Crying Fire! Fire! In Noah’s Flood - Deficit and Inflation Hawks are WRONG!!

[Dezaad]

Crying Fire! Fire! In Noah’s Flood - Paul Krugman Blog - NYTimes.com

My favorite part of this commentary is where he quotes Keynes blasting classical economic theory, which could not account for the Great Depression.

But, the real point is that the hawks, many armchair ones on this board, keep saying that the sky is falling the sky is falling. But, they are never right. Here's why:

Krugman lays out the opposing claims:

• "Deficit spending will raise bond rates" as opposed to that it won't in this environement.
• "Low interest rates and 'printing money' will lead to hyperinflation" as opposed to they won't (again, in this environment).

Here is his response:

In effect, we’ve had a test of those two views. And guess what? Interest rates have fluctuated, but as of 20 minutes ago the 10-year bond rate was 3.17, yes, 3.17 percent. Bond vigilantes, where have you gone. Meanwhile, core inflation — and yes, that is the right measure — just keeps falling.

It is insane that we are listening at all to inflation hawks when we actually are experiencing disinflation. Any inflationary cycle would be child's play compared to a deflationary one. Japan was lucky enough over the last decade or so to have a deflationary cycle that ran while the rest of the world was prosperous. Their pain was not so acute that way. But us? If we experience a deflationary spiral in this environment? Well, lets just say that Republicans would be out of office for the next 6 decades.

 

[phattonez]

Classical econoimcs could definitely account for the Great Depression. Read America's Great Depression by Murray Rothbard. There was a ton of inflation introduced during the 1920s.

Low interest rates and printing money won't necessary lead to hyperinflation. They may lead to stagflation, though. Oops, Keynesian economics can't account for that.

You blame Japan's problems on deflation? How convenient to ignore all of their stimulus packages, you know, the things that are supposed to make our economy better.

And hey, if you believe in deflationary spiral, go to a country that has deflation and don't eat. I mean, deflationary spiral says that people stop buying during a deflation. If that's true, then don't buy food. Well then, don't buy nice drinks. See what I'm getting at? Economic activity does not stop because of deflation (look at the Long Depression, which was not a depression, but a period of growth in the midst of deflation).

 

[donsutherland1]

Dezaad,

Any U.S. budget crisis is still a medium-term threat or beyond. It is not imminent, except under a few possible scenarios e.g., China's real estate bubble bursts and China goes into a prolonged period during which it purchases no new Treasury securities or worse, attempts to sell a large chunk of its holdings. In other words, the U.S. has a decent window of opportunity to address its long-term fiscal challenges. Laying out a credible plan and beginning implementation of some of its components next year would be helpful. By then, it will be clear whether the economy is on a sustained rebound (I think it is, though the rebound is moderate).

It should be noted that the flight-to-safety phenomenon has helped keep U.S. interest rates abnormally low. Hence, even with a rapidly growing debt burden, the costs of servicing that debt have increased more slowly than the debt has increased. But down the road, as the world's economies continue to grow, there could be competition for capital flows that have so far benefited the U.S. via flight-to-safety. Perceptions can be fickle and they can change fairly dramatically. In short, the flight-to-safety benefits the U.S. is currently enjoying should not be presumed to last forever. In the medium-term and beyond, debt burden fundamentals will begin to assert themselves. At that time, among other things, long-term rates could begin to tick up faster than macroeconomic fundamentals would otherwise justify. Fortunately, that time is not now. But the U.S. could be tempting fate if it leaves its fiscal policy largely as is. Already, Congress is poised to consider legislation that would further increase the nation's deficits over the baseline figures on account of its not being fully funded via offsetting revenue increases/spending reductions.