Paul Krugman: US Needs to Start Worrying About ‘Austerity Bomb’

Monday, 26 Nov 2012 12:05 PM

By Michael Kling

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Washington should stop fighting the "fiscal phantom" of the deficit and start worrying about the coming "austerity bomb," warns Paul Krugman in his New York Times column.

The "deficit scolds," as Krugman calls them, say a growing deficit will prompt “a run on Treasury bonds, interest rates will spike and the U.S. economy will plunge back into recession.” So we must slash spending and increase revenue to reduce the deficit.

The deficit scolds keep predicting calamity and they keep being wrong, Krugman says. The bond market clearly disagrees with them, he says, noting that interest rates are at historical lows.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

"Given these realities, the deficit-scold movement has lost some of its clout," Krugman writes.

The real danger, according to Krugman, is the "austerity bomb," otherwise known as the fiscal cliff, the tax hikes and spending cuts scheduled for next year.

The nightmare scenario, which is playing out in Greece, that the deficit scolders predict — investors losing faith in the government's ability to repay its debt — won't happen here, Krugman says.

The United States is not Greece, he explains, as the United States has its own currency, so could always print more money. That could increase inflation and decrease the value of the dollar, but that would actually help by discouraging corporations and individuals from holding cash and increasing U.S. exports.

"As far as I can tell," Krugman writes, "every example supposedly illustrating the dangers of debt involves either a country that, like Greece today, lacked its own currency, or a country that, like Asian economies in the 1990s, had large debts in foreign currencies."

Although the nonpartisan Congressional Budget Office (CBO) has said the fiscal cliff will probably cause a recession and push unemployment over 9 percent, it notes that going over the cliff would improve the economy over the long run by reducing the deficit, according to The Christian Science Monitor.

The CBO warns that completely avoiding the cliff and doing nothing to reduce the deficit would increase the chances of a fiscal crisis, The Christian Science Monitor reports. If that happens, the government might no longer be able to borrow at low interest rates, it warns.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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