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Economy
Related: About this forumKrugman: Rock Bottom Economics
http://www.nytimes.com/2014/11/24/opinion/paul-krugman-the-inflation-and-rising-interest-rates-that-never-showed-up.html?_r=0
Six years ago the Federal Reserve hit rock bottom. It had been cutting the federal funds rate, the interest rate it uses to steer the economy, more or less frantically in an unsuccessful attempt to get ahead of the recession and financial crisis. But it eventually reached the point where it could cut no more, because interest rates cant go below zero. On Dec. 16, 2008, the Fed set its interest target between 0 and 0.25 percent, where it remains to this day.
The fact that weve spent six years at the so-called zero lower bound is amazing and depressing. Whats even more amazing and depressing, if you ask me, is how slow our economic discourse has been to catch up with the new reality. Everything changes when the economy is at rock bottom or, to use the term of art, in a liquidity trap (dont ask). But for the longest time, nobody with the power to shape policy would believe it.
What do I mean by saying that everything changes? As I wrote way back when, in a rock-bottom economy the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly. Government spending doesnt compete with private investment it actually promotes business spending. Central bankers, who normally cultivate an image as stern inflation-fighters, need to do the exact opposite, convincing markets and investors that they will push inflation up. Structural reform, which usually means making it easier to cut wages, is more likely to destroy jobs than create them.
This may all sound wild and radical, but it isnt. In fact, its what mainstream economic analysis says will happen once interest rates hit zero. And its also what history tells us. If you paid attention to the lessons of post-bubble Japan, or for that matter the U.S. economy in the 1930s, you were more or less ready for the looking-glass world of economic policy weve lived in since 2008.
But as I said, nobody would believe it. By and large, policy makers and Very Serious People in general went with gut feelings rather than careful economic analysis. Yes, they sometimes found credentialed economists to back their positions, but they used these economists the way a drunkard uses a lamppost: for support, not for illumination. And what the guts of these serious people have told them, year after year, is to fear and do exactly the wrong things.
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Krugman: Rock Bottom Economics (Original Post)
eridani
Nov 2014
OP
Hugin
(33,163 posts)1. Ouch... A "liquidity trap".
When are they going to learn a little discretionary money in the hands of many is a good thing for the Economy? From the looks of things... Never.
:sigh:
Odin2005
(53,521 posts)2. We are essentially in a pseudo-depression, much like Japan has been in...
...for several decades, now. The only thing keeping this from being a true depression is that things like social security, and food stamps are putting just enough stimulus into the real economy to keep the bottom from falling out; and things like the FDIC prevented a collapse of the banking system.