Sum Of All Fears

Lecture 1: The sum of all fears Paul Krugman

From Eichengreen and O’Rourke

From Eichengreen and O’Rourke

This wasn’t supposed to be possible: “The central problem of depression-prevention has been solved, for all practical purposes.” Robert Lucas, 2003

And many people said things that look stupid in retrospect …

“If you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God. ” Paul Krugman, 1997

This is not a supply shock …

Japan’s lost decade 9

15.4

8

15.3

7 6

15.2

5

Inflation

4

15.1

3

Real GDP per capita

2

15

1 0

Source: IMF WEO database

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

-2

14.9 1985

-1

Interest rate

14.8

Source: Census, Federal Reserve

Japanese money and prices 200

180 160 140

Monetary base GDP deflator

120 100

Source: Bank of Japan, IMF

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

80

Money and prices in the Great Depression

300 250 200 Prices

150

Base

100

M2

50 0 1929

1931

1933

1935

1937

1939

Source: BEA, Historical Statistics of the United States, St. Louis Fed

Net federal borrowing (annual rate)

1200

1000

800

600

400

200

0 2007I

2007II

2007III

2007IV

2008I

2008II

2008III

2008IV

2009I

Source: Brad Setser

The Fed steps out

Source: Federal Reserve/James Hamilton