Right now, there is a fierce debate at the Federal Reserve (fierce by their standards) between those who believe the economies biggest long term risk is inflation and those who believe the biggest risk is deflation. There is no right answer on this and the experts are pretty divided (no climate change "consensus" on this one).

Below is a NY TImes op-ed from nobel award winner Paul Krugman, who was also an Enron advisor. He represents standard liberal thinking across many economic issues. He has argued that the stimulus wasn't large enough, unemployment benefits need to be increased and additional government spending needs to take place to shore up the economy.

Here, he reveals what liberal economists and what I think the administration's preferred strategy is. Inflate our way out of the deficit. My concern is inflation, once unleashed, is difficult to control. Those of us who remember the 70's stagflation under Carter will understand.

Judge for yourselves.


"Learning From Greece
By PAUL KRUGMAN
Published: April 8, 2010
The debt crisis in Greece is approaching the point of no return. As prospects for a rescue plan seem to be fading, largely thanks to German obduracy, nervous investors have driven interest rates on Greek government bonds sky-high, sharply raising the country’s borrowing costs. This will push Greece even deeper into debt, further undermining confidence. At this point it’s hard to see how the nation can escape from this death spiral into default.

It’s a terrible story, and clearly an object lesson for the rest of us. But an object lesson in what, exactly?

Yes, Greece is paying the price for past fiscal irresponsibility. Yet that’s by no means the whole story. The Greek tragedy also illustrates the extreme danger posed by a deflationary monetary policy. And that’s a lesson one hopes American policy makers will take to heart.

The key thing to understand about Greece’s predicament is that it’s not just a matter of excessive debt. Greece’s public debt, at 113 percent of G.D.P., is indeed high, but other countries have dealt with similar levels of debt without crisis. For example, in 1946, the United States, having just emerged from World War II, had federal debt equal to 122 percent of G.D.P. Yet investors were relaxed, and rightly so: Over the next decade the ratio of U.S. debt to G.D.P. was cut nearly in half, easing any concerns people might have had about our ability to pay what we owed. And debt as a percentage of G.D.P. continued to fall in the decades that followed, hitting a low of 33 percent in 1981.

So how did the U.S. government manage to pay off its wartime debt? Actually, it didn’t. At the end of 1946, the federal government owed $271 billion; by the end of 1956 that figure had risen slightly, to $274 billion. The ratio of debt to G.D.P. fell not because debt went down, but because G.D.P. went up, roughly doubling in dollar terms over the course of a decade. The rise in G.D.P. in dollar terms was almost equally the result of economic growth and inflation, with both real G.D.P. and the overall level of prices rising about 40 percent from 1946 to 1956.

Unfortunately, Greece can’t expect a similar performance. Why? Because of the euro.

Until recently, being a member of the euro zone seemed like a good thing for Greece, bringing with it cheap loans and large inflows of capital. But those capital inflows also led to inflation — and when the music stopped, Greece found itself with costs and prices way out of line with Europe’s big economies. Over time, Greek prices will have to come back down. And that means that unlike postwar America, which inflated away part of its debt, Greece will see its debt burden worsened by deflation.

That’s not all. Deflation is a painful process, which invariably takes a toll on growth and employment. So Greece won’t grow its way out of debt. On the contrary, it will have to deal with its debt in the face of an economy that’s stagnant at best.

So the only way Greece could tame its debt problem would be with savage spending cuts and tax increases, measures that would themselves worsen the unemployment rate. No wonder, then, that bond markets are losing confidence, and pushing the situation to the brink.

What can be done? The hope was that other European countries would strike a deal, guaranteeing Greek debt in return for a commitment to harsh fiscal austerity. That might have worked. But without German support, such a deal won’t happen.

Greece could alleviate some of its problems by leaving the euro, and devaluing. But it’s hard to see how Greece could do that without triggering a catastrophic run on its banking system. Indeed, worried depositors have already begun pulling cash out of Greek banks. There are no good answers here — actually, no nonterrible answers.

But what are the lessons for America? Of course, we should be fiscally responsible. What that means, however, is taking on the big long-term issues, above all health costs — not grandstanding and penny-pinching over short-term spending to help a distressed economy.

Equally important, however, we need to steer clear of deflation, or even excessively low inflation. Unlike Greece, we’re not stuck with someone else’s currency. But as Japan has demonstrated, even countries with their own currencies can get stuck in a deflationary trap.

What worries me most about the U.S. situation right now is the rising clamor from inflation hawks, who want the Fed to raise rates (and the federal government to pull back from stimulus) even though employment has barely started to recover. If they get their way, they’ll perpetuate mass unemployment. But that’s not all. America’s public debt will be manageable if we eventually return to vigorous growth and moderate inflation. But if the tight-money people prevail, that won’t happen — and all bets will be off."

Europe is a model for nothing...why do you think our ancestors left in the first place!

This isn't nearly as interesting a Greek tragedy as Euripides' Medea!

I nominate this for Post of the Week.

Speaking of Europe, I think all the mods are on holiday today.

::perk::

::fringe benefit::

and yet we remain well behaved and somewhat civil

The Queens are at their annual convocation, and Pale is dealing with a difficult family situation. (insert snarky barbie comment here.)

I know, what are we thinking?

and I think DQ had jury duty...

That's a scary thought. Think she'll stay awake?

at first, The Final Countdown was kind of catchy

but now it's overplayed at every sporting event

yeah, but not sober

i thought she resigned her MOD duties...

It's hard to stay sober when every time the judge says "Order in the court!" she responds with "A double gin and tonic."

YSIA

I want to thank the Cooler Academy, my fellow actors and actresses, my parents, my fans, and all the little people...

lol

fixed for accuracy