 |
|
Title: The Return of Depression Economics (Penguin Business Library)
ISBN: 0140286853
Author:
Paul R. Krugman
Publicate Date: 2000-06-04
Publish: 2000-06-04
List Price: $18.60
Average Customer Rating: 4.0
Format: Paperback
 |
|
|
|
|
Amazon Lowest New Price: $154.90
Amazon Lowest Used Price: $15.88
|
|
|
|
|
|
|
|
|
|
|
| Customer Review: |
|
1: Krugman is the man
Paul Krugman definitely deserves his Nobel Prize in Economics. I do hope the new Administration will read his books before they govern in this turbulent time.
|
2: Interesting and Educational!
Between 1997-99 seven economies home to two-thirds of a billion experienced a slump resembling the Great Depression. Krugman uses a simplified economy (the Capital Hill co-op baby-sitting co-op) to help explain what went wrong and how to fix it.
Mexico's "Tequila Crisis" of 1994 started with a devaluation that only went about half as far as experts believed necessary. Government credibility, further harmed by economic hanky-panky, was now damaged - it could not sell long-term bonds and had to pay 75% for short-term loans indexed to the dollar. Real GDP dropped 7%, and the contagion spread to Argentina. (U.S. banks recalled their loans, creating a money supply contraction. Both central banks were banned from printing more pesos unless in exchange for dollars - a limitation intended to control inflation. The crises were stabilized by a $50 billion Treasury credit line to Mexico, and World Bank support ($12 billion) for Argentina. Krugman states that Mexico should have tightened credit - instead it loosened it.
Japan spent most of the 1990s in a slump - 1998 production was less than 1991. Major companies were insulated from short-term financial pressures by the practice of groups of allied firms organized around a main bank that typically owned substantial quantities of each others' shares and rarely financed themselves by selling stocks or bonds. Instead the bank loaned them money.
Regulatory bank constraints began breaking down in the 1980s, both in Japan and the U.S. The Bank of Japan, concerned about speculative excess, began raising rates in 1990s, and within a few years land values fell 60%.
Krugman asserts that recapitalizing banks will not encourage them to make bad loans; instead, he suggests getting Japan's economy moving again requires using inflation as an incentive to spend.
And so it goes for the other four financial crises.
|
3: Terrific, wide-ranging introduction to macroeconomics
Pre-George Bush Paul Krugman is a different beast from post-George Bush Paul Krugman, though you can see a different side of The Conscience of a Liberal in The Return of Depression Economics. Conscience of a Liberal is, among many other things, admirable for the concision and sweep of its narrative: in not very many pages, it runs through a century of U.S. history, and to my eye didn't leave out very much. Krugman delivers the story almost breezily; we could be forgiven if we didn't notice that we're learning a lot.
So it is with The Return of Depression Economics, which could be the leitmotif for a course in macroeconomics. Why did Japan, whose economy made the U.S. tremble throughout the early Nineties, falter into a recession for the better part of a decade? How did Mexico, Indonesia, Thailand and Brazil all require IMF bailouts? Why did central banking, which seemed to have mastered the control of business cycles, suddenly lose its bearings?
The remarkable thing about this book is that I feel like I'd be doing it an injustice if I summarized it with fewer words than the book itself contains. There are a lot of stories wrapped up in here. There's a story about properly devaluing your nation's currency, for instance: if you're going to do it, do it only once; this tells the market that you're going to maintain as stable a currency as you can. At the same time, don't devalue just a little bit: the market will think that you have future devaluations on hand and that you're not serious about fixing your country's fiscal problems.
There's a story about hedge funds -- a story that's especially valuable now, a decade after Krugman wrote this book. The hedge funds were all so interconnected that a collapse in the one entailed a collapse in the others. And they're so heavily leveraged that a tiny drop in the market causes an enormous drop in the fund. Combine this with how interconnected they are, and you have a recipe for disaster.
There's another story about the difficulty of measuring a nation's productivity. Krugman spent a good bit of Pop Internationalism addressing this in the context of "Asian tigers" and the Soviet Union. To most outsiders, the USSR looked like an economic miracle, achieving remarkable growth in GDP. To those who looked carefully at the numbers, though, the story was much different: the Soviets achieved those rates of growth by wasteful use of capital. Carefully measuring the productivity of labor and capital -- a metric economists call Total Factor Productivity -- showed that the Soviets were making inefficient use of their resources, and that they'd have to run out of steam eventually. And so they did.
