Have been debating Krugman all day today in my mind and only...

Have been debating Krugman all day today in my mind and only just logged on to read the discussion. Not sure he understands the markets - not sure anyone does these days:)

BUT do economist ever? He is an academic and as Fixator says a Keynsian. Nobel Prize? So is Joseph Stieglitz. (this is what he has to say about the Banks very recently: http://www.bloomberg.com/apps/news?pid=20601109&sid=alC3LxSjomZ8).

Funny thing is that I think that out of all this economics will surely develop and re-write the history books. Keynes, Friedman hehehehe who?

I don't think one can be a purist.

Here are some thoughts by other Economists:

http://news.bbc.co.uk/2/hi/business/8000062.stm
Are there any signs of recovery?

Barack Obama
President Obama warned that a full recovery was not imminent

With the US and the world economy facing economic slowdown, President Barack Obama has said that he sees some signs of recovery. Meanwhile in the UK the Chancellor Alistair Darling is likely to have to revise downward his economic forecast in next week's Budget.

But how real are these signs, and how long will the recession last?

BBC News has asked some of the world's leading economists for their views.

"I think we are at an inflexion point, where output is still falling, but the rate of decline is slowing.

This should put us halfway through the recession, which means that we should be in recovery by the spring of next year.

I think there are signs of things stabilising everywhere you look, from house prices to the stock market to commodity prices, which is one of the best predictors of global recovery.

Fairly soon, we should be seeing the green shoots. One reason I am confident of recovery, compared with the 1930s, is the size of the global stimulus being applied the world economy.

And if a recovery does begin, the UK will be one of the best placed to take advantage of it, because of the fall in the value of Sterling."

Dawn Holland, senior research fellow, NIESR

"I think President Obama's comments were wishful thinking. It is too early to see any green shoots of recovery in the world economy, and we may not see any signs of growth until 2010.

Until then, we expect rising unemployment and falling output, but the falls may not be as sharp as the declines we have seen in the last two quarters. It all hinges on the attitude of the markets to risk, and how much they are prepared to start lending again to businesses and individuals.

At the moment there is little sign that this has improved, but perceptions could change quickly. That means that there is a high degree of uncertainty in any forecast."

Andrew Simms, director, New Economics Foundation

"I think this is the earliest point at which politicians think they can start talking up the economy without being ridiculed. They are trying to rebuild confidence but it is really a self-fulfilling prophecy.

But in many ways the recession is just beginning to work its way through the economy - we haven't yet seen the full effect of rising unemployment.

In fact we may be facing a new form of a recession, that could dance on the edge of depression, if resource constraints - food and oil shortages - are combined with the bursting of the credit bubble.

The government's efforts to create a 'green New Deal' have lacked any real commitment of resources or new policies so far."

Kenneth Rogoff, professor of economics, Harvard University

"I think the US faces a decade of recession, similar to what happened in Japan.

We are not going to be 'off to the races' any time soon in any of the countries that were the 'ground zero' of the financial crisis, such as the US, the UK, Ireland and Spain.

Neither Britain or the US has really fixed the problems in their financial sector, and it is hard to see really robust growth returning in the next few years.

It is in the interest of policy-makers and politicians to trumpet any green shoots in order to encourage investment and talk up the market, but it is very unclear whether they really exist.

The huge government spending is providing a temporary boost to the economy, but it will have to be paid for in higher taxes or higher inflation which could reduce economic output in the future."

Peter Morici, professsor of economics, University of Maryland

"President Obama is grasping at straws.

We have had some mixed data in recent months but hard indicators like retail sales and industrial production have turned sour again.

I think we will see some mild recovery by the fourth quarter of this year, but we are in for a double-dip recession in 2011 and 2012 unless we take drastic action to fix the structural problems in the economy.

These include a broken banking system, rising unemployment, energy dependence, and the trade imbalance, especially with China.

The Obama administration has not tackled these issues head-on because its advisors are too close to Wall Street.

We could be in a Great Depression like that in the 1870s that produced a quarter-century of slow growth."

Barry Eichengreen, Professor of Economcis, University of California, Berkeley

"I am not among those who believe in green shoots, because for green shoots to grow they need watering - with liquidity from the banking system, which is not currently able to provide it.

I fear that the attempt to get the private sector to recapitalise the banking system is whistling in the dark, and ultimately the government - if it can get Congress to agree - will need to put in another large sum of money.

If it doesn't, the recovery could 'bathtub-shaped', with weak or no growth persisting for several years. And without a functioning banking system, the effects of any fiscal or monetary stimulus are much weaker."


