Krugman and the pied pipers of debt

September 30, 2009

Investors are celebrating an incipient “recovery,” but the interventions responsible are sowing the seeds of a more violent contraction down the road. The problem, quite simply, is debt. We’ve accumulated record amounts, yet many economists tell us we need more.

Leading the charge is Paul Krugman. He exhorts us to borrow our way back to prosperity, but he doesn’t acknowledge that his brand of Keynesian economics ignores debt’s consequences. If you look at a chart of America’s total debt burden, he’s leading us over a cliff.

(Click chart to enlarge in new window)


The problem begins with the flawed way Krugman and other economists measure well-being. Primarily, they look at measures of activity, like GDP. These tell us how much people spend, but say nothing about where we get the money.

Every so often, we overextend ourselves, buying too much useless stuff with too much borrowed money. So we cut back, dumping the third family car and swapping the McMansion for a townhome.

But this is problematic for Krugman and other economists. Less spending means falling GDP. It means “recession.”

They ride to the rescue with two blunt instruments — monetary and fiscal policy — that encourage more borrowing and thus more spending. More spending equals “growth” so economists congratulate themselves for engineering “recovery.”

But if recessions never happen, bad businesses and unpayable debts are never washed away. They grow like cancer inside the system.

Since the mid-1980s, we’ve intervened whenever the economy hiccuped, so sectors that should have shrunk sharply — like housing and finance — never did. Feasting on easy credit, these sectors have exploded as a percentage of the economy.

Now, since individuals and corporations refuse to borrow more, the only way to grow spending is for the government to borrow.

According to George Cooper, author of The Origin of Financial Crises, “what is missing from today’s debate is recognition that previous growth rates were artificially supported by an unsustainable credit binge, itself the result of the misapplication of Keynesian policy.”

Cooper counts himself a Keynesian but says Keynesian policy has become “dangerously distorted.”

“We should be using Keynesian stimulus only to arrest the rate of credit contraction not to reverse it. The harsh truth is that our economies desperately need a recession.”

That’s because they desperately need to de-lever. As you can see in the first chart, debt relative to GDP is at record highs.

If we want sustainable growth, spending that drives it must come from savings, not more borrowing. To get there, we must first pay old debts. And that means recession.

Krugman is clearly aware of the consequences of excessive borrowing.

“I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits,” he wrote in 2003, citing a $1.8 trillion 10-year deficit projection from the Congressional Budget Office.

Fast forward six years, total debt has jumped 70 percent relative to GDP and optimistic projections put the 10-year deficitat $9 trillion.

This time, however, Krugman dismisses deficit “hysteria,” arguing that we can grow our way out of debt. “We did it during the Clinton administration,” he told me when he visited Reuters last week.

But we didn’t. While Clinton balanced the federal budget, Americans plowed through their savings. We kept growing because, in the aggregate, we were still accumulating debt.

(Click chart to enlarge in new window)


Krugman has also argued that we can handle larger deficits because we have in the past. After all, public debt peaked at 118 percent in 1945 compared with 65 percent today.

Two problems. First, the argument ignores tens of trillions of unfunded obligations for Medicare and Social Security, debt Krugman loudly lamented in his 2003 column.

It also ignores the higher private debt burden facing us today. According to economist Steve Keen, “Private sector debt accumulated in the 1920s was wiped out by the Depression, so in 1945 the private sector’s debt burden was only 45 percent of GDP. In that situation it was easy to wind down public debt from levels reached to finance WWII.”

Today, private debt is a suffocating 300 percent of GDP, making more public debt that much harder to pay down.

We know how this movie ends. Look at California — or Argentina.

We chortle from afar — “how did their budget get so out of whack?” — yet our own profligacy puts us squarely on that path. Like them, we’ve shown no political will to deal with debt. And so it will deal with us.

But we can print our own currency, you say. If all else fails, the United States can inflate its way out of debt.

Nonsense. If we try, our foreign lenders will cut us off.

As Krugman warned in 2003: “My prediction is that politicians will eventually be tempted to resolve the (fiscal) crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.”

Yet today Krugman is leading the march, arguing that we can borrow indefinitely as long as deflation remains a threat.

Tell that to the Chinese.

What happens when they stop buying our bonds? To Cooper’s point, we’ll need government intervention to cushion the blow of de-leveraging. But there’s a difference between cushioning the blow and reinflating the bubble, which is what we’re doing, wasting trillions propping up housing and banking.

The risk is that we’ll have nothing left when we really need it, when the Great Leveraging becomes the Great De-Leveraging.


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Krugman is an idiot. Half is columns are techno-babble and the other half are warnings of the perils of over-reliance on technical factors (like GDP) in setting policy. Krugman’s posts are an ongoing Orwellian side show in the blogosphere: each column goes down the memory hole so that the contradictions inherent in his next column aren’t brought to light.

Posted by GaryD | Report as abusive

Also, someone should ask Paul what was going on in the years prior 1945 that caused that huge spike in the debt/GDP ratio. Oh yeah, WWII. Why is this important? Because at that time, it was clear where the government was going to reduce their spending; they no longer had a world war to fund. This was the biggest factor in the following years as to why we shrank our public debt.Where is our government going to cut spending now? Afghanistan? No. Social Security? No. Medicare? No. In fact, our government is trying to add a few more trillion dollars in spending on public health care.The Nobel prize lost all credibility once he received one. How can anyone read Paul’s 2003 and 2008′s article side by side and take him serious?

Posted by Vince | Report as abusive

and 2008 = 2009 obviously

Posted by Vince | Report as abusive

Interesting article…..but it begs a question…….Where does the investor go to protect his assets?Short against an equally long position (legally)?Commodities?

Posted by Barton Poran | Report as abusive

I recall Krugman calling for a $600 billion stimulus program last year after Bush’s $160 billion one failed to do whatever the $600 rebate checks were supposed to do. I was stunned at the number and wondered just what thought, if any, went into arriving at it.In the event Krugman got more than he had asked for when Obama pushed his $787 billion ‘stimulus’ bill through.The whole debate is becoming redolent of the Vietnam War if one substitutes billions of dollars for American troops. Then it was General Westmoreland promising the president victory if he could just have 100,000 troops. Then he needed 200,000 more and then another 200,000 and finally, before he was relieved of command, he was asking for another 250,000!Obama began his presidential campaign as the anti-war candidate. He needs to remember what happened to LyndonJohnson when Johnson ‘escalated’ a minor war his predecessor started into the defining event of his presidency. Extending unemployment benefits and bailing out the car industry might be understandable efforts to mitigate a recession he did not create but bankrupting the nation in a endless series of stimulus and bailout packages will cripple him as surely as Vietnam did LBJ.

