Tuesday, June 29, 2010

Krugman 3rd depression

Dow falls below 9900 back to where it was back in March 22, 1999 -- over a decade of no progress. http://www.bloomberg.com/news/2010-06-29/stock-index-futures-decline-on-concern-china-s-economic-growth-set-to-cool.html

Krugman may be right about a third depression but does not know why. Princeton does not have a business school or finance department. What is different today is the quadrillion dollars of financial derivatives, which are a form of debt, a promise to pay.
Derivatives were rare until they took off in the 1980s and 1990s and led to the crash. Financial derivatives are on top of much indebtedness of governments, corporations, and private people. His recommendation for more deficit spending is only going to add to the problem. Like Keynes said, when conditions changed, he had to change his opinion. Keynes went from arguing for a balanced budget to arguing for running a deficit to get out of the great depression. Now we have had deficits for decades and it is time to return to balance and to reduce the overhang of derivatives related debt. The debt and deficits are now the disease, not the cure.