Paul Krugman Reveals How Conservative Economists Are Like Superstitious Medieval Crusaders

The market is treated like a God, whose will only they can divine.

Photo Credit: via youtube

In his Friday column, Paul Krugman delves into the irrationality of economists who have gotten everything wrong about austerity and the perceived threat of hyper-inflation in the past few years, and yet still cling to their quasi religious reverence for the wisdom of the markets. Economists like Alan Greenspan, for instance.

This week's turmoil in the stock market is, in Krugman's view, a result of weak economies world wide, economies that have been stifled by austerity measures and a stern refusal to adopt policies that would stimulate growth and relieve millions of people who are in debt. But those who believe in the "market gods" don't seem to be getting the message.

"We have been told repeatedly that governments must cease and desist from their efforts to mitigate economic pain, lest their excessive compassion be punished by the financial gods," Krugman writes. "But the markets themselves have never seemed to agree that these human sacrifices are actually necessary. Investors were supposed to be terrified by budget deficits, fearing that we were about to turn into Greece — Greece I tell you — but year after year, interest rates stayed low. The Fed’s efforts to boost the economy were supposed to backfire as markets reacted to the prospect of runaway inflation, but market measures of expected inflation similarly stayed low."

Worse, perhaps than worshipping the God-like market, is that the austerity hawks are misinterpreting the message.

Inflation hysterics like Alan Greenspan even express disappointment and exasperation when their dire predictions about inflation don't come true."It’s hard to escape the conclusion that people like Mr. Greenspan knew as much about what the market wanted as medieval crusaders knew about God’s plan — that is, nothing," Krugman zings.

In fact, if you look closely, the real message from the market seems to be that we should be running bigger deficits and printing more money. And that message has gotten a lot stronger in the past few days.

I’m not mainly talking about plunging stock prices, although that’s surely telling us something (but as the late Paul Samuelson famously pointed out, stocks are not a reliable indicator of economic prospects: “Wall Street indexes predicted nine out of the last five recessions!”) Instead, I’m talking about interest rates, which are flashing warnings, not of fiscal crisis and inflation, but of depression and deflation.

Most obviously, interest rates on long-term U.S. government debt — the rates that the usual suspects keep telling us will shoot up any day now unless we slash spending have fallen sharply. This tells us that markets aren’t worried about default, but that they are worried about persistent economic weakness, which will keep the Fed from raising the short-term interest rates it controls.

The interconnected world economy is tumbling in the opposite direction of what Greenspan and his ilk feared: deflation and stagnation, which are far worse than inflation.

Krugman advises skepticism the next time a talking head purports to know what we have to do to satisfy the markets. "What they’re really doing is trying to bully us into doing what they themselves want," he concludes.





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