Posted by sangellone | Report as abusive


Posted by GETHETINFOIL | Report as abusive

Not true getthetinfoil….gov’t and financial sector increased 25% each during that interval, household debt increased 13%, business increased 9%….total increase = 72%.

Posted by Rolfe Winkler | Report as abusive

It is evident none of these commentators read either Mr. Krugman’s books or his NYT periodicals.Krugman stated many times publicly 800 billion was not enough and that the money would be better spent building infrastructure for public transportation, green energy production, education, water and sewer, communications….etc. The stimulus bill that was passed failed to address most of these projects that would have paid dividends in the future health of the economy and environment. Of the 787 billion dollars appropriated only around 20 billion has even been spent.In contrast the 700 billion dollars for the banking industry was all released as well as unknown trillions that the fed funneled to banks and the stock market through the Plunge Protection Team. The threat of inflation due to excessive debt and simply printing money is all to real.Personally I would rather have seen investment banks fail and put people to work rebuilding what was once a great country. Given the state of education, health care, environment and economic opportunity this nation resembles some South American banana republics of the past three decades.

Posted by Anubis | Report as abusive

The only question is which country will start the sell off in US teasuries. They may be blamed intially for causing the US dollar crises but they will save heaps of money and in the future the real blame will be given back to the US and its excessive debt levels. My money is on china

Posted by gd | Report as abusive

Debt methodologies Reverse Pyramid Scams for the USA to date has bankrupted the entire global financial and economic community.Transfering worthless paper US Treasury Bonds Government Debt for the entire masses of worlds labor and property hard assets. This is done instaneously not over decades as in Wall Street historical Pyramid Scam Markets. The countries include China, Saudi Arabia, Japan, Russia and the citizenry of USA..Krugman shills for the elitists…….

[...] Krugman and the pied pipers of debt Rolfe Winkler [...]

[...] de VS zich niet uit deze crisis kan kopen met nog meer schulden01-10-2009 om 08:57 door Steeph Waarom het niet slim is als de VS zich uit deze crisis probeert te kopen door nog meer schulden te m… (toetje) Economie, kredietcrisis, Schulden, Verenigde Staten, Waan v/d Dag Terug naar het [...]

Krugman is exhibiting crass intellectual dishonesty. He should first try what he is preaching in his own home. He doesn’t seem to realise that governments are no different from individuals. They will go broke if they spend more than their incomes and if printing money is the solution, Zimbabwe should be the richest country in the world.

Posted by anthony | Report as abusive

The funny thing is that historically debt/GDP skyrocketed after(!) the worst years of the great depression. The deleveraging happended later, when the economy was recovering. It would be very intersting to see a chart with absolute debt levels or compared to previous year.

Posted by jemh | Report as abusive

I like the 90 year analysis. One can clearly relate it to events over the past century. Most interesting, it looks quite a lot like one of Al Gore’s inconvenient logs: y = kx to the power of m. Fascinating how the financial sector graph, most of all, mimics the composite graph.To the confused investor: get on the bandwagon and invest in property, platinum, gold, diamonds and anything that will become scarce in the near future, albeit in physical or stock paper form. Always good to keep cash and call deposits in the back pocket or under the mattress.As far as the ILLUMINATI goes, self interest blows that conspiracy to pieces. Even if the ‘top’ financial leaders and Fortune playmates run and manipulate the World’s finances, that is better than us plebs trying to do it. That is why we have universal suffrage to vote. They have all the inputs and overview. By the same token, I think everybody is now fed up with wars and crime.Bonds cannot be sold off in one go, it has maturity dates.

Posted by ANON | Report as abusive

[...] Winkler is writing about Krugman and the pied pipers of debt. Investors are celebrating an incipient “recovery,” but the interventions that were responsible [...]

I just don’t see how China, or any other country can benefit from curtailing their bond purchases. To me they seem to be backed into the same corner we are.

Posted by al coholic | Report as abusive

“Every so often, we overextend ourselves, buying too much useless stuff with too much borrowed money”Teach a man only to hammer, and every problem is a nail. At some point, the years of 0% intererst rates I forsee will come back with a ginormous bite out of our asses, as every pension will not be able to meet its obligations – due to trying to meet its return objectives by investing in riskier asset classes.

Posted by fresno dan | Report as abusive

This post should have come around when the Republicans were planning a huge tax cut for the rich, instead of paying down the debt or when they were deciding that an unfunded war to the tune of 1 trillion was necessary.At the moment, if the government decides to not increase the deficit, we will have hungry, homeless people. There will be a gut-wrenching downturn and everyone will be hurt. The poor more than others.

