Paul Krugman

[_w_]

The man who lectures us on the need to borrow more adds that the debt won't be repaid.

Krugman is the grotesquely over-adapted Keynesian ammonite on its way to mass extinction as its environment changes.

Default Is In Our Stars

Not in ourselves.

I think it’s fair to say that a majority of economists believe that excessive private debt played a key role in getting us into this economic mess, and is playing a key role in preventing us from getting out. So, how does it end?

A naive view says that what we need is a return to virtue: everyone needs to save more, pay down debt, and restore healthy balance sheets.

The problem with this view is the fallacy of composition: when everyone tries to pay down debt at the same time, the result is a depressed economy and falling inflation, which cause the ratio of debt to income to rise if anything. That is, we’re living in a world in which the twin paradoxes of thrift and deleveraging hold, and hence in which individual virtue ends up being collective vice.

So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt.

And that’s what is happening now: as this story in today’s Times points out, the main force behind the gratifying decline in consumer debt appears to be default rather than thrift.

So basically, we can do this cleanly or we can do this ugly. And ugly is the way we’re going.

[_w_]

I forgot the link:

http://krugman.blogs.nytimes.com/2010/09/25/default-is-in-our-stars/

[WageslaveX14]

Looking at it another way this:

"So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt."

Could be re-written as:

"So who should policy makers favour? In the end, what must happen is an efective default on a significant part of debt, one way or another. The default could be implicit through inflation, meaning that those who got us into this mess by either borrowing too much or lending too much will be let off, whilst the borrowers will be able to keep the assets that they borrowed irresponsible amounts to obtain. Meanwhile, those who saved and refused to borrow crazy amounts will be punished, as their savings are destroyed whilst they have no hard assets to fall back on. (As an economist, I only look at war as an economic cure, rather than a way of killing millions and destroying the lives of countless remaining survivors.)

Or, if not, we could see a gradual painful process of individual defaults and bankruptcies, meaning that the individuals who are responsible for the problems either default on their debts or have to book a bad loan, and they lose their assets which are sold to those who didn't behave recklessly in the first place.

It is a political question of who you want to favour, and whether you believe that creating an enormous moral hazard will cause even greater problems in the future.

It is not an economic question."

The latter seems more honest to me.

[Tired of Waiting]

The man who lectures us on the need to borrow more adds that the debt won't be repaid.

Krugman is the grotesquely over-adapted Keynesian ammonite on its way to mass extinction as its environment changes.

He says that default is not an option, but the only possible solution. This is not true. He would only be right if America and Britain were closed systems. But they are not.

Only a few countries had these huge credit bubbles, ours was the biggest in relation to GDP, and America's was the biggest in absolute terms, due to their size. (A few other smaller economies had some - Iceland, Ireland, Spain, etc. - but they don't have much global impact.)

Default (via inflation) is a political choice, and not the "only solution". In other words, this Krugman is a b@stard.

A naive view says that what we need is a return to virtue: everyone needs to save more, pay down debt, and restore healthy balance sheets.

The problem with this view is the fallacy of composition: when everyone tries to pay down debt at the same time, the result is a depressed economy and falling inflation, which cause the ratio of debt to income to rise if anything. That is, we’re living in a world in which the twin paradoxes of thrift and deleveraging hold, and hence in which individual virtue ends up being collective vice.

LINK: http://krugman.blogs.nytimes.com/2010/09/25/default-is-in-our-stars/

Edited September 25, 2010 by Tired of Waiting

[_w_]

The latter seems more honest to me.

Yes I agree, but the way I look at it is from this angle:

"We want to borrow more from you (investor, pension fund, etc.) oh and by the by, we're not going to pay you back. Now just sign here will you..."

I know pension funds are given a free reign to lose their members' money these day and are also being captured through regulation. But at some stage, as knowledge of this scam expands, people are going to stop putting up with it.

[_w_]

Default (via inflation) is a political choice, and not the "only solution". In other words, this Krugman is a b@stard.

He is the product of three keynesian generations, he probably doesn't even understand the right and wrong of this.

Although personally, in a shrinking economy, I do believe the debt can't be paid back. The load is just too enormous.

[WageslaveX14]

He is the product of three keynesian generations, he probably doesn't even understand the right and wrong of this.

Although personally, in a shrinking economy, I do believe the debt can't be paid back. The load is just too enormous.

I agree to an extent. However, to me actual, literal default on debt is preferable to inflationary default. The fairest way out of the current situation would be for mass defaults on private and sovereign debt, although as the bankers would hate this, it won't happen.

[WageslaveX14]

By the way, it appears that the NY Times moderators are not allowing any more comments on his blog.

