It is rare for Paul Krugman to preempt the publishing of one his NYT op-ed columns with a blog entry warning that his upcoming Times’ piece was going to be “depressing.” But, this evening, that’s exactly what he did when he posted this: “Prophylactic Du Jour.”
So…I’ve just finished reading his op-ed column, “Euro Zone Death Trip,” and I now understand what he was referencing, less than 90 minutes ago.
As he tells us towards the top of his NYT column…
Euro Zone Death Trip
Paul Krugman
NY Times
September 26, 2011
…On one side, Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened — and a euro collapse could inflict vast damage on the world.
On the other side, European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact — namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.
The story so far: The introduction of the euro in 1999 led to a vast boom in lending to Europe’s peripheral economies, because investors believed (wrongly) that the shared currency made Greek or Spanish debt just as safe as German debt. Contrary to what you often hear, this lending boom wasn’t mostly financing profligate government spending — Spain and Ireland actually ran budget surpluses on the eve of the crisis, and had low levels of debt. Instead, the inflows of money mainly fueled huge booms in private spending, especially on housing…
Bold type is diarist’s emphasis.
Also earlier on Sunday, Krugman posted this piece on his blog: “Catastrophic Stability.” In it he discussed bond market “breakevens” – “the difference in interest rates between regular bonds and inflation-protected bonds of the same maturity, which give a measure of inflation expectations.”
He notes that, “It’s not a perfect measure by any means, since there are issues of risk and liquidity.” But, we’re also told that “…breakevens do give a quick read on the issue, and can be helpful in thinking about where we are…”
The he puts it all in even more simple lay-speak…
Catastrophic Stability
Paul Krugman
“Conscience of a Liberal” Blog, NY Times
September 25, 2011 11:18AM
…The market seems to expect price stability for Germany — an inflation rate of 1 percent or so over the next 5 years. And that has a clear message: it’s signaling catastrophe for the euro…
…
…But if Germany is going to have only 1 percent inflation, we’re talking about massive deflation in the periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would greatly magnify the debt burden. This is a recipe for failure, and collapse.
Another way to say this is that the euro is going to have a chance of working only if the ECB delivers much more expansionary and, yes, inflationary policies than the market now expects. If you don’t think that’s a possibility, say goodbye to the euro project…
Bold type is diarist’s emphasis.
And here’s the money quote, IMHO, in Monday’s NYT column…
…As a result, the market now expects very low inflation in Germany — around 1 percent over the next five years — which implies significant deflation in the debtor nations. This will both deepen their slumps and increase the real burden of their debts, more or less ensuring that all rescue efforts will fail…
Given the basics, which Krugman provides us in his commentary, it’s quite easy to understand why the Nobel Prize-winning economist is quite pessimistic as far as the longevity of the Euro’s concerned.
Then again, given the sum and substance of his writing over the past 24 hours, it’s not a stretch to say that Professor Krugman is now all but telling us it’s looking more and more like the Euro’s toast. And, while he notes it won’t take a full-blown Depression to insure that outcome, he’s detailing a scenario which provides us with a likely narrative which may be almost as bad.
So, as Krugman warned us just two hours ago, if all of these inconvenient truths are bumming you out, there’s always music to settle your soul: “Prophylactic Du Jour.”