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.
1. Why is Krugman still wrought up about the possibility of deflation? The Fed has intervened so massively that it is hard to think of how they get their balance sheet back to normal without a large inflation over an extended period of time (I hope you understand the joke in the last few words).
2. I love this guy's use of words. The "inflation hawks" are "clamoring." Sounds like the angry mob in a Frankenstein movie. "Mass unemployment." Sounds like the Great Depression. How frightening. Please spare us the hyperbole.
3. I suppose I'm a "tight-money" person. It's quite obvious that monetary policy needs to be tighter in some sense - the key question is how and when, as I've written about elsewhere on this page. Maybe Krugman can help us out a bit here, but I doubt it. I have not seen any evidence that he knows squat about how monetary policy works or why.