Posted by Steve Smith | Report as abusive

Sudden death for the U.S. dollar!by Larry Edelson on September 18, 2009Click here to post your comments …This week, we’ve examined three powerful forces now arrayed against the U.S. dollar …*President Obama and Fed Chief Bernanke are not only refusing to defend the dollar, they are intentionally causing its demise with out-of-control spending and money-printing. Their motives are clear: Gutting the greenback’s value is the ONLY way they can ever hope to service our massive debt.*Foreign governments, central banks, financial institutions and investors are slashing their dollar investments. In some cases, they are dumping dollars to insulate themselves from the greenback’s head-long plunge. And by doing so, they’re causing the dollar’s decline to accelerate.*The United Nations and the G-7 plus China, France, India, Russia, Brazil and others are already laying plans to replace the U.S. dollar as the world’s reserve currency — and by doing so, will crush what little international demand remains for the greenback and send it into its death spiral.These are not mere “predictions.” As we’ve seen in my emails to you this week, each of these assaults on the U.S. dollar is happening right now. And as a result, the dollar’s value — the value of YOUR dollars — has plunged more than 14% in the last 6 months.Worse: Each of these assaults on the U.S. dollar is still in its early stages! As they continue to hammer the greenback in the months ahead, the dollar’s decline can only accelerate wildly.The fourth horseman of the dollar apocalypseNow, a FOURTH, and even more disturbing anti-dollar movement is quietly brewing in Washington, New York, London, Paris, Berlin, Moscow, Shanghai, Tokyo and many other financial capitals worldwide.Unlike the other assaults on the dollar we’ve examined, this “ultimate debt solution” is NOT yet in place. The world leaders and central bankers who discuss it now speak only in whispers; behind closed doors.But for reasons I give below, I’m convinced that world leaders now have no choice but to implement this solution — and that it will soon explode into the headlines.If I’m right, it will spell SUDDEN DEATH for the U.S. dollar — and an instant, explosive implosion in the buying power of your money.When this solution is unveiled, it will be too late for you to shield yourself. The trap will have been sprung. You will simply awake one morning to discover that your money buys only a fraction of what it did 24 hours earlier.My mission is to help make sure that you are NOT surprised … that you have ample time to protect your savings, investments and retirement … and that you also have what you need to continue growing your wealth — even as this ultimate debt solution robs others of everything they’ve ever earned.The ULTIMATE global debt solutionIt’s no secret that the U.S. credit crisis spread like wildfire around the globe — or that nearly every government on Earth has amassed enormous new debts in an effort to spend its way out of this crisis.Put simply, the U.S. government is NOT alone. Many governments around the world are now drowning in debt — and they’re desperately searching for the “magic solution” that will keep that debt from crushing their economies.And like President Obama and Fed Chief Bernanke, they fear that the only way they’ll ever be able to service their debt — let alone repay it — is to do so with cheaper money.The only way for that to happen would be for the G-20 — the world’s largest economies — to agree to a new monetary order, much like they did 65 years ago by signing the Bretton Woods agreements in 1944.Even while World War II continued to rage, Allied leaders met in Bretton Woods, New Hampshire. Their mission: To stabilize wildly fluctuating currency exchange rates. Their solution: Create a new world monetary order that pegged global currencies to the price of gold.This time around, global leaders are faced with a different problem: Massive debts that none of them can ever repay. But the solution will seem eerily familiar — and like the Bretton Woods agreements, it involves the price of gold.To instantly slash the value all of their currencies at once, world leaders simply need to raise the price of gold. For instance:The G-20 could instantly and automatically slash the dollar’s value by HALF simply by setting the price of gold at $2,000 per ounce.TO YOU, that would mean food, energy and everything else you pay for every month would instantly DOUBLE in price.BUT FOR THEM, it would mean that the cost of servicing or repaying their national debts would be cut by half.Will the G-20 slash the buying power of money by doubling the price of gold? Maybe. Maybe they’ll raise gold prices less; maybe more. If anyone tells you he knows, he’s pulling your leg.But one thing seems clear to me: With the entire developed world now drowning in a sea of unpayable and in some cases, unserviceable debt, resetting the price of gold is the ONLY way out.In fact, the process has already begun with the explicit calls you’ve been hearing in the press from heads of state for “a new financial architecture” … “a new Bretton Woods” … “new financial regulatory structures.”How soon is it likely to happen? Again — nobody knows for sure. It may be a few months from now or even a couple of years in the future. But I have absolutely no doubt that it WILL happen.

Good lord! Krugman doubters!!Check out this column:”To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” 2/opinion/dubya-s-double-dip.html

Posted by Bob_in_MA | Report as abusive

I have a question about the graph. The graph shows Government Debit going down during the 1930’s. I was surprised when I saw this. I did a Google search and went to: tates_public_debtThis site says Gross Debt in Billions was 16.2 in 1930 and 43.0 in 1940. There was very little growth of GDP in the 1930’s; therefore, I would expect the Government debit on the graph to increase quite a bit during the 1930’s. Why is Government Debit in 1940 lower than 1930 on the graph?

Posted by Robert Willey | Report as abusive

[...] Winkler is writing about Krugman and the pied pipers of debt. Investors are celebrating an incipient “recovery,” but the interventions that were responsible [...]

The solution is to print money without borrowing like Lincoln did with the greenbacks.The government needs to send every adult $1000/month to pay off debts until privatedebt is a small fraction of GDP.In the meantime, abolish the Federal Reserve. Money should be democratic and not controlled by oligarchs.

As Anubis pointed out, few people seem to bother with reading Krugman. He took great pain to differentiate debt that is an investment for our future (infrastructure, better education etc. from the kind of debt our politicians and banksters are so fond of nowadays, namely bailout money without conditions for the financial sector.I would totally expect Newsmax or Fix News to be organically incapable of understanding this; but, that a usually sharp and smart commentator like Rolfe miss this crucial point is disappointing to say the least.

Posted by Francois T | Report as abusive

LOL Warren.Thanks for that.

Posted by Andrew | Report as abusive

This is the best takedown of Krugman I’ve read (h/t Cafe Hayek): m/2009/08/25/willful-omissions-from-paul -krugman/

Posted by Vake | Report as abusive

[...] Krugman and the pied pipers of debt – Reuters [...]

Yours is only the latest critique of Krugman’s spend-spend-spend through more debt-debt-debt approach to economic recovery, but it may be among the clearest and broadly read. Thank you.Although there is much about what Krugman says that I agree with, his unwavering and often illogical support for further indebtedness is beyond comprehension. Moreover, his siren call for greater debt plays right into the hands of politicians of BOTH parties who have never shown any restraint in spending nor any willingness to raise taxes.It will all not end well.

Posted by Lilguy | Report as abusive

Over a 17 year period, a mere 4% inflation rate will cut the value of the dollar in half. It doesn’t take a genius to put that into perspective. You have the Fed with a target policy of 4% inflation (which we will not hit in the next few years, so they will have to throw printing into overdrive to approach it,) and you have people who are saving to put their kids through college. Think it won’t affect you, and that inflation is healthy at ‘only’ 4%? This means that if you buy 30 T year bonds, you’re practically an idiot if they yield less than the fed’s target rate average over that period. Think bankers make out like gangbusters on your 30 year fixed rate mortgage because they pull more than twice the principle down over that time? Think again.

