Tuesday, July 20, 2010
Delong: Austerians vs. Keynesians (Keynesians prevail)
But what happens should a government's printing press print more bonds than investors think it will dare to raise future taxes to pay off? What happens when a government's debts are no longer regarded as safe? Then policies of monetary or fiscal expansion or of banking sector asset swaps and guarantees do not boost but reduce the supply of safe high-quality assets: they move government paper out of the "safe" and into the "risky" category. We saw this in Austria in 1931 and in East Asia in 1997-8 and in Greece right now. Then not expansion but rather austerity to restore confidence in the safety and quality of government liabilities is the best a government can do to attempt to relieve depression--that and cry for help from outside.
Here we have the crux: Right now Greece and Ireland and Spain and Portugal and Italy need to be austere. But Germany and Britain and America and Japan do not. With their debts valued by the market at heights I had never thought to see in my lifetime, the best thing that they can do to relieve the global depression is to engage in coordinated global expansion: expansionary fiscal policy, expansionary monetary policy, and expansionary banking policy are all called for on a titanic scale.
But, the members of the Pain Caucus say, how will we know when we have reached the limits of expansion? How will we know when we need to stop because the next hundred billion tranche of debt will permanently and irreversibly crack market confidence in dollar or sterling or deutschmark or yen assets? Will shrink rather than increase the supply of high-quality financial assets the world market today so desperately wants? And send us spiraling down?
Trust me, we will know when the time comes to stop expansion.
Financial markets will tell us.
And not by whispering in a still, small voice.
Trust me, we will know, and right now we are still very, very far from that point indeed.