Quote of the Day

“Yes, total debt in the U.S. economy, public and private combined, has risen dramatically relative to G.D.P. No, this doesn’t mean that we as a nation have been living far beyond our means, and must drastically tighten our belts. While we have run up a significant foreign debt (although not as big as many imagine), the rise in debt overwhelmingly represents Americans borrowing from other Americans, which doesn’t make the nation as a whole any poorer, and doesn’t require that we collectively spend less. In fact, the biggest problem created by all this debt is that it’s keeping the economy depressed by causing us collectively to spend too little, with debtors forced to cut back while creditors see no reason to spend more.

“So what should we be doing? By all means, let’s restore the kind of effective financial regulation that, in the years before the Reagan revolution, helped deter excessive leverage. But that’s about preventing the next crisis. To deal with the crisis that’s already here, we need monetary and fiscal stimulus, to induce those who aren’t too deeply indebted to spend more while the debtors are cutting back.

“Unemployment, not excessive money printing, is what ails us now — and policy should be doing more, not less.”  Emphasis added.

Paul Krugman, from “The Urge to Purge,” NYT

Quote of the Day

“This economy has no forward momentum and little help from monetary or fiscal policy.  As if that were not enough, ill winds are blowing in from both a contracting Europe and slowing growth in emerging markets.”

Kathy Bostjancic, director of macroeconomic analysis, the Conference Board

I would say no help from monetary or fiscal policy.

But Obama does have one thing going for him — he has Mitt.

Fifty Shades of Sado-Monetarism

From “Another Bank Bailout,” Paul Krugman, NYT:

“Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldn’t blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank won’t move.

“And that doesn’t even take into account the growing risk of a euro crackup. For years Spain and other troubled European nations have been told that they can only recover through a combination of fiscal austerity and ‘internal devaluation,’ which basically means cutting wages. It’s now completely clear that this strategy can’t work unless there is strong growth and, yes, a moderate amount of inflation in the European ‘core,’ mainly Germany — which supplies an extra reason to keep interest rates low and print lots of money. But the central bank won’t move.

“Put all of this together and you get a picture of a European policy elite always ready to spring into action to defend the banks, but otherwise completely unwilling to admit that its policies are failing the people the economy is supposed to serve.

“Still, are we much better? America’s near-term outlook isn’t quite as dire as Europe’s, but the Federal Reserve’s own forecasts predict low inflation and very high unemployment for years to come — precisely the conditions under which the Fed should be leaping into action to boost the economy. But the Fed won’t move.

“What explains this trans-Atlantic paralysis in the face of an ongoing human and economic disaster? Politics is surely part of it — whatever they may say, Fed officials are clearly intimidated by warnings that any expansionary policy will be seen as coming to the rescue of President Obama. So, too, is a mentality that sees economic pain as somehow redeeming, a mentality that a British journalist once dubbed ‘sado-monetarism.’

“Whatever the deep roots of this paralysis, it’s becoming increasingly clear that it will take utter catastrophe to get any real policy action that goes beyond bank bailouts. But don’t despair: at the rate things are going, especially in Europe, utter catastrophe may be just around the corner.”  Emphasis added.

And that utter catastrophe may put Mitt in the White House.  Catastrophe squared!

While the Storm Clouds Gather, Far Across the Sea…

Once again (see WWI, WWII), we will get dragged into Europe’s mishegas and suffer for it.  In a global economy, the Atlantic Ocean really is just a pond, or maybe just a puddle.

From “Europe’s Economic Suicide,” Paul Krugman, NYT:

“The question then was whether this brave and effective action [the European Central Bank’s making money available to banks late last fall] would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place.

“But they didn’t.  Instead they doubled down on their failed policies and ideas.

“Consider the state of affairs in Spain, which is now the epicenter of the crisis.  Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent…, and the youth unemployment rate over 50 percent.  This can’t go on — and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.

“[T]he prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

“This is, not to mince words, insane.  Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen:  such programs push depressed economies even deeper into depression.  And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.

“The Continent needs more expansionary monetary policies, in the form of a willingness…on the part of the European Central Bank to accept somewhat higher inflation;  it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it.

“What we’re actually seeing, however, is complete inflexibility.

“Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy — and their society — off a cliff.”  Emphasis added.

The lamps are going out all over Europe, and we shall not see them lit again in President Obama’s first term, which may make it his only term.  He’s not just facing Mitt, he’s facing Merkel.