Finance Basic To Advance Level Knowledge

Over at Cafe Hayek, Russ Roberts takes on Paul Krugman's claim that most studies show fiscal policy tightening will stall a recovery rather than help it: Unfortunately, Krugman doesn’t provide a link to those “many studies” of the historical record. Maybe he was busy or simply didn’t have room to provide them. But I will just mention that in 1946, federal spending fell about 55% when the war ended. The Keynesians predicted a horrible depression. Yet despite the release of 10 million people into the labor market with demobilization private sector employment boomed and the economy thrived . That’s a great natural experiment. I am eager to read any of the alleged many studies of the historical record. Like Roberts, I am skeptical about the ability of discretionary fiscal policy to stabilize the business cycle.  His critique, however, is too quick to embrace the popular view that fiscal policy consolidation actually improves the economy.  On this point, Krugman is correct th...

Hard money advocates have been taking a beating in the blogosphere over the past few days, complements of Matthew Yglesisas , Paul Krugman ,  Mike Konczal , and Ryan Avent .  These critics make some good points about the hard money view.  Here is Avent's critique: The hard money approach is atrocious economics. I don't think it's outlandish (or even particularly controversial) to say that the biggest difference in the outcome of the Great Recession and the Great Depression was the change in central bank approach to policy. An economic catastrophe was averted. What's more, hard money is a great force for illiberalism. Sour labour market conditions fuel anger at the institutions of capitalism and free markets. And when countries are denied the use of normal countercyclical policies, they quickly reach for illiberal alternatives like tariff barriers. These points are often overlooked by hard money supporters.  There is, however, an even bigger problem for them....

Amidst all the U.S. budget talk last week, the IMF decided to weigh in by noting the U.S. lacked a "credible strategy" to handle its public debt.  Now Standard & Poor's has decided to pile it on by downgrading U.S. public debt from stable to negative.  From the FT: “We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns..." Between this and the rumors of a possible Greek debt restructuring , global markets are roiling.  If this turns ugly, then Fed should be ready to accommodate the spike in global demand for dollar-denominated money.