Tuesday, August 03, 2010

World Upside Down

What’s this world coming to? Krugman tells me to read the Wall Street Journal and I find hedge fund managers channeling Krugman and rich guys giving back-handed compliments to Democrats. (I didn’t have any trouble believing rich guys were bashing the Tea Party. The Tea Party is killing the Rich Guy’s Republican Party.)

From the WSJ -- Big Investors Fear Deflation

”Mr. Fournier's $4 billion hedge fund Pennant Capital says "political winds shifted" when European nations recently told U.S. Treasury Secretary Timothy Geithner at the Group of 20 summit they will focus on balancing their budgets rather than stimulating economic growth. The rising clout of the Tea Party movement in the U.S. also has colored his view that elected officials won't have the ability to spend.

Mr. Fournier and some others say Tea Party adherents are appropriately worried about hefty government debts, but that without near-term spending and programs by elected officials, the economy could sink further.”

Here’s my non-expert-that-reads-too-much translation: Krugman’s long-running warning about deflation is looking a lot more likely. Europe has pulled back on the stimulus too soon (see the recent U.K. election) so the European Union won’t be pulling the world’s economy out of the recession. That leaves us (or U.S.). And our politics are so messed up that the big-money boys aren’t sure we’ll have the political capability to do what is necessary (i.e. a second stimulus package).

For those (like me) that don’t really understand deflation, Krugman gives a short lesson on the subject in another blog posting.

Are you following along okay?

1) Krugman is right
2) The Democrats were right to pass the stimulus bill
3) The Republicans were wrong to oppose the stimulus
4) The Tea Party is so wrong they crossed the line into Crazyland.

”Indeed, many of these star investors don't see extended deflation as a sure bet and predict that, as deflation becomes more likely, the Federal Reserve and other government officials will take radical steps to arrest the decline, such as buying bonds or introducing spending programs.”

(Emphasis added)

You’re smart people. You read the paper. Do you think if we need to “introduce” another spending program (i.e. a second stimulus) that Congress will be able to find the courage to do it? Do you think that if the Republicans take over Congress in this election that they’ll be able to do it? The “I’m-scared-of-the-Tea-Party” Republicans? That is what scares investors. It ought to scare you too.

Behind the Curve
Published: March 8, 2009

”Yet many economists, myself included, actually argued that the plan was too small and too cautious.”

”So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.

But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.”

It will be September 2010 in another month. The recession rages on, unchecked.

(Note: I recognize that technically the recession is over. For the 14.6 million unemployed and the 8.6 million “ involuntary part-time workers”, I bet that is cold comfort.)

Don Brown
August 3, 2010


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