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Krugman writes: "It's a variant on the same old story: investors loved these economies not wisely but too well, and have now turned on the objects of their former affection."

Paul Krugman. (photo: NYT)
Paul Krugman. (photo: NYT)


This Age of Bubbles

By Paul Krugman, The New York Times

23 August 13

 

o, another BRIC hits the wall. Actually, I've never much liked the whole "BRIC" - Brazil, Russia, India, and China - concept: Russia, which is basically a petro-economy, doesn't belong there at all, and there are large differences among the other three. Still, it's hard to deny that India, Brazil, and a number of other countries are now experiencing similar problems. And those shared problems define the economic crisis du jour.

What's going on? It's a variant on the same old story: investors loved these economies not wisely but too well, and have now turned on the objects of their former affection. A couple years back, Western investors - discouraged by low returns both in the United States and in the noncrisis nations of Europe - began pouring large sums into emerging markets. Now they've reversed course. As a result, India's rupee and Brazil's real are plunging, along with Indonesia's rupiah, the South African rand, the Turkish lira, and more.

Does this reversal of fortune pose a major threat to the world economy? I don't think so (he said with his fingers crossed behind his back). It's true that investor loss of confidence and the resulting currency plunges caused severe economic crises in much of Asia back in 1997-98. But the crucial point back then was that, in the crisis countries, many businesses had large debts in dollars, so that falling currencies effectively caused their debts to soar, creating widespread financial distress. That problem isn't completely absent this time around, but it looks much less serious.

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-1 # robcarter.vn 2013-08-23 18:51
Well I'll be damned. Bubbles yes usually from Krugman's mouth and many who follow trendy phrases.

But I actually think (perhaps for the first time in my anti-theorists view) Paul Krugman may have got this one about right.

Still I do not agree USD stupid currency exchange numbers today are holdable. I firmly expect to see USD drop in exchange values better than 35% over the next few months and 18 months from now should be about 85 cents AUD/CAD? Even worse in 2 years.

For now I see Singapore Dollar values unsustainable for the same period? Good heavens in Vietnam they sell SQD for 16,700 and AUD 19,200 with CAD close by 20,200 when USD is 21,200+ that ain't right values?
 
 
+1 # m... 2013-08-23 21:55
Though I do think the dollar is not a good bet in any long view.., I think the dollar will rise against most currencies at least in the short to medium term.

Deserved label or not, the US is still the 'safe haven' of choice simply because the perception remains that it is, even if its a case of only being the best run down house in the very bad economic neighborhood.

The Economic Catastrophe is still a reverberating ripple in the Global Economic Pond as it continues to make its wavy way back and forth through the ENTIRE Global system.

It was an earthquake with lots of continuing aftershocks.

Will the Foundation hold..?
 
 
0 # dkonstruction 2013-08-26 07:52
Quoting robcarter.vn:
Well I'll be damned. Bubbles yes usually from Krugman's mouth and many who follow trendy phrases.

But I actually think (perhaps for the first time in my anti-theorists view) Paul Krugman may have got this one about right.

Still I do not agree USD stupid currency exchange numbers today are holdable. I firmly expect to see USD drop in exchange values better than 35% over the next few months and 18 months from now should be about 85 cents AUD/CAD? Even worse in 2 years.

For now I see Singapore Dollar values unsustainable for the same period? Good heavens in Vietnam they sell SQD for 16,700 and AUD 19,200 with CAD close by 20,200 when USD is 21,200+ that ain't right values?


This is the same prediction that has now been made for years by those that are still using a gold-backed understanding of the monetary supply and not one based on the new realities of a fiat money system.

For those interested check out the work by the Modern Monetary Theorists (much of this work seems to be coming out of the Levy Institute at Bard College) such as L. Randall Wray

http://www.amazon.com/Modern-Money-Theory-Macroeconomics-Sovereign/dp/0230368891/ref=sr_1_1?ie=UTF8&qid=1377524959&sr=8-1&keywords=modern+monetary+theory

Also, there are great reading for free on the web at:

http://moslereconomics.com/mandatory-readings/

These are professional economists inspired by the work of Hyman Minsky.
 
 
0 # Charles3000 2013-08-24 04:21
"Bubble" is not a good word to define what happens. It fits the instant situation but it does not describe the time sequence of what really happens. The proper terms are "instability" and "oscillation". With those terms any engineer can tell you what happens. A system is unstable and oscillates in ever greater amplitude cycles until the output is saturated. Why are systems unstable and how can they be made stable? It is an exact science. Positive feedback will always cause instability and our system of capitalism is loaded with positive feedback. One of the Fed chairs once noted his knowledge of the need for negative feedback to stabilize an economic system when he said the Fed's job was to take away the punch bowel when the party gets too hot. It takes a little thinking to see all of the positive feedback in the system and some imagination to conceptualize how negative feedback can be added to stabilize the system. Bandwidth or reaction time is the other important variable. A wide bandwidth or "fast" system is characterized by short cycle times when it goes unstable while low bandwidth or slow systems have high amplitude, long cycle time periods of instability. Here, our Fed and the entire central banking system is notoriously "slow". They do something and it takes months for anything to happen. That leads to the high peaks and low valleys and long cycle times we are experiencing. Dr. Krugman should chat with a control system engineer to understand what is happening.
 
