Irreverent Economics

Some time ago we enjoyed high economic growth, while at the same time the government ran high deficits. Some people thought this a virtuous combination. After all, doesn’t correlation equate  to causality?

Unfortunately, the eventual downturn came even if we had been assured by the government that no such thing would happen. The government responded with even more deficits —  or a strong stimulus package in the new language. Still, it didn’t work.

Now, the next government is aggressively trying to balance the budget,  slashing expenditures and raising taxes. This has brought out all the critics who claim that their little domain is essential to the future of the country or welfare of the people.

I say, good luck to the government. It is on the right  track. Stick to your guns.

The bond markets would seem to agree, as bond rates last week went to 1.43%, below even  German rates.

Still, the situation here has attraced some interesting opinions, from a no less leading light than Mr. Krugman discussing the British Fashion Victims. His dodgy analysis of Iceland was discussed on these pages earlier. The Telegraph today summed this up better than I could by  “Will someone please shut Krugman up“.

So is Krugman right or the bond markets right? I think I would rather keep the bond market happy. I don’t beleive in Santa any more.

Coincidentally, I will lecture on his rather nice 1G currency crisis model today and will discuss his Pangloss Asia crisis model next week.  Sometimes the classics are best.

There is a good interview with Angela Merkel  in the Wall Street Journal yesterday, aptly called “Merkel Rejects Obama’s Call to Spend”

I sometimes get the impression that our leaders think they operate in  two  parallel  universes at the same time. In one universe government is too indebted,  the deficit is too high and the sharks (i.e.  the bond markets)  are  circling. In this universe it is essential to get the deficit under control with austerity being the word of the day.

In the other universe  we are heading for another downturn and it is essential to implement some stimulus packages. It is in this latter universe that some members of the G20, most prominently the US and France, are demanding that Germany stimulate its economy.

On this issue, Mrs. Merkel  got her priorities right,  and is rejecting Obama’s  call to spend. The   believe in stimulus packages is based on dubious economic reasoning, while not getting state finances under control is bound to end up in tears.

The Wall Street Journal observes  that Germany is willing to give up other cherished objectives in order to resist the  siren call of stimulus spending

Germany’s position threatens to isolate it within the G-20, likely making it difficult for it to win support for tougher financial-market regulation and its other priorities.

That is as a good trade-off as I have ever seen.

Stick you your guns