Check Out the Cafe

Over at TPM Cafe Book Club, there is a great running discussion of Paul Krugman's book The Return of Depression Economics. The discussion features some of the best economists/ economics bloggers out there, including Dean Baker, Brad DeLong, Mark Thoma, Robert Reich and Krugman himself.

Krugman originally wrote the book in the 1990s in response to the problems buffeting Asia at the time and has revised the book to reflect current American conditions. Krugman describes "depression economics" and the way it is playing itself out as follows:

Right now the world economy is in a nosedive, and understanding what I call "depression economics" -- the weird world you get into when even a zero interest rate isn't low enough, and a messed-up financial system is dragging down the real economy -- is essential if we're going to avoid the worst.

The key thing, when you're in a situation like this, is realizing that normal rules don't apply. Ordinarily we'd welcome an increase in private saving; right now we're living in a world subject to the "paradox of thrift," in which private virtue is public vice. Normally we want to be careful that public funds are spent wisely; right now the crucial thing is that they be spent fast. (John Maynard Keynes once suggested burying bottles of cash in coal mines and letting the private sector dig them up -- not as a real proposal, but as a way of emphasizing the priority of supporting demand.)

The big test for the next few months will be whether policymakers here and abroad can wrap their minds around this Alice-in-Wonderland world. If they can't, nobody knows how deep the rabbit hole goes.

The posts are definitely worth reading for yourself, especially since (as of yesterday) we live in a country that has no monetary policy.