A good friend sent me two articles from the American press and asked for my comments. I thought it is a good opportunity to share both the articles and my comments. One is by the well-known Dr. Paul Krugman. The other is a community banker in the US. The article by the Community Banker is actually an answer to the piece by Krugman.

Paul Krugman’s prescriptions are nothing new. This bilateral email exchange gives me the freedom to call his proposals/suggestions NUTS.

Bernanke, the Fed Chairman, has already used some of the suggestions that has been made by BB, the Professor, to the Bank of Japan and now by PK to BB.  The Federal Reserve bought not just government securities. He bought all kinds of debt securities. He has now pre-announced interest rates for the next two years. what is missing? An inflation target. What is the US inflation rate now? It is already above 3%. It is not really missing.

When BB made these suggestions to BoJ in the 1990s, it was a different world:

1) Japan was not the US in the sense that its monetary policy actions and decisions do not impact the world as much as US actions do. The yen is not a global reserve currency.

2) Globalisation of trade, movement of commodities, global transmission of financial asset prices and correlation of asset prices across the world had not progressed to the degree that we witness now. So, America’s actions today will have far-reaching global consequences than America’s actions in the early 1990s

3) Resource constraint is a big issue, in my view, today. Saudi Arabia’s oil consumption has risen manifold. Climate change and climate volatility are playing havoc with harvests and yields. Plus, fnancialisation of commodities also means that low interest rates easily stoke speculation. That is what the article by the Community Banker also confirms.

4) There are global inflationary consequences of Fed actions. Switzerland’s desperation with its currency strength clearly illustrates that.

The absence of even a cursory acknowledgement of the costs and of the scope for the law of unintended consequences to become operational is almost a criminal omission.

I have commented on this irresponsibility of the ‘neo-Keynesians’ on several occasions in my blog and in my MINT columns. Most recently here.

Check out these two blog posts by Tyler Cowen (‘Marginal Revolution’) on Irish bond yields, the growth in the Irish economy and the silence of the Keynesians. As to how the Irish economy achieved this growth rate, read this good piece in Wall Street Journal. ‘Marginal Revolution’ thinks that this piece in FT was one of the best in documetning Ireland’s recovery. I think this post is long on rhetoric and short on specifics. The Wall Street Journal piece is better in that respect.

Yes, the answer is simple: Austerity, some debt reduction, a decline in real wages and a competitive exchange rate would go a long way towards restoring growth in peripheral Europe. Who is holding up the Euro from weakening? Is it the ECB or China or the Federal Reserve? The answer is: ALL THREE

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.