"What does not change / is the will to change"
--Charles Olson, "The Kingfishers"

Thursday, May 20, 2010

Stagnation ahead?

Paul Krugman's column, which is on the Times site tonight, but will be in print tomorrow, reminds us that the danger is not the deficit -- not in the short term, anyway -- but the likelihood that we are entering a long period of economic stagnation, a "lost decade," and that we are not doing enough to prevent it.

Interest rates, he said, have ticked up and the right back down, and that stagnation appears to be what is ahead -- and not a healthy recovery or a Greek-style collapse of confidence by the people who loan us money.
What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky — hence, the plunge in the stock market — into the perceived safety of U.S. government debt.


What’s behind this new pessimism? It partly reflects the troubles in Europe, which have less to do with government debt than you’ve heard; the real problem is that by creating the euro, Europe’s leaders imposed a single currency on economies that weren’t ready for such a move. But there are also warning signs at home, most recently Wednesday’s report on consumer prices, which showed a key measure of inflation falling below 1 percent, bringing it to a 44-year low.

This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.

So what we should really be asking right now isn’t whether we’re about to turn into Greece. We should, instead, be asking what we’re doing to avoid turning Japanese. And the answer is, nothing.

It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.

In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

2 comments:

reinkefj said...

Remember the Great Depression was caused by the Gooferment and it's Smoot Hawley tariff.

This one was caused by CRA, Freddie + Fannie, repeal of Glass Stegal, the FED, the SEC, the FDIC, and the FTC. (imho in that order) (p.s., blaming Wall Street is like blaming the insane in the asylum. Corrupt gooferment makes this all possible.)

The answer is freedom; not gooferment. How's all that deficit spending worked out for Japan? How did socialism work out for the old Soviet Union. Remember Thatcher's quote on "other people's money"?

No, we pull ourselves back from the brink by tough love. Sure it's going to hurt. But, do we have the right to endebt future generations?

imho:

(1) End the various "wars". Bring all the boys and girls home.

(2) End the psuedo War on (some) drugs. Pardon ALL non-violent drug offenders.

(3) End all restrictions on small businesses. (License to braid or cut hair' please don't make me barf!) (Dollar van prohibitions.)

(4) Zero corporate, estate, and income tax. Return to constitutional tariffs and excise taxes.

(5) Start selling off the "national assets".

(6) Return -- with a forty year plan -- education costs to the parents.

(7) End welfare -- corporate and personal -- with an appropriate transition period.

(8) End the Social Security ponzi scheme with a Chile-like solution to give folks time to adapt.

(9) Open the borders with an expedited identification scheme. (i.e., here illegally? come down and get your picture taken and finger prints checked and dna sample! Here's your new green card.) (i.e., want to come here. post a bond for your return trip. no communicable diseases. pic, finger, dna. welcome to the land of opportunity.)

10. Re-institute Constitutional money in gold and silver. Figure out a transition plan from FED to gold.

Then stand back and watch this economy take off. You'll have growth and civility that is unprecedented.

Anonymous said...

Bat-detritus Meshuganah sums up goofertarianism very nicely. Our country has become so dumbed down, so stupefied, so beaten into a pulp, that this soulless robotic ideology has actually taken root in the minds of many misguided people.