Part 1 is here.
The article "Paul Krugman Throws In Towel , Says We're Headed for Another Depression" (see below) talks about Paul Krugman coming to the conclusion that the global economy is headed for a depression because govts are making the mistake of cutting off the stimulus too early thinking the recovery is in the bag. This same mistake was made in 1937 when govts cut spending after a huge rebound from the Great Depression to plunge the economy back into recession.
I think we are headed for tough times but I don't think Krugman is right about the part that govts are cutting stimulus because they think the recovery is well on the way. I think the Europeans are implementing austerity because they see disaster coming if they don't start cutting spending. If you look at the growth generated in the US and Europe by the stimulus packages, it has been quite dismal. The Europeans probably realised that they can't keep propping up the economy using stimulus and the economy will falter anyway given the results we are seeing. If you keep fighting off the inevitable, you will be worse off at the end of the day when the inevitable arrives. The bond vigilantes who launched an attack of the Euro and bonds of weak Europeans in May 2010 sent out a strong signal that there will be more pain unless Europe does something about its deficits. Parts of Europe i.e. Spain & Greece are already experiencing depression like conditions with unemployment rising to 20%.
The economic problems we are seeing have been in the making for the last 2-3 decades. The level of debt in the global economy is enormous and we cannot have sustainable and stable growth unless this debt is reduced. Pain may be inevitable and the Europeans leaders have thrown in the towel because they realised this....it is the American govt that is in denial.... still thinking they can spend their way out of this mess.
While Paul Krugman talks about depression, 68 units from a condo project called Waterfront Gold, a 99 leasehold condo tucked somewhere in Bedok Reservior were sold at a price of 1075 per sq feet[Link]. The developer has cleverly divided the project into 3 phases - Waterfront Key, Waterfront Waves and Waterfront Gold bumping up prices by 25% for each phase. The penthouse in Waterfront Gold with an area of 2000 sq ft went for more than $2+M....but there is no property bubble in Singapore says our wise MM Lee. The problem with bubbles is they have a way of bursting that catches people "off guard". In a few months, we may have to hear our esteemed Minister Mah talked about how unforeseeable and unpreventable this whole situation was. Singaporeans spend and invest a large part of their savings and income on property very often taking up huge debts to finance their purchase - this is perhaps the achilles heel of our economy.....
Paul Krugman Throws In Towel, Says We're Headed For Another Depression
For the last several months, Princeton professor Paul Krugman has become increasingly agitated about what he feels is a disastrous mistake in the making -- a sudden global obsession with "austerity" that will lead to spending cuts in many nations in Europe and, possibly, the United States.
Krugman believes that this is exactly the same mistake we made in 1937, when the country was beginning to emerge from the Great Depression. A sudden focus on austerity in 1937, it is widely believed, halted four years of strong growth and plunged the country back into recession, sending the unemployment rate soaring again.
In Krugman's view, the world should keep spending now, to offset the pain of the recession and high unemployment--and then start cutting back as soon as the economy is robustly healthy again.
Those concerned about the world's massive debt and deficits, however, have seized control of the public debate, and are scaring the world's governments into cutting back.
Which fate is worse? It depends on your time frame.
Cutting back on spending now would almost certainly make the economy worse, at least for the short run. Not cutting back on spending later, meanwhile (and Congress has shown no ability to curtail spending), will almost certainly keep us on a road to hell in a handbasket.
The White House's own budget projections show the deficit improving as a percent of GDP to about -4% by 2013. After that, however, even the White House doesn't think things will get much better. After a few years of bumping along at about -4%, the deficit will begin to soar at the end of the decade. And thanks to the ballooning costs of Medicare, Medicaid, and Social Security--along with inflating interest payments from all the debt we're accumulating--the White House expects the deficit to soar to a staggering -62% of GDP by 2085.
What Krugman and his foes agree on is that that's no way to run a country. And it's time we finally faced up to that.
In the meantime, we'll continue to fight about what to do in the near-term. And Krugman thinks he has lost that war and we're headed for another Depression.