Tags: Krugman | austerity | inflation | economy

Krugman: Emphasis on Austerity, Inflation 'Killing' Global Economy

By    |   Monday, 13 October 2014 05:54 PM

Investors and policymakers around the world are freaking out about the global economic slowdown.

While the U.S. economy grew a healthy 4.6 percent in the second quarter, the eurozone registered zero growth, and Japan's economy shrank 7.1 percent.

And what's the cause of the economic torpor?

'The proximate answer lies in a series of policy mistakes," Nobel laureate economist Paul Krugman writes in The New York Times.

"Austerity when economies needed stimulus, paranoia about inflation when the real risk is deflation, and so on."

So why do governments insist on these flawed policies? "The answer, I'd suggest, is an excess of virtue. Righteousness is killing the world economy," Krugman argues.

Debt needs to be forgiven and written off, but that's not happening. And why is that? "As I said, it's about righteousness. The sense that any kind of debt forgiveness would involve rewarding bad behavior," he explains.

"So the policy response to a crisis of excessive debt has, in effect, been a demand that debtors pay off their debts in full. What does history say about that strategy? That's easy: It doesn't work," Krugman proclaims.

"Maybe, just maybe, bad news — say, a recession in Germany — will finally bring an end to this destructive reign of virtue. But don't count on it."

Federal Reserve officials have warned that the economic sluggishness might spread into the United States, delaying interest rate hikes by the central bank. Most economists now expect rate increases to begin around mid-2015.

"Not only are they not ready to raise rates, they don't even want people to think they're ready to raise rates. So it's not even on the radar screen," Ward McCarthy, chief financial economist at Jefferies Group, tells Bloomberg.

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Investors and policymakers around the world are freaking out about the global economic slowdown.
Krugman, austerity, inflation, economy
Monday, 13 October 2014 05:54 PM
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