The G20 conference is now part of history, but shortly after it was over, Paul Krugman, a Nobel-winning economist, made some waves by strongly opining that the consensus to get spending and debt levels down was precisely the wrong approach. (Krugman’s rather depressing op-ed in the New York Times, is here.)
In light of the big sell-off on Tuesday, Michael Babad, in the Globe and Mail, reprised some of Krugman’s thoughts and tied them in with events in the larger market. He reports on Scotia Bank’s currency strategist Camilla Sutton’s findings, and lists some bullets:
- A string of disappointing economic indicators suggest the U.S. may be weaker than believed
- A shift in tone from global policy makers is pressuring estimates for world economic growth. (Theme of G20 summit.)
- Bank for International Settlements (an organization for central bankers) believes central banks should hike interest rates “before the macro economic environment fully justifies it.” (Here is their widely discussed report.)
- Europe is still having issues and financial reform problems.
Canadian financial portal, the Market Financial, has a quite interesting, upfront take on the Bank for International Settlements’ report and Krugman’s diagnosis of the world’s economic ills. Blogger Prof JP summarizes the fundamentals like this:
This is not an inventory recession, like all since WW II have been. The cause is different and the fix is different. In this, “Credit expansion economic collapse,” the cause was too much debt in households, corporations, cities and states, not so much Federal debt. It was that debt that wasn’t federal that cut spending and ate up paychecks and profits and tax revenues in cities and states with servicing debt. As the debt increased, so did the amount of money people needed to spend servicing debt, especially if the debt they had from a home, car, and other assets was combined with high interest credit card debt or a double dip of debt such as the main mortgage plus a home equity loan.
Intelligent debt consolidation is a good idea for consumers, but is now the time for government austerity, especially with increasing deflation fears in the market? Hopefully these experts can work it out.
