Lost Decade, Here We Come - Paul Krugman Blog - NYTimes.com

Sobering words this AM from Paul Krugman's blog.

I'm not sure who's right - those who have become fairly hysterical about the looming deficits, while others (including Larry Summers of the President's economics team) are calling for a second dose of stimulus - but I would agree that imposing draconian spending cuts at a time when the economy is only beginning to improve doesn't seem to make too much sense.

Here's an excerpt from Professor Krugman:

The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.

But what about Greece and all that? Look, right now sovereign debt problems are taking place in countries with a very specific problem: they’re part of the euro zone, AND they’re badly overvalued thanks to huge capital inflows in the good years; as a result they’re facing years of grinding deflation. Counties not in that situation are not facing any pressure from the markets for immediate cuts; as of this morning, 10-year bonds were yielding 3.51 in Britain, 3.21 in the US, 1.27 in Japan.

Lost Decade, Here We Come - Paul Krugman Blog - NYTimes.com