Question

Read the article below and explain why Krugman believes a recession is imminent. Either agree or disagree with Krugman and explain why.

Paul Krugman Warns an Imminent U.S Recession

Nobel laureate Paul Krugman is possibly the world's most famous Keynesian economist thanks to his position on the New York Times editorial board. And he just joined the growing chorus of voices calling for a US recession in the next two years. The US economy is struggling for two reasons: The scope for a powerful monetary and fiscal response is limited, and the current "leadership" under President Trump lacks the competence to adequately respond to a crisis, during an interview with Bloomberg in Dubai. But moving past the US, Krugman echoed the IMF's finding that the world is "dangerously unprepared" for the coming global recession, citing the slowdown in China, and a Europe inching ever-closer to a eurozone-wide recession, as the two biggest risks the global economy."I wouldn't be as definitive, but it seems pretty likely. There seems to be an accumulation of smaller problems and then the underlying backdrop is that we have no good policy response. The Fed can't cut rates very much, there is, in fact, fiscal space if we were prepared to use it but it's hard to see that this current leadership is going to respond in any kind of nimble way so yeah I think there's better than even odds that we do have a recession." And when the disaster finally arrives, not the US, nor China, nor Europe will be able to bring adequate policy responses to bear to combat the slowdown...because after a decade of rock-bottom interest rates (they're still negative in Europe) and QE central banks are tapped out...and while there is still some wiggle room for the type of Keynesian fiscal-policy response that Krugman is so fond of, he believes governments will lack the political will when the time comes. "I actually see two and one of them is China. I'm in the camp that has been predicting a Chinese crisis over basically inadequate consumption for a long time and it keeps not happening but it does seem to be getting closer to that point. The other is Europe: the euro area is clearly experiencing a slowdown, it is getting closer to recessionary levels already...and there's no recourse. Draghi has no room to cut rates - they're negative already. And there's plenty of room for fiscal expansion...but Germany won't do it. I think Europe is a danger spot that's potentially as big a deal as China."

If another crisis on the magnitude of the great financial crisis were to arise, Krugman - who has admitted in the past that his recession calls have been terribly inaccurate - warned that the world economy is in a far worse a position to respond, thanks to the increase in aggregate debt totals and the lack of quality "leadership." "We're clearly in worse shape. We came into the last crisis with interest rates well above zero, we came into the last crisis with debt substantially lower than it is now...and we came into the last crisis with substantially better leadership...our current Treasury secretary is no Hank Paulson. I think we're in much worse shape. We probably don't have a crisis of that magnitude about to hit us - God help us if we do - but we're in much worse shape to deal with whatever shocks come along than we were ten years ago." While Krugman's predictions certainly sound dire, there is a silver lining to be found: After all, these gloomy pronouncements are coming from the same man who once said the fax machine's impact on modern society would be greater than that of the Internet.   

Answer 1

I agree with Krugman's analysis and I would like to justify the reasons for the same.

As per economics, a recession happens when there is a tremendous slowdown in economic activity. This again happens when there is a slowdown in consumption. People stop buying in fear of job cuts, lower liquidity and start to hoard money. When this happens, companies also start cutting down on production. As an example, the automobile market in India is going through this phase as auto sales have dipped and companies have cut production for 5 months straight now.

This slowdown in consumption basically translates into a low volume of money available in the market for transaction. People rather prefer to store money in banks and other financial instruments wherein they get interest. Also, businesses do not take a loan fearing an inability to pay back the high-interest rates.

This slowdown in consumption is very much profound across two major markets currently as Krugman has mentioned. Europe and China and facing continuous slowdown in consumption with no signs of revival. The only way to recover the market is by infusing liquidity in the system and increase the volume and velocity of money. The way to do this is to cut interest rates. Already interest rates are at rockottom. So we are staring at imminent recession.