The overarching story, if I'm reading Krugman right, is that we need more Keynes now, not less. If people expect a recession in the future, they consume less now. This leads to a contraction in the economy, which leads to layoffs, which leaves people even less economically secure, which makes them hoard more. The Keynesian response is demand-side stimulus: dump money into public works to get people spending again, print more money to pay for it, and put up with the temporary inflation that results.
I know almost no macroeconomics, but I'm dying to learn. If Krugman's book has any major faults, it's the absence of any footnotes that could help someone like me. I ended this book wishing to dive more deeply into any of the various stories; Krugman gave me nowhere to go. (For the record, it looks like Lectures on Macroeconomics, by Krugman's erstwhile MIT colleagues Blanchard and Fischer, is one classic direction to go from here.)
|
4: The future that didn't work: Japan in the 1990s and 2000s.
In 1998 Japan produced less than it did in 1991. Between 1953 and 1973, Japan in the space of two decades became the world's largest exporter of steel and automobiles. However, in the early 1970 growth slowed from the record level growth of 9% too less than 4% after 1973. Bank loans and import licenses flowed to favor industries and firms; the economy's growth was at least partly channeled by government's strategic designs (MITI). The second factor influence Japanese affluence was keiretsu. Members of the Japanese keiretsu - a group of allied firms organized around a main bank - typically owned substantial quantities of each other's shares, making management largely independent of the outside stockholders. However, if the loans looked unstable, wouldn't the banks start lose depositors? But in Japan, depositors believed the government would never allow them to lose their savings. One by one the Japanese government targeted strategic industries that could serve as engines of growth. The strategy was to create an export drive that initially ignored profitability and meanwhile built market share and at the same time drove foreign competitors into the ground. The Japanese government was accumulating massive debt in a race to the top. At the beginning of the 1990s, Japan hot economy was experiencing a speculative real estate boom. Speculative investments in real estate almost caused a banking crisis in the 1970s.
Moral hazard occurs when one person assesses the risk of an endeavor and causes another person to bear the cost if things go badly. Borrowed money is inherently likely to produce moral hazard. Heads I win, tails you lose. Japanese banks forget normal placed restrictions on what borrowers could do with the loaned money and reduced or eliminated owner capital requirements. These banks loaned large sums of money, no questions asked. Investors in the bank had become careless about where they were storing their money. The depositors were not asking questions about the bank investment; instead, they were relying on the government to safeguard their investment. Bank Deregulation opened up more competition for public savings and increased freedom to make bad risk investments. Competition further eroded profit margins for banks to cling to old-fashioned ways of doing business. The bank loaned more and helped inflate the Japanese bubble economy. In 1990, the Bank of Japan raised interest rates and the air started to stream out of the bubble with land and stock prices dropping 60% below peak. "Japanese authorities seem to have regarded all of this as healthy-a return to more sensible, realistic asset valuations."
Instead a deepening economic malaise was setting in: unemployment hitting 10% and historical GDP contraction. Analyst called the phenomena a "growth recession", "liquidity trap", or "growth depression". Japan manufacturers were increasing producing, inventories stock piling, and consumer spending lagging. Spending was not keeping up with production. In 1996, Japan's Finance Ministry was running a 4.3% of GDP deficit. Japan was experience a baby bust and its working-age population were declining. The retired citizens were a heavy fiscal burden on the Japanese government. In 1997, Prime Minister Ryutaro Hashimoto increased taxes to reduce the budget deficit. The Japanese economy plunged into a recession. The debt to GDP ratio was 100% but the investors maintained faith in the long-term soundness of the Japanese government. The Japanese banking crisis paralleled the 1930-31 banking crisis inflicted by long-term damage to credit markets. Credit was not available, even when quality opportunities presented it. The market was starved for money. The eight-year stagnation was a time for repentance.
The European Central Bank could join BOJ and raise interest rates. The affect would appear as an attempt to dampen inflation in the euro. The affect would be a cascade the cool down and curtail a period of easy credit. The Stock markets in development countries will fall significantly. The tightening will lead to a slowdown in the world economy.
