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February 11, 2019

Paul Krugman Warns An Imminent U.S Recession


Nobel laureate Paul Krugman is possibly the world's most famous Keynesian economist thanks to his position on the New York Times editorial board. And he just joined the growing chorus of voices calling for a US recession in the next two years.
The US economy is struggling for two reasons: The scope for a powerful monetary and fiscal response is limited, and the current "leadership" under President Trump lacks the competence to adequately respond to a crisis, during an interview with Bloomberg in Dubai.
But moving past the US, Krugman echoed the IMF's finding that the world is "dangerously unprepared" for the coming global recession, citing the slowdown in China, and a Europe inching ever-closer to a eurozone-wide recession, as the two biggest risks the global economy.
"I wouldn't be as definitive, but it seems pretty likely. There seems to be an accumulation of smaller problems and then the underlying backdrop is that we have no good policy response. The Fed can't cut rates very much, there is in fact fiscal space if we were prepared to use it but it's hard to see that this current leadership is going to respond in any kind of nimble way so yeah I think there's better than even odds that we do have a recession."
And when the disaster finally arrives, not the US, nor China, nor Europe will be able to bring adequate policy responses to bear to combat the slowdown...because after a decade of rock-bottom interest rates (they're still negative in Europe) and QE central banks are tapped out...and while there is still some wiggle room for the type of Keynesian fiscal-policy response that Krugman is so fond of, he believes governments will lack the political will when the time comes.
"I actually see two and one of them is China. I'm in the camp that has been predicting a Chinese crisis over basically inadequate consumption for a long time and it keeps not happening but it does seem to be getting closer to that point. The other is Europe: the euro area is clearly experiencing a slowdown, it is getting closer to recessionary levels already...and there's no recourse. Draghi has no room to cut rates - they're negative already. And there's plenty of room for fiscal expansion...but Germany won't do it. I think Europe is a danger spot that's potentially as big a deal as China."
If another crisis on the magnitude of the great financial crisis were to arise, Krugman - who has admitted in the past that his recession calls have been terribly inaccurate - warned that the world economy is in a far worse a position to respond, thanks to the increase in aggregate debt totals and the lack of quality "leadership."
"We're clearly in worse shape. We came into the last crisis with interest rates well above zero, we came into the last crisis with debt substantially lower than it is now...and we came into the last crisis with substantially better leadership...our current Treasury secretary is no Hank Paulson. I think we're in much worse shape. We probably don't have a crisis of that magnitude about to hit us - God help us if we do - but we're in much worse shape to deal with whatever shocks come along than we were ten years ago."
Watch the interview below:
While Krugman's predictions certainly sound dire, there is a silver lining to be found: After all, these gloomy pronouncements are coming from the same man who once said the fax machine's impact on modern society would be greater than that of the Internet.   
Courtesy of Tyler Durden, Founder of Zero Hedge  (More by ZH here)    

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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