Skip to main content

Dean Baker vs. Paul Krugman

I often tend to agree with Dean, and its no different this time around, but it should be remembered that Volcker not only caused pain domestically with unemployment, he caused the debt crisis by hiking interest rates to the stratosphere.

Dean is right that the US will not be Greece, and that common currencies, like the euro (or dollarization in Latin American countries like Ecuador or El Salvador) imply that external imbalances must be adjusted with lower levels of output growth and higher unemployment.   But it is important to note that the US will also not be Zimbabwe. Hyperinflation is not about monetization of public debt. The German and Latin American cases show that is about being unable to keep the external value of the currency when faced with a balance of payments crisis.

If the US monetizes debt, and the economy is not at full employment, the level of activity should increase. If hypothetically it gets to full employment, monetization of public debt may lead to private agents using money to repay existing debts, to some currency substitution, and to some excess demand (which would force business to invest to adjust capacity to demand).

The last two may lead to some demand inflation.  Certainly during World War II, when unemployment reached 1.2%, and in the late 1960s, when unemployment fell below 3.5%, some demand pull inflation forces were at work.  But Zimbabwe is not related to that at all!!!


Popular posts from this blog

What is the 'Classical Dichotomy'?

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…