 
+1 # RMDC 2013-08-24 05:19
Krug misses the whole point of the BRICS. The combined economies of the BRICS nations is larger than the combined economies of Europe and the US. But the West dominates the rules for international trade. The BRICS would like to create a world trading system that works outside of the rules that privilege the US and Europe.

The BRICS as a trading pact is a good balance to the US/Euro. Since capitalism is a system based on a balance of forces, it needs a counterweight to the West, if 2nd and 3rd world nations are ever to gain wealth relative to the west.

Western investors are just predators looking only for a short term profit or meal. If I were a BRICS nation, I would tell western investors to keep their money at home. The vision of the BRICS nations is long term and also about national development. Western capitalism is just the opposite -- about looting, pillaging, and running to the next wounded victim.

But Krug is an apologist for western capitalism. That's why his fingers are crossed. In the long term, the center of world trade will move toward the BRICS nations, as the west sinks into neo-feudalism and poverty for most of its population. The BRICS nations actually make commodities; the west makes fewer and fewer products every year (other than weapons and entertainment).
 
 
+2 # dbriz 2013-08-25 15:30
"Krug" misses lots of things.

His Nobel prize winning work merely proves that a good heart surgeon does of necessity make a decent general practitioner.

You are correct to point out that the BRICS nations seek a trading counterbalance to assuage the systemic unfairness built into the western created NAFTA, WTO and IMF political power. As they should.

Where many err is to conflate all this with capitalism.

These current machinations take place within the context of what should more accurately be called "Corporatism" or, "crony capitalism". Think more of a mercantile system and you are closer to reality.

Capitalism is at it's heart, a pricing system based on free market supply and demand. It can be argued that examples of "pure" capitalism are difficult to find. True enough.

Yet what is condemned as "capitalism" today more closely resembles National Socialism.

Featuring rigged markets with price fixing, artificial interest rates, market manipulation, poor investments propped up with funny money and a banking and corporate system deemed "too big to fail".

Krugman has offered little solution but "more of the same", only faster.
 
 
0 # dkonstruction 2013-08-26 07:57
Quoting dbriz:
"Krug" misses lots of things.

His Nobel prize winning work merely proves that a good heart surgeon does of necessity make a decent general practitioner.

You are correct to point out that the BRICS nations seek a trading counterbalance to assuage the systemic unfairness built into the western created NAFTA, WTO and IMF political power. As they should.

Where many err is to conflate all this with capitalism.

These current machinations take place within the context of what should more accurately be called "Corporatism" or, "crony capitalism". Think more of a mercantile system and you are closer to reality.

Capitalism is at it's heart, a pricing system based on free market supply and demand. It can be argued that examples of "pure" capitalism are difficult to find. True enough.

Yet what is condemned as "capitalism" today more closely resembles National Socialism.

Featuring rigged markets with price fixing, artificial interest rates, market manipulation, poor investments propped up with funny money and a banking and corporate system deemed "too big to fail".

Krugman has offered little solution but "more of the same", only faster.


dbriz, respectfully, capitalism is at it's heart a system of production not a pricing system. If we understand capitalism as a pricing system (this is the old "buy cheap sell dear" model) then we have a hard time explaining what makes capitalism "distinct" from earlier forms of trade and commerce.
 
 
-1 # dbriz 2013-08-26 11:28
dk: I could have made a better choice of phrasing. Mea Culpa.

My main point I hope, was better made.
 
 
0 # kalpal 2013-08-24 07:49
Seems like the guys who hold PhD's in BS economics are willing to make predictions that if wrong will be forgotten by the time its obvious that they are wrong and so will proceed to spout more drivel because no one will ever dredge their ignorance out of the past and ask them to plea a mea culpa.
 
 
0 # RicKelis 2013-08-24 12:09
FYI-from the article: Paul Krugman: [Evidently] investor loss of confidence and the resulting currency plunges caused severe economic crises in much of Asia back in 1997-98. But [then] many businesses had large debts in dollars; falling currencies caused debts to soar, creating widespread financial distress. [Now] that problem looks much less serious. In fact, the biggest threat right now is that [emerging markets'] central banks will raise interest rates sharply in an attempt to prop up their currencies, which isn’t what they or the rest of the world need right now. Banks gone wild were at the heart of the commercial real estate bubble of the 1980s and the housing bubble that burst in 2007.
 
