Friday, August 26, 2011

Deliberately Running the Ship of State onto the Shoals

Here is a post by Paul Krugman in his NY Times blog where he is pulling his hair out because the lunatics have taken charge of the asylum. Governments are doing exactly the opposite of what they should in the face of a worldwide depression, the first big one since the Great Depression:
Liberty, Equality, Austerity

Sigh. France cuts growth targets, unveils austerity plan. We’re told that it is doing so because it expects slower growth — which the austerity will make even slower.

But France faces soaring interest rates, right? No:

Click to Enlarge
ECB, Bloomberg

At this point the entire advanced world is doing exactly what basic macroeconomics says it shouldn’t be doing: slashing spending in the face of high unemployment, slow growth, and a liquidity trap. It’s a global 1937. And if the result is another recession, the witch-doctors will just demand more bleeding.
The Recession of 1937 was a completely self-inflicted wound caused by FDR listening to the conservatives calling for "fiscal austerity" and "balanced budgets". It is a wonderful example that demonstrates, in the midst of a depression, that tight money is wrong-headed, that the government has to counteract the increased private saving with public spending to allow the private sector to work of its excessive debts.

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