Friday, February 6, 2009


This article by Paul Krugman is worth reading and considering.

What if we are going into a period of long term deflation? Are you really ready for that in your portfolio?

I guess getting into cash and getting ready to invest in companies selling buttons and shoes might be a good idea.

absent a change in fiscal policy, CBO projects that the shortfall in the nation’s output relative to potential levels will be the largest– in duration and depth– since the Depression of the 1930s.

This really should be the key point in the stimulus debate. Yes, the effects of fiscal policy are uncertain; yes, running up large debts is risky; but doing nothing is even riskier, because there’s a high probability that if we don’t act strongly deflation will get embedded in the economy. We may be damned if we do, but we’ll almost surely be damnified if we don’t.

The paradox of thrift is the best-known example: when everyone tries to save more in an economy in which interest rates are up against the zero bound, everyone’s income falls, and we’re worse off than before. The paradox of deleveraging has gotten currency, too: everyone tries to shrink their balance sheet, and the result is plunging asset prices, which leave everyone worse capitalized than before.

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