"It's a depression"

Joshua Holland: Let me ask you first about a somewhat provocative word in your title, the D-word. What makes this a depression rather than a so-called “Great Recession” that we’ve heard so much about?

Paul Krugman: A recession is when things are going down, when the economy is heading down. A depression is when the economy is down, and stays down for a long time. We have the Great Depression, which was more than a decade. There were two recessions in there and there were two periods that were recoveries in the sense that things were getting better, but not much better. The whole period was a period that was really terrible for America and for the world. We’re in a period like that right now. Not as bad as the Great Depression, but that’s not much to recommend it. It’s a sustained thing. We’re now in year five of very high unemployment with terrible prospects for young people. It’s a depression.

JH: It’s the politics. Last year when our credit was downgraded it wasn’t downgraded because of any economic reality, but because Congress couldn’t get it together to lift the debt ceiling.

What about the bond markets? We’re hearing again and again that they’ll punish us if we don’t cut Social Security or if we don’t transfer healthcare costs onto elderly retirees. Have we seen any evidence for this? Is there anything behind this assertion?

PK: Gosh, if you believe the people saying that you would have lost a lot of money. I know people have lost a lot of money doing that. The bond markets are willing to lend America -- the US government -- long-term money at about 1.7 percent as of right now. That’s ridiculously low. The index bonds that are protected from inflation actually have a negative interest rate. The bond markets are saying they’re worried about economic stagnation. They’re worried there aren’t going to be investment opportunities because the demand is so weak. So they’re going to park their money in US government debt, which is considered safe. The last thing you should be worrying about, at least according to the bond market, is those deficits. Those are not the problem right now.

JH: We’re not the only ones who have been afflicted by this scourge of irrational deficit hysteria -- the idea that we should cut spending when private sector demand is deep in a hole. Let’s talk about Europe. Are we headed toward the end of the European economic union? Basically, as I understand it when you look at the very heavily indebted countries, they’ve essentially created a gold standard. They can’t devalue their currencies and can’t do any of the monetary tricks that one would logically pursue in these circumstances.

PK: They created something that’s actually worse than the gold standard. If you’re serious about economic history then you know the gold standard was a major reason that the Great Depression got as bad as it did. But at least countries had their own currencies. All they had to do was say all right, enough of this gold standard business, and they could escape. Now it’s much harder.

I don’t see how Greece stays in the euro. Leaving will be terrible, but staying is a no-hope situation. They will leave. Once people see that can happen, there will be in effect bank runs in Spain and Italy, which are much bigger players. That can only be contained if European elites start to behave very differently. They have to say, wait a second -- punishing people for their alleged fiscal sins is not the priority now -- saving the euro is. That means open-ended lending to the banks and the governments of those countries. It means having a much more expansionary and somewhat inflationary monetary policy. Maybe that will offer enough hope to save the system. It’s moved pretty fast now. I think you can see that there’s quite a large chance that there will be no euro a year from now.