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Richmans' Trade and Taxes Blog
Krugman: G-20 summit will continue the depression
In his blog entry today, Paul Krugman realized, based upon the results of the G-20 meeting, that the world's governments are not going to run budget deficits to pull the world out of the depression. Here is a selection:
Krugman has almost figured it out. But he hasn't yet figured out that chronic trade deficit countries cannot afford to run huge budget deficits without risking bankruptcy.
I first identified the current depression in an October 7 2008 blog entry entitled, "A Worldwide Depression Started this Week." I based my conclusion upon the fact that only balanced trade can grow forever; mercantilism eventually bankrupts the trade deficit countries, spoiling the markets for the mercantilist countries.
Eventually, I discovered that John Maynard Keynes had the same theory. He tried to set up a post-World War II institution that would maintain balanced trade in order to avoid depressions like the current one. But instead we got the WTO and the inadequate ideology that even imbalanced free trade is good.
I also noted in October 2008 that the worldwide depression would not end until the mercantilist countries cut their domestic savings in order to balance their trade. I argued that this would not occur voluntarily, because countries don't readily switch away from long-term growth policies that have been working for them.
I also argued, at the time, that the trade-deficit countries, such as the United States, could get out of the worldwide depression simply by balancing trade. That is still true. But at the G-20 summit, President Obama promised (in the communique) not to do anything before 2014. That particular part of the communique reads:
Going into the summit, there was a bipartisan coalition of legislators favoring tariffs to force China to let the yuan rise. President Obama had asked them to wait until after the G-20 summit before taking action. Little did they know that President Obama would undercut them at the summit.
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