[Tired of Waiting]

Looking at it another way this:

"So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt."

Could be re-written as:

"So who should policy makers favour? In the end, what must happen is an efective default on a significant part of debt, one way or another. The default could be implicit through inflation, meaning that those who got us into this mess by either borrowing too much or lending too much will be let off, whilst the borrowers will be able to keep the assets that they borrowed irresponsible amounts to obtain. Meanwhile, those who saved and refused to borrow crazy amounts will be punished, as their savings are destroyed whilst they have no hard assets to fall back on. (As an economist, I only look at war as an economic cure, rather than a way of killing millions and destroying the lives of countless remaining survivors.)

Or, if not, we could see a gradual painful process of individual defaults and bankruptcies, meaning that the individuals who are responsible for the problems either default on their debts or have to book a bad loan, and they lose their assets which are sold to those who didn't behave recklessly in the first place.

It is a political question of who you want to favour, and whether you believe that creating an enormous moral hazard will cause even greater problems in the future.

It is not an economic question."

The latter seems more honest to me.

Very well said.

Just one small point: In your honest version, the world "must" should be changed, to something that indicates choice, preference. Krugman's most misleading argument is that default "has" to happen, "no choice". Bullsh!t. It is a choice. A thieving choice.

[silver surfer]

Although personally, in a shrinking economy, I do believe the debt can't be paid back. The load is just too enormous.

So you agree with him, as do I.

[alexw]

He says that default is not an option, but the only possible solution. This is not true. He would only be right if America and Britain were closed systems. But they are not.

Only a few countries had these huge credit bubbles, ours was the biggest in relation to GDP, and America's was the biggest in absolute terms, due to their size. (A few other smaller economies had some - Iceland, Ireland, Spain, etc. - but they don't have much global impact.)

Default (via inflation) is a political choice, and not the "only solution". In other words, this Krugman is a b@stard.

LINK: http://krugman.blogs.nytimes.com/2010/09/25/default-is-in-our-stars/

He's completely right. When we hear talk of inflation or deflation, both cases are a default. Inflation - inflate away your debts. Deflation - default on your debts.

When you talk of paying down our debts thats not possible because the system is so out of wack that its simply not possible to - not without the very defaults that you are arguing against - to correct those imbalances.

[newbonic]

The man who lectures us on the need to borrow more adds that the debt won't be repaid.

Krugman is the grotesquely over-adapted Keynesian ammonite on its way to mass extinction as its environment changes.

Oi! What's wrong with ammonites.

[silver surfer]

Oi! What's wrong with ammonites.

[needsleep]

I agree to an extent. However, to me actual, literal default on debt is preferable to inflationary default. The fairest way out of the current situation would be for mass defaults on private and sovereign debt, although as the bankers would hate this, it won't happen.

Mortgage debt is the big problem in the UK. Defaults will have to happen sooner or later. The lenders are surely itching to crack on with the business of foreclosing on a grand scale. They will certainly not be out of pocket - they insure themselves against defaults, get to chase the borrower for the debt and gain possession of an asset which can be sold on. Preventing this process helps prevent any meaningful recovery.

[interestrateripoff]

Can we give him another Noble prize? His genius deserves rewarding.

Academia is full of useless herdist twats.

Amazing he gets to teach this crap to the next Noble prize winners.

Luckily it's all contained....

[interestrateripoff]

Ludwig von Mises describes the endgame brought on by reckless expansion of credit: "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

[wonderpup]

Can we give him another Noble prize? His genius deserves rewarding.

Academia is full of useless herdist twats.

Amazing he gets to teach this crap to the next Noble prize winners.

Luckily it's all contained....

There never was a Nobel Prize for Economics- I believe the Nobel family were not happy about their name being attached to it.

Seems about right to me- a fake honour for a fake profession.

[plummet expert]

The man who lectures us on the need to borrow more adds that the debt won't be repaid.

Krugman is the grotesquely over-adapted Keynesian ammonite on its way to mass extinction as its environment changes.

WORLD WAR II DID NOT CURE THE DEPRESSION as claimed by Krugman!

The fact is the uk ended the war with a 238% debt to Gdp ratio! It was only acceptabel because markets were aware it was war that caused an economy to stop normal activity and become a war machine. We had Marshall aid from the USA - a free gift of £5billion - all spent by Labour within 5 years of the end of the war. There was food rationing until 1955. I don't know what planet Krugman is on! The economy remained depressed until the end of the fifties.

Edited September 25, 2010 by plummet expert

[interestrateripoff]

There never was a Nobel Prize for Economics- I believe the Nobel family were not happy about their name being attached to it.