Posted by dave | Report as abusive

Fresno Dan, apparently the federal government is now guaranteeing private pensions. Like everything else.You want my opinion? Two classes of people will benefit from what finally happens: the rulers, the billionaires, who really know how to play the game, and the scum, the deadbeats, who really know how to cheat. Moo?

Posted by Pete Cann | Report as abusive

October 1st, 2009 12:25 pm GMT- Posted by Mark:you have no idea of basic supply and demand principles, you are putting the chariot before the horses.October 1st, 2009 1:17 pm GMT – Robert Willey:good point, I found the intercepts where the lines cross each other also interesting, because that is where the paradigm shifts occurred.

Posted by ANON | Report as abusive

This offers a teachable moment.Observe what happened to debt between 1929 and 1933. All forms of debt increased as a percent of GDP. Did this represent leveraging? No, it represented a collapsing economy. In nominal terms GDP fell by nearly 50% between 1929 and 1933. Of the various forms of debt the only kind that increased in nominal terms was government debt. Businesses, households and the financial sector were all paying off debt or saving during the contraction but because prices fell and real output fell debt as a percent of output continued to increase. This is known as the “Paradox of Thrift.” It works out to a very bad end if everybody tries to get through the fire exit at the same time. Government sector debt did rise in nominal terms between 1929 and 1933 but not by much (up by 20%) and not for lack of trying to balance the budget. Taxes were raised and budgets cut repeatedly.Then in 1933 the tide was reversed and federal budget deficits were allowed to rise (The New Deal). As a result government sector debt nearly doubled by 1941 in nominal terms. But note that it still fell as a percent of GDP, from about 70% in 1933 to 60% in 1941. How could that happen?Simple, nominal GDP more than doubled (up by over 120%) between 1933 and 1941. Note that between 1933 and 1941 all other forms of debt declined as a percent of GDP. But in nominal terms all were roughly constant during that period and nominal household debt actually increased.So what’s the lesson in all of this? When in inflation is low or prices or falling and the economy is in a tailspin debt can still increase relative to income even though debt is being paid down or saving rates are increasing. In such a situation with everyone trying to save at the same time the economy is being depressed due to the lack of aggregate demand. The way out is for the government sector to temporarily (until things stabilize) run large fiscal deficits to lift the economy.Keynesian Economics 101.

Posted by Mark A. Sadowski | Report as abusive

Good article.You wrote ‘According to George Cooper, author of The Origin of Financial Crises, “what is missing from today’s debate is recognition that previous growth rates were artificially supported by an unsustainable credit binge, itself the result of the misapplication of Keynesian policy.”’Well, Obama’s growth rate forecasts are for 3.9% in 2010 and then over 4% for the following years! Today the IMF forecast US growth for 2010 at 1.5%.Where is this all heading? This will end in a Government debt bubble crises. The two worst hit will be the USA and UK. Do not think that China et al will rescue us as I believe that they are in a worse state than admitted, however, much better than many. China has built far too much manufacturing capacity and this will only reinforce the coming deflation. To try and avoid deflation expect the printing presses to be producing huge quantities of debt.At the moment the stupid traders on the markets are ignoring all of this. They believe the green shoots BS. Well, within 18months the DOW will be below its March lows.

Rolfe Winkler CFA for nobel prize 2010

Posted by dvictr | Report as abusive

OK – I’ve got the tin foil, what now?

Posted by Peter H | Report as abusive

great post! loved the first graph… thanks for speaking the truth.Wrote a piece on “What Happens if Americans Return to a Historical Savings Rate” 8/12/what-happens-if-america-returns-to. html

America has gone from the gold standard to the debt standard.

Posted by John | Report as abusive

The solution is simple:TAX THE RICHIES!Wealthy people need to start paying a lot more for their privelege to be rich in the USA!When the going gets tough, the Richies need to pay more taxes.

Posted by Bob | Report as abusive

[...] Winkler is writing about Krugman and the pied pipers of debt. Investors are celebrating an incipient “recovery,” but the interventions that were responsible [...]

Like most economists, Krugman will suggest economic programs consistent with his political ideology. Since he is simply a “progressive” leftist (i.e., a communist), he is all for destroying the US economy so as to make everybody dependent on the govt; which will be controlled by “intellectuals” like himself.When Bush was running up deficits, Krugman, like all his communist lefties was screaming bloody murder about how the accumulated debt load was dangerous. Now that Krugman has a fellow communist in office, Obama, well, debt loads now mean nothing.Frankly, the notion of economic “science” is in itself a joke. Most economists espouse economic policies consistent with their political proclivities.In fact, economics can best be described as a CARGO CULT SCIENCE. This apt description for the fake science of economics was originated by the great theoretical physicist Richard Feynmann; though not to describe economics but is describes it perfectly.And yes, as an aside, if unlimited spending and debt accumulation lead to wealth and prosperity than California today would be the 2ncd wealthiest entity in the world today; a runner-up to Japan, which has spent and spent and spent and spent its way into nearly 20 years of recession.Economics is a joke and a fraud, and within that fraudulent field, Keynesian economics is as reliable as astrology.At least in astrology, they know where the planets will be at anytime in the future; economists are still arguing about what caused and / or ameliorated the Great Depression.Krugman uses his economic credentials to spout forth his communist prescriptions. It’s clear he sees himself as a member in waiting of the NOMENKLATURA and or APPARTCHIK.

Posted by ARealist | Report as abusive

And now, hopefully we are coming to the realization that all of our so called wealth counts for nothing. We in the United States worship money.The proof is in the fact that all social problems are discussed in terms of where the money will come from to deal with these problems.The health care debate for example is just an argument over where any profits should go. It has nothing to do with health.We know the economy is failing but we still hold on to our hopes for an external solution when there is no external solution forthcoming.The problems we face have never had anything to do with our systems and everything to do with our inability to refrain from exploiting those systems when ever possible for our own pleasure.We have tons debt because there has been rampant profiteering at the expense of the working and the poor.And it is to these same people that business and government look to in order to “ease the burden”. So first you are financially raped and then you are told it is your fault (let the buyer be ware). Then you’re made to pay for the damages to fix the problems that are causing you pain. All the while those taking your money also take the credit for using it to “help you”. lolRidiculous.Forget about where the money will come from. We face problems of real suffering. And these problems can only be solved with action. And that action has to come from a genuine desire to make things right. Nothing more.How many Americans offering opinions as to how the system should be fixed have made it a habit to simply do something to extend aid to another human being in even the smallest measure?Have you ever given money to one of your fellows simply because you didn’t need it as badly as them? Have you ever extended your influence to help another person into a better situation without the expectation of anything in return?Have any of you forgiven debts owed to you simply because you know the debtor is unable to pay and you wished to ease their burden?How many of us take the time to put human beings first before system rules or policies? That’s the first step to fixing this awful mess.

