Paul Krugman: Liquidity trap makes future ‘more or less speculation’


Will Hutton has a pretty good interview with Paul Krugman in the Guardian newspaper.  The exchange is quite long, so it gives you a fairly broad understanding of Krugman’s view on the global economy and specific country economies.  What I found especially interesting was Krugman’s admission that we are essentially flying blind.

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The Federal Reserve has hit the zero bound just as Japan had done nearly a decade earlier.  At this point, traditional monetary policy has no effect – we are pushing on a string.  What comes next, nobody knows and Krugman has said as much.

The thing about Japan, as with all of these cases, is how much people claim to know what happened, without having any evidence. What we do know is that recessions normally end everywhere because the monetary authority cuts interest rates a lot, and that gets things moving. And what we know in Japan was that eventually they cut their interest rates to zero and that wasn’t enough. And, so far, although we made the cuts faster than they did and cut them all the way to zero, it isn’t enough. We’ve hit that lower bound the same as they did. Now, everything after that is more or less speculation.

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