28 June 2010
Europe May Cause a Third Depression
In his OpEd article in the June 28, 2010, New York Times, Paul Krugman is right to warn that the European (and, to some extent, American) policies of mistakenly carrying water for investors in government debt is likely to deflate the world economy to an extent comparable with the Great Depression and the Long Depression before it. What Mr. Krugman fails to acknowledge is that it is only when the public deceives itself into thinking that good times will last forever—when it inflates a bubble—that the economy grows and people improve their standards of living.
In fact, economists from the days of Adam Smith and earlier (when they were known as soothsayers) have always claimed that theirs was the realm of reality and that those who had figured out the truly ephemeral nature of abstract principles of finance and investment were only out to defraud the rest of us. The Europeans and the Fed have swallowed totally the economists’ rationalization without recognizing that it takes a measure of fantasy to keep funding sources confident that returns on their investment will continue into the future.
Mr. Krugman may call the danger to the world economy deflation. What he really means is that without constantly inflating expectations through deficit spending, at a rate that does not get out of control, the world’s national leaders will inevitably disappoint financial markets and condemn their societies to prolonged torpor.
In his OpEd article in the June 28, 2010, New York Times, Paul Krugman is right to warn that the European (and, to some extent, American) policies of mistakenly carrying water for investors in government debt is likely to deflate the world economy to an extent comparable with the Great Depression and the Long Depression before it. What Mr. Krugman fails to acknowledge is that it is only when the public deceives itself into thinking that good times will last forever—when it inflates a bubble—that the economy grows and people improve their standards of living.
In fact, economists from the days of Adam Smith and earlier (when they were known as soothsayers) have always claimed that theirs was the realm of reality and that those who had figured out the truly ephemeral nature of abstract principles of finance and investment were only out to defraud the rest of us. The Europeans and the Fed have swallowed totally the economists’ rationalization without recognizing that it takes a measure of fantasy to keep funding sources confident that returns on their investment will continue into the future.
Mr. Krugman may call the danger to the world economy deflation. What he really means is that without constantly inflating expectations through deficit spending, at a rate that does not get out of control, the world’s national leaders will inevitably disappoint financial markets and condemn their societies to prolonged torpor.
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