Wednesday, June 27, 2012

Krugman On Deleveraging

Paul Krugman opines today on why present economic policy for ending the depression is all wrong. Perhaps “policy” is not the right word, since his reference is to what “debtors” are doing, and God only knows who the “debtors” are. But, moving right along, without having a clue as to who we are talking about, which is perfectly okay because we also don’t have a clue as to what the hell we are talking about,

So one way to explain our depression is to say that debtors, as a group, are trying to deleverage too fast, in the sense that the collective rate at which they are trying to pay down debt isn’t feasible given the zero lower bound on interest rates.

Now, that sounds very erudite, talking about things like “deleveraging,” “collective rates” and the “zero lower bound,” but in plain English what he’s saying right there is that people should not pay down debt when interest rates are this low. Saying that it "isn’t feasible" is his way of saying that he thinks it's stupid because, of course, it's perfectly feasible. His thinking is how we got into this mess in the first place. “Borrow on your home equity now because I can offer you a mortgage at 1.34% interest.”

He is also illustrating why economists should never discuss financial matters because a borrowing decision should never be based on what the interest rate is; it should be based on whether or not you need the money and whether or not you will be able to pay it back. The interest rate enters into the decision only because it is a factor affecting your ability to repay.

"You can save $2000 by buying a car now with these low, low interest rates." News flash; I can save $20,000+ by not buying a car at all, because I don't need a new car. I don't even want a new car, and if I did, I don't want it badly enough to be making payments on it. If I don't need a car, don't want a car, and can't or don't want to make payments on a car, the interest rate is absolutely irrelevant. Paul Krugman, take note.

He also says at one point, that “you can’t get real interest rates low enough to induce sufficient spending on the part of those not deep in debt.” Because, of course, spending is done only by means of incurring debt, which is the basis of Paul Krugman’s economy. He might, unwittingly, be pointing out that a lot of people are smarter than Paul Krugman is, and are not borrowing money merely because the interest rates are low.

I suspect that his wife never lets him go into a store by himself.

The paragraph after the one I quoted says that the government’s economic policy goal “is not to stop aggregate deleveraging,” by which, if you take away his thesaurus, he means not to stop people from paying debt down to zero, but “to slow it down to a pace that can be accommodated by monetary policy.” God only knows what that second part means, because I’m not sure that even Paul Krugman does. He doesn’t, at any rate, explain it. If you are disturbed by a government policy of officially discouraging reduction of debt, you are not alone.

1 comment:

  1. bruce8:54 AM

    All those guys have thesauruses.. thesaurii? and of course, lawyers and politicians. All that debt does is give banks more money and take away from other things people could be spending it on (like food, shelter, etc.) and of course, consumer products and services to "prop up the economy". Which begs the question if Krugman et al ever lived in he reality that is most of us. (Answer: no).