Paul Krugman on Euro Rescue Efforts: 'Right Now, We Need Expansion'

[sysop]

In a SPIEGEL interview, Nobel Prize-winning economist Paul Krugman argues that this is not the time to worry about debt and inflation. To save the euro zone, he argues that the European Central Bank should loosen monetary policy and the German government should abandon austerity.

http://www.spiegel.de/international/...834566,00.html

[FreeOregon]

Yes, expansion, not austerity is needed. But the expansion must come in the private sector, not the government sector. The government sector cannot repay any sums it borrows without a healthy private sector. A healthy private sector must come first. And the private expansion needs to be financed without credit, or at least without government credit.

Having reached the point at which the marginal change in GDP for each increment of debt has turned negative, (See Palyi's curve) borrowing to stimulate no longer works.

What stands in the way of private expansion is debt. It's time to wipe out all debt, private and public, and begin again.

How to do that? After all, for each debtor there's a creditor looking to be paid.

If you set the goal of a debt free beginning, perhaps not unlike that in Germany in 1948 when the D-Mark came into existence, then you want a debt free slate from which to start over. Since Central Banks are printing paper currency to save the creditors anyway, why not wipe out the debts at the same time.

Let's do this rationally.

Inflationary? Probably not. If you wipe out the debts the new money fills a gaping hole. And there's really no difference between a bond at near zero interest and cash.

Professor Fekete has said for years that a zero interest rate policy destroys capital and the banks one day awaken to find themselves insolvent. Sound familiar?

It's true that after such a restructuring both creditors and debtors may be much more careful about extending and accepting credit. That's good. It's also true that credit extended to each productive project would need to be self-liquidating, each project standing on its own merits, generating the funds with which to repay credit extended. And governments, or some governments, might not be able to borrow at all. For awhile. So what. We are going to that point anyway.

[sbanicki]

Greek leftist leader Alexis Tsipras: 'It's a war between people and capitalism', The Guardian, May 19,2012

Greeks, Italians and Spaniards need a say in the plan to bring their countries back to health. In addition, the ailing countries should not be allowed to become too assimilated with the rest of Europe to fail.

Greece is rebelling against the austerity being imposed on it by the rest of Europe. Mr. Tsipras is leader of a political party in Greece that seems to be in the best position to decide not only Greece's fate, but also that of the euro. I admire his will to fight for what is right for the Greek's; however, it should not be a fight against capitalism.
Read More: http://www.freeourfreemarkets.org/20...ates.html#more

[alfredmifsud]

Great interview Mr Krugman.

Just you should have been more bold and state clearly that the pre-condition for Europe's recovery is a clean up and recapitalisation of the shattered banking system ( zombies keep coming on!!) and this can only be funded by monetisation.

The sooner we get on with it the better.

[muley63]

The silence is deafening. Krugman has been right, yet Spiegel offers no rebuttal because there is none. Germany has failed Europe and the Euro Zone and the consequence will be severe for the continent and the world.

Germany is the doctor who refuses to help a person who has a heart attack until the person gives up smoking and red meat. Germany insists on a economic treatment for Europe that will condemn a generation to poverty. For generations, a pan-Europe consciousness was Germany's number one goal and now that is over. To risk all that for Greece. One twentieth the cost of integrating East Germany. What a shame.

[American_in_Munich]

Paul Krugman's interviews and columns are always interesting!

It is difficult of course in the middle of a financial crisis to think about such things, but I would welcome leading economists starting to think about how best to approach the steady-state, non-growth economies in our future. Physicists have accepted for over a century now that all closed systems come to equilibrium, shouldn't the politicians and the economists be doing the same?