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Paul Krugman: Avoiding Reality on Greece   May 16th, 2010
Krugman demonstrates a dangerous denial of reality       


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Liberal economist Paul Krugman can always be counted on to advocate for liberal spending policies (except when they're not spending enough), but this latest article by Krugman raises the real possibility that he's not grounded in reality. More importantly, it raises the possibility that other liberals--such as President Obama--may be thinking exactly the same way.

Paul Krugman's article is entitled "America not Greece, so ignore fear mongering" and, believe it or not, tries to make the case that we do not need to learn any lessons from Greece; and that to suggest otherwise amounts to fear mongering. It's a short article and I would encourage you to read it all.

He offers two reasons why America is different than Greece. The first reason is that, going into this economic crisis, we weren't as far in debt as Greece (as a percentage of GDP). True enough. But on our current course it's just a matter of not-too-much time until we get to the same place, so that's hardly reassuring.

The most breathtaking explanation Krugman offers, however, as to why we don't have to worry is:

During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation. But since it doesn't, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So, the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.

It's worth noting, by the way, that Britain -- which is in worse fiscal shape than we are, but which, unlike Greece, hasn't adopted the euro -- remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.

This, to me, is absolutely amazing.

It would seem that it's Krugman's position that it's a tragedy that Greece has to implement austerity measures and apply sanity to their budget; if only they could print more money they could avoid all this pain. He seems to think that the solution to spending too much money is to "restore competitiveness through devaluation" (printing money). The problem in Greece apparently isn't that there are too many people receiving too much money from the government, nor a general lack of fiscal discipline, but that Greece can't print more money.

Krugman seems to think the U.S. can print money so, therefore, we won't experience the same pain as Greece.

If it were only so easy.

What Krugman is tacitly endorsing is "monetizing the debt." It's nothing new. It's been done by irresponsible governments throughout history, most recently and famously by Zimbabwe. Basically, when the government runs out of money and can't borrow more (or doesn't want to do so because the interest rates are too high), the government simply prints more money. Presto! Problem solved.

The evidence that Krugman offers in support of this is the UK--they're worse off than us in regards to debt, but they can still borrow money at a reasonable rate. Therefore, he concludes that the ability to print money is a good thing and reassures investors.

Perhaps. But in my opinion it's not the printing press which reassures investors, it's confidence that the country is inherently responsible and will get things in order. Investors apparently still trust the UK and the US, but no longer trusted Greece.

This is actually somewhat like the matter of nuclear weapons: Very few people are really concerned about the U.S., the U.K., and France having nuclear weapons because they are stable governments, and most of the world trusts them not to misuse their weapons. The problem is when nuclear weapons get in the hands of unstable or radical regimes that can't be trusted with the power at their disposal.

Likewise, investors may currently be comfortable loaning money to the U.S. because they trust the U.S. will manage its currency in a responsible manner, and eventually manage its finances in a responsible manner. However, if it becomes readily apparent that the policy of the U.S. is to devalue the currency, investors will either disappear or simply ask for a proportionally higher interest rate.

The printing press is a potential weapon of mass destruction for a currency. Investors will trust a country with the printing press until such time as that printing press is grossly abused.

Debasing a currency is not a good thing, it's not a solution, and it only delays and changes the nature of the day of reckoning. Debasing a currency is a tactic used by irresponsible governments, such as Zimbabwe, and most definitely is not a substitute for sound fiscal management.

This is why, in a matter of months, people have gone from talking about the Euro as a possible reserve currency to talking about its potential demise, and why the Euro has lost so much value in recent weeks. That's the damage caused to the Euro as a result of the European Central Bank promising to monetize the debts of some countries, effectively devaluing the Euro.

The real concern here, though, isn't what Paul Krugman thinks, but the possibility that President Obama and other Democrats hold that same belief.

Although they've publicly stated that they're concerned about the growth in the national debt and promise fiscal responsibility in the future, all evidence is to the contrary. Rather than taking the national debt seriously, Obama has appointed a commission to study the issue. Rather than looking where we can make serious cuts in spending, Obama and Democrats have piled on the brand new health care entitlement that's going to cost us even more.

Considering that there is no evidence that Democrats take the national debt or deficit seriously, this article by Paul Krugman would seem to raise the possibility that their "exit strategy" is to devalue the dollar. That would certainly explain why they're not too concerned about the national debt. If they're planning on devaluing the currency, they know that in the future they can pay it back more easily with devalued dollars.

If that's the course of action they've chosen, however, the ramifications will be huge. For us domestically, inflation. Internationally, there will be renewed interest in looking for some other reserve currency. And the dollar losing its status as the primary reserve currency would create a whole new set of problems for us.

I do not share Krugman's belief that abusing the printing press and creating inflation is in the best interest of our country, nor that it's a compelling reason to believe that what's happening in Greece can't happen to us.

Consistently spending more money than you have is the road to bankruptcy. The printing press has yet to overcome that basic reality of finance.

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