[...] more detail and some excellent graphics, read this article by Rolfe Winkler at [...]

Krugman was once credible im my opinion.He now espouses mostly a right wingnut mentality concerning deficts,debt,etc.As a Nobel Prize winner,he now seems like a repug nut.WTF??

Posted by rant1 | Report as abusive

“Every so often, we overextend ourselves, buying too much useless stuff with too much borrowed money. So we cut back, dumping the third family car and swapping the McMansion for a townhome.”But this is problematic for Krugman and other economists. Less spending means falling GDP. It means “recession.””In case you haven’t noticed, it also means a soon-to-be 10% unemployment rate. This isn’t about people having to ditch the extra car and switch to a smaller house, it’s about people losing their jobs, their homes, their retirement money, college for their kids, and in some cases their spouse. It means crime rates go up, lives fall apart, and misery rises. You could probably find a less “let them eat cake” way to make your points.Krugman has said that adding to the national debt is the least bad of the lousy alternatives. What’s your alternative? Balance the budget and send us straight into Great Depression 2? In case you missed it, we can’t just lower interest rates this time and have that old black magic work again. It’s a bit hard to lower rates once they get to zero.

Posted by kjmclark | Report as abusive

Krugman’s apparent inconsistency concerning fiscal deficits is actually perfectly consistent. Not so long ago it was viewed as common sense to be in favor of fiscal surpluses in times of prosperity and deficits in times of depression. Now so many seem to think the opposite.We are truly living in a Dark Age of Macroeconomics. So much of the knowledge that was learned the hard way in the last depression must now be reinvented completely anew.

Posted by Mark A. Sadowski | Report as abusive

I hear you KJM. Unemployment IS the problem. But the more debt we accumulate today to try to avoid unemployment, the MORE people will eventually lose their jobs.That’s the whole point here. Every recession is about jobs going away. So every time the economy hiccups, we stimulate in order to protect jobs.But the jobs we’re protecting are jobs that will go away anyway eventually, once credit is no longer available to support them. Think auto sector, housing, banking.Look at what happened on the other side of the 20s. That’s the future we’ve written for ourselves by letting debts accumulate in order to paper over past recessions.Keynesians think they’re doing everyone a favor, protecting jobs. But after the temporary hit of extra spending, we’ve still got to deal with the debt. And that means interest payments. And that means less spending on goods and services (and thus more unemployment than we would have had if we’d done nothing) in the future.Take a look at car sales post cash for clunkers. So we got a temporary boost that protected auto sector workers for….a month. But we’ll be paying interest on that debt for years to come.The only way for the scheme to work is if you can borrow increasing amounts FOREVER. But you can’t. Eventually debt has to be paid (or repudiated). Either scenario is much uglier than the one we’re dealing with now…

Posted by Rolfe Winkler | Report as abusive

@Rolfe Winkler,You wrote:”Look at what happened on the other side of the 20s. That’s the future we’ve written for ourselves by letting debts accumulate in order to paper over past recessions.”The other side of the 20s was the Great Depression. During the four years of contraction the government tried to balance its budget with the inevitable tragic consequences. Only when it allowed public debt to take the place of private debt did the economy begin to recover (and total debt as a percent of GDP actually fell).You’re viewing this with an accountant’s mentality but you’ve put public debt on the same side of the books as private debt. They’re not the same thing at all. One is the yin to the other one’s yang. They belong on opposite sides of the ledger.

Posted by Mark A. Sadowski | Report as abusive

I understand that it is conventional wisdom that the Fed is attempting to “inflate away” the value of the nation’s government liabilities and this might in fact be true. But if this is so, then why is the duration of outstanding treasuries approximately 4 years and going lower? If it was the government’s intention to devalue our liabilities via inflation, would it not make more sense to extend duration so that the liability actually has time to be devalued? By shortening duration, all the Fed is doing is heightening re-financing risk, which does not seem to be a prudent course of action if you are trying to inflate your way out from underneath a debt burden. Am I missing something?

Posted by Conflationist | Report as abusive

Mark,I think you’re missing that nothing the gov’t did in the 30′s actually had much of an effect until a little war came along and gave millions of people something to do. The same practices that tried to pull us out of the depression collared growth for 30 years after the war.Further, it was poor monetary policy, not the gov’t budget that precipitated the collpase of the great depression.

Posted by Andrew | Report as abusive

Rolfe, I’ll send this to you in an email in case you find it useful and don’t have time to read through the dozens of comments here, but because I’m a shameless self-promoter, I’m also gonna post it here. It’s a take-down of Krugman’s latest claim that this whole crisis can be traced back to Reagan-backed deregulation of home equity loans: pp/2009/09/paul-krugman-writes-partisan- hackery-ensues.html

Andrew,I think you’re missing the fact that real GDP nearly doubled between 1933 and 1941, and that industrial production more than tripled in the same time period. In addition the unemployment rate fell from 22.5% to 6.0% between 1932 and 1941 according to the 4th edition of the “Historical Statistics of the United States” (unemployment figures that are consistent with current BLS numbers). That’s the very reason why FDR was reelected easily to four terms as president. (The only other reason is the population of the United States must have been brainwashed on a massive scale.)And as for how the economy functioned after WW II what revisionist history are you referring to? I have a book called “The Great Leap” that tried to explain the unbelievable growth in living standards from 1948 to 1973. There has never been such a period of tremendous economic advancement before or since in the United States. GDP per capita grew at a 2.5% annual rate during that period. For comparison it grew at a 1.8% annual rate from 1973-2008 and at a 1.6% annual rate from 1790-1948.P.S. A bursting asset bubble precipitated the GD. Bad monetary policy exacerbated it. Stone Age fiscal policy spelled our doom. We could do it all over again if you want.

