Posted on Monday 29 November 2010
Krugman starts out with a little snark:
The best thing about the Irish right now is that there are so few of them. By itself, Ireland can’t do all that much damage to Europe’s prospects. The same can be said of Greece and of Portugal, which is widely regarded as the next potential domino. But then there’s Spain. The others are tapas; Spain is the main course.
Krugman goes on to talk about the problems that Spain is having and the danger it poses for the world economy.
So Spain is in effect a prisoner of the euro, leaving it with no good options. The good news about America is that we aren’t in that kind of trap: we still have our own currency, with all the flexibility that implies. By the way, so does Britain, whose deficits and debt are comparable to Spain’s, but which investors don’t see as a default risk. The bad news about America is that a powerful political faction is trying to shackle the Federal Reserve, in effect removing the one big advantage we have over the suffering Spaniards. Republican attacks on the Fed — demands that it stop trying to promote economic recovery and focus instead on keeping the dollar strong and fighting the imaginary risks of inflation — amount to a demand that we voluntarily put ourselves in the Spanish prison. Let’s hope that the Fed doesn’t listen. Things in America are bad, but they could be much worse. And if the hard-money faction gets its way, they will be.
I’m not an economist, but I see these things as a zero-sum game. For one economy to win, another one must lose. I wish I had time to expound on this further.