Seems about right to me- a fake honour for a fake profession.

http://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Sciences

The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics[1] (Swedish: Nobelpriset i ekonomi), is an award for outstanding contributions to the science of economics. It is generally considered one of the most prestigious awards for that science.[2] The official name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (Swedish: Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne). It is not one of the Nobel Prizes established by the will of Alfred Nobel during 1895, but is commonly identified with them.[2][3][4][5][6] The Prize in Economics, as it is referred to by the Nobel Foundation, was established and endowed by Sveriges Riksbank, Sweden's central bank, during 1968 on the Bank's 300th anniversary, in memory of Alfred Nobel's 1895 will.[2][7][8][9] Like the Nobel Laureates in Chemistry and Physics, Laureates in Economics are selected by the Royal Swedish Academy of Sciences, and a Prize Committee similar to the Nobel Committees are used.[10][11] It was first awarded during 1969 to the Dutch and Norwegian economists Jan Tinbergen and Ragnar Frisch, "for having developed and applied dynamic models for the analysis of economic processes.

.....

The nomination process, selection criteria, and awards presentation of the Prize in Economic Sciences are performed in a manner similar to that of the Nobel Prizes.[10][15][18] The Prize is awarded by the Royal Swedish Academy of Sciences "in accordance with the rules governing the award of the Nobel Prizes instituted through his [Alfred Nobel's] will",[10] which stipulates that the prize is awarded annually to "those who ... shall have conferred the greatest benefit on mankind".[3] The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is the only non-Nobel prize that has ever been associated officially with the Nobel Foundation.

......

Some critics argue that the prestige of the Prize in Economics derives in part from its association with the Nobel Prizes, an association that has often been a source of controversy. Among the most vocal critics of the Prize in Economics is the Swedish human rights lawyer Peter Nobel, a great-grandnephew of Alfred Nobel.[25]

Swedish economist Gunnar Myrdal (who was a recipient of the prize himself) and former Swedish minister of finance Kjell-Olof Feldt have also advocated that the Prize in Economics should be abolished.[23] Myrdal's position of wanting the prize abolished was based in the fact that it had been given to such "reactionaries" as Friedrich Hayek (whom Myrdal shared the 1974 Prize in Economics with) and afterwards to Milton Friedman in 1976.[23]

In his speech at the 1974 Nobel Banquet Friedrich Hayek stated that if he had been consulted whether to establish a Nobel Prize in economics he would "have decidedly advised against it"[23][26] primarily because "the Nobel Prize confers on an individual an authority which in economics no man ought to possess... This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.

It is a rather amusing discussion, especially when I'm sure the majority of winners are for complex mathematical models which predict nothing but just look very impressive on paper.

How many of these prize winners predicted the crash?

[interestrateripoff]

WORLD WAR II DID NOT CURE THE DEPRESSION as claimed by Krugman!

The fact is the uk ended the war with a 238% debt to Gdp ratio! It was only acceptabel because markets were aware it was war that caused an economy to stop normal activity and become a war machine. We had Marshall aid from the USA - a free gift of £5billion - all spent by Labour within 5 years of the end of the war. There was food rationing until 1955. I don't know what planet Krugman is on! The economy remained depressed until the end of the fifties.

I think what cured the depression was most of the major nations where in ruins and everything needed rebuilding again, which meant everyone had the huge potential to grow their way out of debt.

[bpw]

note how his comment supports the statement made by mike maloney....... paying down debts will deflate the money market resulting in increased defaults (less money in the system)

[Liquid Goldfish]

WORLD WAR II DID NOT CURE THE DEPRESSION as claimed by Krugman!

The fact is the uk ended the war with a 238% debt to Gdp ratio! It was only acceptabel because markets were aware it was war that caused an economy to stop normal activity and become a war machine. We had Marshall aid from the USA - a free gift of £5billion - all spent by Labour within 5 years of the end of the war. There was food rationing until 1955. I don't know what planet Krugman is on! The economy remained depressed until the end of the fifties.

Isn't he talking about the USA, rather than UK?

[_w_]

So you agree with him, as do I.

There's a mild difference: I don't believe it is a good idea to encourage people to borrow (steal) even more considering that it can't be repaid.

Call it worlds apart.

[_w_]

Oi! What's wrong with ammonites.

Like today's banks, they were beautiful but also degenerate organisms unable to adapt but to one specific environment.

[_w_]

Isn't he talking about the USA, rather than UK?

He is talking about the USA but he is also regularly lecturing the UK and Europe on the need to increase the amount of unsustainable debts ... that he knows can't be repaid.