« Links for 4-21-14 | Main | 'House Prices and Secular Stagnation' »

Monday, April 21, 2014

Paul Krugman: Sweden Turns Japanese

Can you say, "sadomonetarist"?:

Sweden Turns Japanese, by Paul Krugman, Commentary, NY Times: Three years ago Sweden was widely regarded as a role model in how to deal with a global crisis. ... Sweden, declared The Washington Post, was “the rock star of the recovery.”
Then the sadomonetarists moved in..., the Riksbank — Sweden’s equivalent of the Federal Reserve — decided to start raising interest rates. ...
Lars Svensson, a deputy governor at the time ... vociferously opposed the rate hikes. Mr. Svensson, one of the world’s leading experts on Japanese-style deflationary traps, warned that raising interest rates in a still-depressed economy put Sweden at risk of a similar outcome. But he found himself isolated, and left the Riksbank in 2013.
Sure enough, Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.
So why did the Riksbank make such a terrible mistake? ... At first the bank’s governor declared that it was all about heading off inflation... But as inflation slid toward zero..., the Riksbank offered a new rationale: tight money was about curbing a housing bubble... In short, this was a classic case of sadomonetarism in action. ...
At least as I define it, sadomonetarism ... involves a visceral dislike for low interest rates and easy money, even when unemployment is high and inflation is low..., they don’t change their policy views in response to changing conditions — they just invent new rationales. This strongly suggests that what we’re looking at here is a gut feeling rather than a thought-out position. ...
Where does this gut dislike for low rates come from? At some level it has to reflect an instinctive identification with the interests of wealthy creditors as opposed to usually poorer debtors. But it’s also driven, I believe, by the desire of many monetary officials to pose as serious, tough-minded people — and to demonstrate how tough they are by inflicting pain.
Whatever their motives, sadomonetarists have already done a lot of damage. ...
And they could do much more damage... Financial markets have been fairly calm lately... But it would be wrong and dangerous to assume that recovery is assured: bad policies could all too easily undermine our still-sluggish economic progress. So when serious-sounding men in dark suits tell you that it’s time to stop all this easy money and raise rates, beware: Look at what such people have done to Sweden.

    Posted by on Monday, April 21, 2014 at 12:33 AM in Economics, Monetary Policy | Permalink  Comments (22)

          


    Comments

    Feed You can follow this conversation by subscribing to the comment feed for this post.