Posted by Mark A. Sadowski | Report as abusive

Mark/Andrew….you’re both wrong, IMHO. The Depression wasn’t caused by fiscal or monetary policy in the 30s. It was caused by insane leverage run up in the ’20s.The rebound from the lows of the early 30s wasn’t the result of anything Roosevelt did so much as it was the result of previous debts being extinguished by the Depression.

Posted by Rolfe Winkler | Report as abusive

imho, the crucial thing about the Keynesian government-led spending to restart a faltering economy is that it is TEMPORARY. it can only replace other spending as a stop-gap measure. when the economy resumes “normal” growth, the government must use taxation to pay down the debt. the great leveraging problem faced presently is insoluble because, just like the impossibility of endless debt accumulation, endless growth is also physically impossible. so after the final and catastrophic deleveraging, a new financial (and economic) model not based on endless growth needs to emerge. we may be some way off…

Posted by swalker | Report as abusive

You are all wrong and too focused on WW1&2, maybe we are all in denial about the recent history: we are also comparing debits with credits and forget the magical journal – call it the ‘journalits’, which may have two legs, one leg, or three legs depending what you want to fudge, or which balance sheet hole you want to plug. Granted, one should be careful with numerators and denominators. Household debt and financial sector debt had a small effect on the composite graph although the latter had to grow over time to feed households and business, and the financial sector also bought government bonds to sell it on and sell debt to business and households, so we remove the contra/double counting. That leaves business and government debt. Government debt took over from business debt when WW2 commenced with all its effects, pro’s and con’s. Apart from the A-bombs, it financed WW2. Government debt then tapered off to meet business debt in 1969 – the Cold War/nuclear race, space race/moon landings, Woodstock and commencing of Vietnam War ? Then they moved in tandem, feeding a senseless war, re-establishing a baby boomers’ middle-class, further funding a very expensive space program, meddling here and there, establishing oil contacts and building up gold and dollar reserves. But then in 1997, something went very cockeyed all around and business took over from government again. Today everybody is in the dwang, in the middle of WW3. I hope I got all of that right, with not too many omissions, but let’s debate it further.

Posted by ANON | Report as abusive

…come to look at it and think about it, we are better off than in 1920: business debt is lower and government debt slightly higher. Just by doing a visual estimation, the two cancelled each other out over time between 50% and 100%. So they took turns to take the flack, but ended up as a flat line, at reasonably un-hysterical levels. We must just not let them go out of tandem again with a stupid war. Have a good one.

Posted by ANON | Report as abusive

So basically you are saying Keynes was right and supply side Reaganomics was wrong.

Posted by cheaplaborcapitalist | Report as abusive

Krugman advocates stimulus spending for things that we MUST spend on, recession or no, if we want the country to remain competitive. What’s debatable is whether the trillions dumped into the banks this year is actually stimulus or just giving crutches to lame dinosaurs. Without well-functioning infrastructure (roads, bridges, rails, education system, health care system, ports, water navigation, airports, etc.), the country becomes less efficient, both in an absolute sense and relative to other countries which are constantly improving facilities, and costs of doing business increase as existing infrastructure ages and decays. These are facts whether there is a fiscal crisis or not. Since America has spent, in the last 25 years, only a fraction of what is necessary just to maintain its existing infrastructure, spending expressly for this purpose is now doubly mandated – as stimulus to keep unemployment a little lower and just to provide the facilities that business needs to grow. And calling it “communism” is like calling the Pope an Islamic Jihadist.