This is along the lines of my thinking as previously posted to DunnyC. Funny thing is I didn't read this until today:

http://www.business-standard.com/india/news/abheek-barua-should-we-listen-to-paul-krugman/360329/

Abheek Barua: Should we listen to Paul Krugman?
Govts must regulate flow of 'speculative' investments in commodity markets

Abheek Barua / June 8, 2009, 0:48 IST

There is apparently serious debate in the American economics community on whether the large amount of dollars sloshing around in the system will fuel inflation going forward. The venerable and loquacious Paul Krugman is on one side and argues that in the current environment the textbook relationship between excess money and inflation does not quite hold. “These aren’t ordinary times,” he writes on his blog, “banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really ‘printing money’ after all...it would be a big mistake if the Fed lets fear of inflation distract it from the urgent task of heading off a financial meltdown.”

The US Federal Reserve Board seems to be squarely in the Krugman camp. Fed Chairman Bernanke in a testimony to the Congress last week underplayed the fears of inflation. “We anticipate that inflation will remain low,” he said, adding “the slack in resource utilisation remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued.” Incidentally, the American central bank has, in the past few months, added $1.45 trillion of new money through its quantitative easing programme (buying back government and other bonds) and plans to add more as long-term yields head northward pulling things like mortgage lending rates up with them. There are others, however, who are not as sanguine as Bernanke. Inflation expectations embedded in the treasury inflation-protected securities (TIPS) market have been climbing steadily. In May 2009 itself the implicit ‘breakeven’ inflation rate on 10-year TIPS has moved up by about 70 basis points.

Krugman does have a point. With soaring unemployment that is to decline in a hurry, wage pressures are unlikely to emerge for a while. Thus the spiral of rising wages and prices that usually goes with high inflation is unlikely to emerge as a risk in the foreseeable future. Krugman’s logic appeals to basic intuition — high inflation is a corollary of high growth; it is unlikely to come in a severe recession. The policy implication — the US central bank should continue to pump money until it sees more definitive signs of a pick-up in the real economy.

However, one surely cannot ignore the impact of high liquidity on commodity prices. Take the case of oil. From their February lows, crude prices have moved up by over 50 per cent. Much of the increase in prices came in May and coincided with the rally in stock prices. This is actually more than sheer coincidence. Much of the recent rise reflects the so-called ‘financialisation’ of commodity markets, a rather succinct term that describes the fact that commodities have become an asset like stocks. This means their prices respond to the same factors that drive sharp rallies in stocks. Thus the recent rally in both oil and stock markets played on the heady mix of rising risk appetite and high liquidity.

Financialisation does not mean that markets disregard fundamentals like the balance of demand and supply. Unfortunately, for most commodities, supply has been under strain and this is likely to continue as long as large investments go into augmenting production wherever possible. These investments are unlikely to happen in a hurry and supply is likely to fall short of demand. The upshot is that for most commodities there is a fundamental tendency for prices to rise. The fact that they tend to be traded as assets exaggerates this tendency and causes prices to flare up more than the simple arithmetic of demand and supply would suggest.

Thus the prospect of oil prices returning to $100 a barrel seems real. Could it derail the nascent recovery in the global economy that seems under way? Some (including Krugman perhaps) would argue that central banks should focus entirely on ‘core’ inflation and not try and fight price pressures in commodities by tightening money. A spurt in oil or other commodities would tend to be ephemeral and would not ‘embed’ itself into the economy unless real demand conditions picked up.

That, for any central bank, is a difficult call to take. It is certainly not one that the bond markets would buy into. They would tend to take cues more from headline inflation numbers rather than core inflation trends. Thus rising commodity price inflation is likely to translate into higher bond yields and higher interest rates in general. For a net importer of commodities like India, the rise in oil prices could also push up the current account deficit. Thus the rise in capital inflows could get gobbled up by a rising commodity import bill.

Both rising interest rates and a widening current account could scupper growth. Thus the global economy and India run the risk of ‘stagflation’ before they even begin to show decisive signs of recovery. This is exactly the risk that threatened the globe in 2008 when high oil prices and inflation seemed to accompany a severe economic slowdown. I would argue that hiking interest rates or tightening money is a textbook solution to an unusual problem — one that’s likely to create more problems than solve them. The only way out of this is for governments to get together and regulate the flow of ‘speculative’ investments in commodity markets (something akin to banning futures in commodities if you want a local example). This might seem terribly anti-market and all that, but surely, the financial crisis has taught us that the market is not always right.

The author is chief economist, HDFC Bank. The views here are personal