Thursday, May 20, 2010

Krugman: Lost Decade Looming?

by Calculated Risk on 5/20/2010 11:58:00 PM

From Paul Krugman in the NY Times: Lost Decade Looming?

... Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

... As of Thursday, the 10-year [Treasury] rate was below 3.3 percent. I wish I could say that falling interest rates reflect a surge of optimism about U.S. federal finances. What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky ...

Low inflation, or worse yet deflation, tends to perpetuate an economic slump ... just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.

So what we should really be asking right now isn’t whether we’re about to turn into Greece. We should, instead, be asking what we’re doing to avoid turning Japanese.
...
Will the worst happen? Not necessarily. Maybe the economic measures already taken will end up doing the trick, jump-starting a self-sustaining recovery. Certainly, that’s what we’re all hoping.
The two key numbers: the unemployment rate is at 9.9% and inflation, by all key measures, is low and declining (CPI, core CPI, PCE deflator trimmed mean CPI, etc). Of the two problems, unemployment is real and now - and inflation is a possible future threat. The focus needs to stay on the real and now.