@Rolfe Winkler,You wrote:\”Mark/Andrew….you’re both wrong, IMHO. The Depression wasn’t caused by fiscal or monetary policy in the 30s. It was caused by insane leverage run up in the ’20s.\”It was the sudden deflation of an asset bubble in 1929, the stock market (total equity equaled about 165% of GDP) that initially tipped the balance. The flip side of the asset bubble was of course debt. As the asset bubble deflated this set off a wave of deleveraging that resulted in further asset deflation. The decline in net asset values led to a negative wealth effect that caused a negative shock to aggregate demand (much like today except now it is mostly real estate wealth).The current judgment of economic historians (see, for example, Barry J. Eichengreen, Golden Fetters) is that attachment to the gold standard played a major part in keeping governments from fighting the Great Depression, and was a major factor turning the recession of 1929-1931 into the Great Depression of 1931-1941.Countries that were not on the gold standard in 1929, or that quickly abandoned the gold standard, by and large escaped the Great Depression. Countries that abandoned the gold standard in 1930 and 1931 suffered from the Great Depression, but escaped its worst ravages. Countries that held to the gold standard through 1933 (like the United States) or 1936 (like France) suffered the worst from the Great Depression.Commitment to the gold standard prevented Federal Reserve action to expand the money supply (monetary policy) in 1930 and 1931, and forced President Hoover into destructive attempts at budget-balancing (fiscal policy) in order to avoid a gold standard-generated run on the dollar.Commitment to the gold standard left countries vulnerable to \”runs\” on their currencies, Mexico in January of 1995 writ very, very large. Such a run, and even the fear that there might be a future run, boosted unemployment and amplified business cycles during the gold standard era.The standard interpretation of the Depression, dating back to Milton Friedman and Anna Schwartz\’s Monetary History of the United States, is that the Federal Reserve could have but for some mysterious reason did not boost the money supply to cure the Depression; but Friedman and Schwartz did not stress the role played by the gold standard in tieing the Federal Reserve\’s hands, the \”golden fetters\” of Eichengreen. Friedman was aware of the role played by the gold standard, hence his long time advocacy of floating exchange rates, the antithesis of the gold standard.You also wrote:\”The rebound from the lows of the early 30s wasn’t the result of anything Roosevelt did so much as it was the result of previous debts being extinguished by the Depression.\”The recovery from the trough in GDP in 1933 was the result of two major policy changes that took place after the change in administration (FDR entered office in March). First, the Gold Reserve Act (effective January 30th, 1934) devaluated the dollar from $20.67 a troy ounce to $35 an ounce. Second, federal spending soared 40% in nominal terms in FDR\’s first year going from about $4.5 billion in FY 1933 to $6.5 billion in FY 1934. It was further boosted to $8.2 billion in FY 1936.Real GDP, which had fallen by an average of 7.8% from 1929 to 1933, surged by 9.5% from 1933 to 1937. The idea that debt extinguishment during 1929-1933 caused this sudden reversal in economic output is dubious. In nominal terms total debt decline by only about 10% between 1929 and 1933 and as a percent of GDP it actually soared from about 180% of GDP in 1929 to about 310% of GDP in 1933 (for Gods\’ sake, look at your own graph!). The sudden shift in monetary and fiscal policy in 1934 matches what happened both theoretically and in timing much better.Today our monetary policy is no longer bound by \”golden fetters.\” But there is a complication in the form that interest rate policy has already hit the zero lower bound (the liquidity trap). And extraordinary monetary policy such as quantitative easing is limited in practicality. Jan Hatzius of Goldman Sachs has estimated that it takes about $1.3 trillion in expanded federal reserve balance sheets (about what we have already done) to achieve the equivalent of a 1% change in the federal funds rate. Many economists (e.g. Hatzius and Glenn Rudebusch of FRBSF) estimate according to a Taylor Rule the federal funds rate should be about -5% right now (an impossibility). To expand the federal reserve balance sheet by the resulting $8.5 trillion would be highly dangerous and could have inflationary consequences down the road.A much better route is discretionary fiscal stimulus (as distinct from TARP and other measures). It substitutes for the decline in consumption and investment that the economy is suffering from right now. It accomodates the surge in private savings with a surge in public borrowing. The net effect is ironically that total indebtedness as a percent of GDP might actually fall even as the nominal government debt increases.This is exactly what eventually happened in the Great Depression, which was allowed to degenerate into a liquidity trap, as a zero interest rate policy was in in effect more or less constantly from July of 1932 through October of 1941. Between 1933 and 1941 total debt as a percent of GDP plunged from about 310% of GDP to about 160% of GDP (again look at your own graph) even as government sector debt nearly doubled in nominal terms. In a liquidity trap, the way to get out of debt, is to grow out of debt, and since the problem is a shortage of aggregate demand, the solution, ironically, is to increase government borrowing.That’s why it is shortsighted to advocate fiscal austerity under our circumstances. Fiscal austerity exacerbated the Great Depression and led to four long years of rapid contraction and soaring debt as a percent of GDP, again ironically the opposite of what was intended. We need to relearn the old common sense fiscal policy of running fiscal surpluses in times of prosperity and deficits in times of depression. To do the opposite would be like having two dance partners both trying to lead at the same time.

Posted by Mark A. Sadowski | Report as abusive

Two substantive corrections to my previous comment:”Real GDP, which had fallen by an average of 7.8% from 1929 to 1933, surged by 9.5% from 1933 to 1937.”should read:”Real GDP, which had fallen by an average of 7.8% annually from 1929 to 1933, surged by an average of 9.5% annually from 1933 to 1937.”And the quantitative easing that is currently required is $6.5 trillion, not $8.5 trillion (5*1.3=6.5 of course).Other than that I think what I tried to say is fairly clear albeit long winded. Sorry but this is an important topic to me that needs to be explained constantly.

Posted by Mark A. Sadowski | Report as abusive

I think you’re being a bit unfair to Krugman by repeating that 2003 quote that’s been floating around the internet. Massive deficit spending when interest rates are at a zero-bound and a depression is looming is Keynesian econ 101. That is most certainly NOT the situation we faced in 2003.I think you’re right though. He, and most, seem to dismiss the idea that debt/GDP cannot just keep growing forever.

Posted by Mark | Report as abusive

Armchair economists. It’s obvious that facts, if there are any, mixed with opinions, which there are nothing but, create one confusing mishmash of the “nobody has a flippin’ clue what’s gonna happen” blues.Y’all sound like you have the end all be all handle on how money works in the world. When in fact, nobody knows how it really works. All of these heads of state and finance are just poking hot sticks at a very angry beast hoping to calm it. If you leave it alone it will just starve and get angrier. If you poke it more it will surely get even more riled. And then, in the end the damn thing will no doubt bust out and eat us all.Y’all’s religiously toned economic diatribes are just teasing the beast. And about the only thing I believe I can trust right now is that I need to go buy GLD and IAU and maybe stock up on some Krugerrands and Canadian goldleaf. Maybe a couple of boxes of 12 gauge too…

Posted by Anonymole | Report as abusive

We remain trapped in outdated theories and paradigms. Let’s quote Einstein, as far as I recollect: ‘One cannot solve a problem if one thinks the same way as when the problem was created’.

Posted by ANON | Report as abusive

Andrew, we have a little war now, not then. That was a big war. The government maintained larger deficits relative to GDP than what we have now. The war getting us out of the depression is one of the great misrepresentations of history.As war production quickly accelerated in 1939(lend lease act) the administration became acutely aware of the effects of inflation from a rapidly heating economy. The first world war had brought rampant inflation here at home.The government first instituted wage and price controls as law. Rationing of goods and resources necessary for the effort and requiring defense contractors to pay very high wages left workers with far more money than they could spend. The end result was that Americans saved and bought war bonds with their disposable income. War bonds and taxes accounted for better than 75% of the funding of the war.When manufacturing had finally retooled for a peace time economy, Americans were eager to spend the money they saved through the war on products that were unavailable during those years(cars, refrigerators, televisions….).Why not implement similar polices today. We could build solar panels, electric generators, electric cars, natural gas conversion kits, etc., etc.,etc.. We could reinvent and rebuild our society in profitable ways that would enable us to pay off debt as we once did after WW II.

Posted by Anubis | Report as abusive

I am concerned about the debt. Krugman is also concerned. But people are suffering economically. And the ability of our economy to generate jobs is the real issue. We have plenty of “public projects” and investments that we can sensibly make now and then scale back later this part of our stimulus effort. The growing economy will lighten the relative debt burden, and the public investment will help us all in the longer term. Some of these investments are targetted at green projects and global warming, some at health care, some at technology. All these help in the long run, and can eventually be throttled back to make the financial situation sustainable.