2000s, inflation caused by factors, such as, high-energy prices caused Japanese investors to sell Yen and buy dollars. The sudden rise in the Japanese stock market suggested an surge in speculative spending and rise in the overvaluation of the Japanese stock market. The Japanese market depended on US consumption and US consumption depended on cheap Japanese products and massive levels of credit. As the Japanese economy inflated Yen bought less domestic products and a save haven needed to be found. One haven was buying dollars, if the yields remained high enough for the risk. High yield investments in US Treasurer notes made overseas investment became attractive. Low yield Japanese bank notes had no holding power. The selling of the yen made Japanese products cheaper for foreigners too buy and foreign goods expensive. "The yen must, as a matter of sheer accounting, fall enough to match that trade surplus to the desired export of capital". Demand for Japanese goods would rise to a certain balance point. However, if the dollar was expected to fall then dollars converted back to yen would return less yen. The Japanese saver will be less enticed to transfer savings into overseas investments, if on the dollar/yen conversion a profit was not realized or if the Japanese investor believed a loss in the future was likely on the exchange. Therefore, Japanese savings would not be exportable without confidence in a save return, savings that fueled consumption.
Inflation drove Japanese money out of the country into higher US treasury yields, which promised foreign investment a safe return back. The Japanese foreign investment fueled the consumption of Japanese products: electronics, computers, steel, and automobiles. The stock market and real estate markets reflected behavioral and quantity factors that represented various levels of productivity, consumption, speculation, and confidence. However, rising interests in America would cause Bank of Japan to raise its rates, to bridle domestic inflation and slow down the exodus of yen and both side move rapidly into depression.
However, hedge funds could cause another scenerio to materialize. Historically, as inflation increased and the dollar devalued, US investors sought to put money in hedge funds seeking double digit returns investments in emerging markets. Some speculators borrowed new cheap Asian money and invested in higher yield US securities others reaped the benefits of hot money. Hedge funds seemed content to remain positioned in emerging markets, as long as US consumption remained strong. When foreign Asian markets becoming uncertain about the future panick set in. Panick was fueled by fears that US inflation will rise and US consumption decrease. This was a worst case scenerio because Asian markets were in the business of production not consumption and any changes in expectations of consumption could have massive impacts. The hedge fund remained root while profits were within the acceptable threshhold but as profits drops so did their confidence wain and these hedge funds could flee out of Asia back into US securities. The sudden increase in available liquidity would cause a surge in borrowing and business growth,further inflating the economy, drive down interest rates, and inflate the stock market. The surge in market capital in the stock market will cause a job boom, until balance is achieved then a massive depression will set in, lasting about 20-30 years.
|
5: Famously wrong, again and again
Paul Krugman has his head so far up his fundament he mistakes his flatulence for flashes of brilliance. Sadly, he has an army of similarly misinformed acolytes who bring tapers of toilet paper to his bonfire of vanities, of which this book is the chief offender.
Krugman's inadequacies are regularly chronicled in his innumerable "corrections" in The New York Times, and in various blogs and most notably Krugman Watch and various National Review Online criticisms. As numerous as Krugman's critics are, he needs more, for his entire approximation of thinking out loud in the public sphere deserves the contempt he inspires. He isn't even the last great Keynesian, he is the last great Johnsonian-small `d'-`democrat, who has never met a social ill that a command and control governmental response could not remedy, especially if it employs lots of bureaucrats in a Weberian utopia of human clerical ants.
But Krugman's cretinous weltanschauung does not for a bad book make: his smug leaden prose, however, does. For this is a horribly unreadable book in which he panders to a reader he considers as stupid as, oh, say, the average New York Times subscriber, and proceeds to make it simple for even that left-of-the median audience of the standard normal curve for intelligence. There are appreciative reviews here for Krugman making complex issues simple. But Krugman doesn't exactly do that. Instead, he glosses over important dimensions of difficult topics by not acknowledging that other possible solutions exist, and instead props up his smarmy policies with rhetorically comforting sticks from the standard normal response of a DNC press release. I'd laugh if I weren't choking on my own vomit from how bad a book this is.
There is a picture in modern dictionaries of intellectual dishonesty and misrepresentation of ideology as science. The example photograph is Paul Krugman, `economist.'
|
|
|
|
|