 
0 # RicKelis 2013-08-24 12:11
FYI, from the article -abstract, pt.1: So, another BRIC hits the wall. It’s hard to deny that India, Brazil, and a number of other countries are now experiencing similar problems. And those shared problems define the economic crisis du jour. It’s the same old story: Western investors loved these economies not wisely but too well, and have now turned on the objects of their former affection, pouring large sums into emerging markets. Now they’ve reversed course. Result: 1) India’s rupee, 2) Brazil’s real 3) Indonesia’s rupiah, 4) South African rand, 5) Turkish lira [are plunging]. This reversal of fortune [doesn't] pose a major threat to the world economy; [at least] I don’t think so.And this latest financial turmoil raises a broader question: Why have we been having so many bubbles? For it’s now clear that the flood of money into emerging markets was yet another in the long list of financial bubbles over the past generation: 1) housing bubble, 2) dot-com bubble; 3) [90s] Asian bubble; 4) [80s] commercial real estate bubble.
 
 
+2 # RicKelis 2013-08-24 12:13
FYI, from the article -abstract, pt.2:
The ’50s, the ’60s, even the troubled ’70s, weren’t nearly as bubble-prone. The loose-money policies of Ben Bernanke and, before him, Alan Greenspan, pushed down interest rates, but the Fed was only doing its job. We’ve had a whole generation of successive bubbles — and inflation is lower than it was at the beginning. O.K., the other obvious culprit is financial deregulation — not just in the United States but around the world. Cross-border flows of hot money [are] at the heart of the crisis now erupting in emerging markets — and central to the ongoing crisis in Europe, too. In short, the main lesson of this age of bubbles — a lesson that India, Brazil, and others are learning once again — is that when the financial industry is set loose to do its thing, it lurches from crisis to crisis.
 
 
+2 # James38 2013-08-24 17:29
Well said RicKelis. But we need to proceed to the next level of analysis.

We need to realize that all wealth and social power comes from the entire combined efforts of all citizens. No person becomes wealthy by themselves.

Governments exist to organize and direct the use of the wealth and power that society generates beyond basic necessities.

Well directed, that wealth and power creates healthy abundant food, good infrastructure, universal and excellent education, universal health care, and an abiding respect for the planet we all live on.

Poorly directed, Governments allow (or become) individuals who sequester huge amounts of society's surplus energy, becoming obscenely wealthy and creating useless and destructive stuff like wars, immense ornate palaces, resorts, yachts, and mansions, none of which have anything to do with respect for or the well-being of the citizens who created the wealth in the first place.

We have heedlessly allowed this sort of manipulation and sequestration of wealth throughout most of human history, but overpopulation, Climate Degradation, and overuse of resources has brought us to the brink of Global disaster.

The oncoming disasters of Climate Change will destroy the lives of all, eventually including the wealthy, who will have nowhere to hide.

A Global awakening is absolutely necessary. Accurate information is the key.

Continued-
 
 
+2 # James38 2013-08-24 17:32
Concluding

Accurate information is available. Here are some sources:

Read “Storms of My Grandchildren” by Dr. James E Hansen

“Merchants of Doubt” by Naomi Oreskes and Erik Conway

“Super Fuel – Thorium the Green Energy Source for the Future” by Richard Martin

Another excellent book: “Thorium Power Cheaper Than Coal” by Dr Richard Hargraves.

Also see this presentation by Kirk Sorenson of Flibe Energy:

http://www.youtube.com/watch?v=P9M__yYbsZ4

Or this reference to the same lecture:

Thorium: An energy solution - THORIUM REMIX 2011 - YouTube

Humanity has outgrown the possibility of remaining ignorant of our effect on Earth.

If we remain ignorant and unaware of our abuse of the planet, we will perish.

We need to learn to respect our planet.

It is our only home. It used to seem huge, but it is actually
small and fragile.
 
 
0 # FDRva 2013-08-24 23:45
What a pity that the Democratic Party in the Obama era has become so 'bubble-friendly.'

Banker/contributors doubtless will be better bailed out than needy school systems.

How very biparti$an of the president.

Has he resigned yet--or does he know no shame??
 
 
0 # dkonstruction 2013-08-26 08:07
Dean Baker (the Center for Policy Studies) was one of the few that said we were in a housing bubble and saw the crash coming before it happened. He now persuasively argues in this recent piece that we are in a similar bubble today and that nothing was in fact "solved" by the way we came out of the crisis (if in fact we really have come out of it at all). It's a sobering if not frightening piece of what's still to come.

This is what Krugman should now be focusing on as well.

http://www.project-syndicate.org/blog/the-reemergence-of-housing-bubbles--should-we-be-worried--by-dean-baker

Krugman's problem is that he essentially has no analysis or critique of capitalism as a whole. If he did, for example, he would talk about how crisis for capitalism is not the problem but rather "the fix" i.e., it is how the system corrects itself and thus it is important to understand how the system comes out of a crisis in order to understand what sets up the next one (as well as the fact that major economic crises for capitalism are ultimately always crises of profitability something Krugman just simply does not talk about (unlike, for example, writers such as Andrew Kliman in The Failure of Capitalist Production or Chris Harman in Zombie Capitalism)
 

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