your overall bills will probably be the same or more next year. Real deflation would be good, a loaf of bread for 50 cents next year would be something to look forward to. In the Depression one could get up to 25 hamburgers for a dollar. Now that is deflation.