One of the reasons, as I explained in my book, for calling our economic crisis a "depression" is that, as was already clear on February 2, when the book was completed, the government was spending trillions of dollars--on top of all the normal expenses of government--to try to arrest the downward spiral and speed recovery. Since then, the expenditures, commitments, and guarantees--all of which represent costs, actual or expected, though many or even most of them will eventually be avoided or recovered--have increased further, and concern has begun to be expressed that the soundness of America's public finance and currency is being undermined by the growing mountain of public debt. The interest rate at which the government borrows to finance the public debt has been rising, and there is even talk, though surely premature, that the government may lose its triple A credit rating!
Remarks by the distinguished macroeconomist Paul Krugman, at a panel discussion of the economic situation published in the current New York Review of Books (June 11), help to bring the problem into focus.
Krugman has been trying for some time, without success, to correct a misunderstanding by the prominent historian (and author of an excellent recent book on the history of banking) Niall Ferguson. Ferguson, who was also on the panel, argued as he has before that the monetary and the fiscal responses to a recession or depression--that is, reducing interest rates by expanding the supply of money, and increasing demand for goods and services by deficit financing of public works--operate at cross purposes. The cost of public works has to be financed by borrowing, and any increase in borrowing raises interest rates and therefore reduces the effectiveness of the monetary response.