Monday, June 28, 2010

There Is Hope: Krugman Predicts Third Depression

For those of you who read me regularly (both of you) you'll know that I have an aversion to NY Times and Nobel Prize winner Paul Krugman's economics. Today he called for a third Depression, which I tend to agree with. He believes we are in a deflationary spiral that will lead us into another Depression. This prognostication does give me a bit of hope as if he believes it, there is a higher probability than not that it won't happen.

Krugman is of the Keynesian school of economics - a school which worships at the feet of government and credits FDR with getting us out of the Great Depression (which is baloney). The basic premise is that the government should step in and spend if consumers and business stop - we must grow at all costs and this means massive deficits (Keynes also said deficits should be paid down in good times....but nobody listens to that). Krugman believes that because the world and US governments are not spending enough or are not committing to spend more that this will end in a deflationary spiral.

This is of course fundamentally incorrect and an example of how economists who approach problems from different viewpoints can also come to the same conclusions.

I share the same fears of Krugman (but don't consider myself an economist) but for different reasons.

One thing I'd like to point out in Krugman's piece that surprised me is how he characterizes depressions, I don't know if he just doesn't know his history or if he chooses to follow his own rechristened history:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

This statement is not true. Recessions are a construct of the Great Depression. When the US economy was headed back into Depression (rather it was still in one) FDR didn't have it in him to call it a depression, thus he created a new term "recession". Before the Great Depression the US experienced only depressions. So yes, after the the Great Depression Recessions were common and depressions rare - but historically this is inaccurate.

Regardless, when Krugman and I agree than things are either really bad or I am wrong. Guess its time to study some more.

Scott Dauenhauer CFP, MSFP, AIF