>I really don't have any feel for the debate to which Krugman makes another
>lucid contribution.
You've got to hand it to Krugman, he's real good at this.
> Yet some questions come to mind:
>
> > Still, massive current account imbalances mean
> > that the surplus countries are holding an ever growing share of their
> > wealth in the deficit countries, a process that cannot go on forever;
>
> But the Japanese are in no position to face massive retaliation if they
>start selling off Treasuries.
You think the U.S. would go nuclear like this if Japanese repatriated some capital? Or if they stopped buying new Treasuries? It'd be political dynamite to shut down the flow of TVs and Discmans; look how gingerly the U.S. puts duties on high-end Eurofoods. And don't forget the EU - they could bring capital home too, and what could the U.S. do? Not to mention U.S. investors, who could diversify out of domestic assets if the dollar weakened.
> > What will work is radical monetary expansion in the demand-constrained
> > economies - Japan definitely, maybe also Europe if necessary.
>
>Do people agree with this? What contradictions would it bring forth?
The fiscal and monetary squeeze in Europe is pure madness. No it's not madness; it's class war against the welfare state and high wages. But he's right that they're demand-constrained. And he's probably right about Japan too - why not monetize bond debt? What do they have to lose at this point?
Doug