Posted by concerned-citizen | Report as abusive

There is a case to be made for remaining neutral (emotionally and economically) to the inflation/deflation/public debt debate. Any policy choice has its winners and losers. Those whining about inflation and government crowding-out of private capital markets are those who are too entrenched (mentally and financially) in making their living in the financial sector and too unimaginative to figure out how to thrive in a high-inflation reality. Whether we like it or not things are what they are and there is always a way to prosper.

Posted by coudenhove-k | Report as abusive

[...] China comes calling [...]

Let’s start a letter-writing campaign to Hu Jintao and beg him to cut off the credit card. They — and we — will be better off in the long run!

Paul Krugman stopped being an economist a long time ago. After falling in love with his own press clippings, he became an ideologue… no longer dealing in, pun intended, hard currency… he’s become an intellectual Ponzi scheme himself.Krugman’s about as credible on the economy as Al Gore is on Global Warming. Advice from Krugman on the economy is about as useful as advice on dieting from Micahel Moore.

Posted by Phil Cohen | Report as abusive

Obviously we have equal fair and equal trade with China, They send us poison toys and meat, we send them toxic debt.

Posted by twm | Report as abusive

Excellent Article! Finally it is said loud and clear clear. Borrowed money does not make a recovery! Imagine you are running a business, will you call it success if you always have to borrow $2000 every day, to make $1000 ? That is what is happening with our GDP. The borrowing required to increase the GDP is more than the increase itself! It is not sustainable anymore.This is a deflationary crash. What is deflation? Let me explain shortly. When we borrow, banks create money. They do not lend existing money. In fact, they only create a promise to pay you. All bank accounts are promisses to pay you. When we write a check, it works like money, but the person who takes our check puts it back to the bank. So the bank does not really pay out any money. Here is how banks create money: banks_create_money.htmlAlmost ALL of our money supply is created this way. It is called bank credit. When we borrowed it for the last 50-100 years, we promised to pay it back with interest! The interest portion is not even created yet. It was supposed to be created when we borrowed more in the future. But now the borrowing and lending has stopped! There is an expectation that money supply will grow so that we can earn principle+interest and pay it back, but if money supply shrinks then it becomes impossible to earn enough to pay back what we owe. This is called deflation. Money supply is deflating. This is why the government allowed sub-prime! So that more people would borrow and more money would get generated. This way they postponed the crash. But now there is nobody left to borrow. Years of inflated bank credit is deflating now. If money supply deflates 50%, then all prices / salaries will decrease. We must get used to it. Read this book, it is a must: onquer_the_crash.html

thanks for the information great food for thought, its amazing how much we don’t want to account for?

If you spend all your life as a hammer, then all you see are nails. Economists, Krugman included, see the whole thing as financial. More money here, less there, pump this, deleverage that, borrow more to make more money. Myopic vision overwhelms the tunnel eyes of the elites. Just like one Greenspan.Why does the USA find itself in the current situation where a large portion of the economy of the past 2 decades was centered on manipulating money?Because the ex-super industrial power discovered that it no longer has the kind of industrial excellence, capacity, products and services to sustain the high standard of living it has got used to. Easier to make a living by moving money around – for a while.No amount of financial manipulations can fix America’s economic problems. Particularly now, when an excess of financial trickery has blew the fake economy back to reality.No economists can offer a solution. Disregard all of them.The solution can only come from the people if they are determined to create wealth the hard way, the honest way, the smart way.

Posted by The Real Deal | Report as abusive

The problem is false wealth. Debt is one aspect of that. The major on is derivative financial instruments. We need to take the double taxation off of dividends, tax gain from the sale of stock heavily, and make it impossible to make a profit on derivative instruments. The problem we are now in is a result of foolish stack of “wealth” that represented no actual product or service. Stock should be bought for their basic purpose: sharing in the the profit of a firm, not for their supposed future value. That way the CEO’s job description becomes to produce a good cash flow, rather than get on the psychological treadmill of getting the stock price to rise.What do you think?

Posted by Tom | Report as abusive

Problem, America makes little or nothing of real worth, Like in the 30′s thru? therfore we cannot recover? Except for the? Problems problems, common folks need solutions.I think the smarts are here, lets have it.

It is perfectly valid to point out that the debt we are accumulating may be a problem down the line. But, it only *may* be a problem. I’m with Krugman and a few of the commenters here. We need to keep stimulus going to dig ourselves out of this hole and that means racking up even more debt in the short term.I know this is not going to be a popular statement here, but the fact is that our upper income tax rates are too low. That changes next year when our reckless tax cuts for the wealthy expire. Not to mention our appalling 15% rate for qualified dividends and long term capital gains. Since when does unearned income deserve to be taxed less than earned income? We shouldn’t even have the 20% rate that starts next year. Far from promoting real investment, these rates promote unsustainable bubbles.The United States is capable of pulling in the revenue to pay off our national debt. We just have to do it and be careful where we pull the revenue from. I say we introduce a new tax bracket for the ultra wealthy and have the government start trying to recover all the money that was stolen from the taxpayers in the Great Financial Fraud. Let’s go after the people that got bonuses for running our economy into the ground.

Posted by Kirk | Report as abusive

The rich rules over the poor and the borrower becomes the lender’s slave — Proverbs 22:7

Posted by Greg Parker | Report as abusive

We know from those wise people in Washington that certain banks and friends are too big to fail. I would ask those wise people, at what point is a country to big to fail? Maybe we should have asked the wise leaders of the Soviet Union before it disappeared.

Posted by Jimmy Gilliam | Report as abusive

Parker, you are so correct in sighting that proverb. Now add to it “where your treasure is there your heart is also”.And with the two, those rich in the spirit will rule over those poor in it. In this understanding the citizen is not bound by the merchant tyrants that now rule our nation. Those rich in spirit, that is to say, those who are people of conscience and who strive to live in love, can use their gifts to elevate us above this money worship we now engage in.

[...] remedy… Is really the Keynesian poison… Charts come from great Reuters blog. Can be read here. __________________ I would rather be exposed to the inconveniences attending too much liberty [...]

[...] Winkler is writing about Krugman and the pied pipers of debt. Investors are celebrating an incipient “recovery,” but the interventions that were responsible [...]