“As recently as two years ago, anyone predicting the current state of affairs (not only is unemployment disastrously high, but most forecasts say that it will stay very high for years) would have been dismissed as a crazy alarmist.”
That was Paul Krugman in today’s newspaper. Thomas Friedman is fixing problems in the Middle East, so we’ll have to make do with Krugman to entertain us on economic matters.
It is amazing that anyone takes Krugman seriously. It is obvious now that he – and his fellow interventionists – had no idea what was going on two years ago.
Now, at least he sees the drift of events more clearly; we are headed towards a Japan-style deflationary slump.
“It’s a good bet that by some measures we’ll be seeing deflation by sometime next year,” he writes.
“Mr. Bernanke has thought long and hard about how to avoid a Japanese-style economic trap, and the Fed’s researchers have been obsessed for years with the same question. But here we are, visibly sliding toward deflation…”
So you see, dear reader, even a Nobel Prize-winning dog can learn a new trick. Now, he sees through a glass darkly… Soon, he will be face to face with deflation.
Of course, the poor man still completely misunderstands what is really going on. But what do you expect? His career depends on not understanding it. Krugman would have to turn his back on his neo-Keynesian creed if he ever caught on to the plot. He would have to look for a new job if he were ever to tell his readers about it. Almost everyone wants the feds to “do something” to avoid the Japanese “trap.” Imagine what would happen if The NY Times’ leading economist were to say:
“Forget it. The feds have already done too much. Following my advice, they were a major cause of the present crisis. Following my advice, they have made it worse. I was wrong. Now the best thing they can do is to withdraw as gracefully as possible.”
That’s not what Times readers want to hear. It’s not what anyone wants to hear, except us “crazy alarmists” here at The Daily Reckoning.
We’ve been talking about the Japan trap for years. Economist Richard Koo calls it a “balance sheet recession.” He’s right about that. The private sector destroys excess capacity and excess debt. When it’s over, the private sector balance sheet looks a lot better.
Of course, it could happen faster. In Japan, it may still be going on. Why? Because the Japanese feds worked so hard to stop it. Monetary stimulus. Fiscal stimulus. Quantitative easing. They tried everything. And kept at it for nearly 20 years.
But what they were really doing was preventing the one fix that really fixes. It is as if they were letting the air out of the market economy’s tires…and then were amazed that it didn’t roll.
You know what cures a depression, dear reader? We’ll tell you. A depression.
A depression destroys excessive debt. Businesses with too much debt go broke. Bonds that can’t be paid go into default. Households that have spent more than they could afford go broke.
Problem solved. Debt disappears.
Then, the economy can grow again.
So what does Krugman suggest? You guessed it: stop the process of debt destruction at all costs! Do what the Japanese did, in other words, only do more of it.
Bill Bonnerfor The Daily Reckoning
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.
Yes, in the end we will have a country full of rich people who don’t have a clue about what it really takes to make a dime.
so… inflation or deflation?
That’s the point exactly.
This Bill Bonner article says nothing. It is a rant with no suggestions as to how to improve the economic conditions of the United States’ economy. For the life of me, I have no idea why the Christian Science Monitor printed it.
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