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The Greatest Controversy of Economic Between Paul Krugman and Niall Ferguson English

    “For historians each event is special. In contrast, economists think that there are patterns in the data.”, Kindleberger, a great economic historian, said. This on the 14th of October, in Seoul, there was a great controversy of economics between Paul Krugman and Niall Ferguson. These great scholars’ dispute shows not only their thinking about the currently economic situation but how the great scholars insult the opponents. Krugman, the people call him the best economist writer after Keynes died, called Ferguson “a poser” in the New York Times while Ferguson who speaks elegant British English called Krugman “a patronizer” in the Financial Times. In the middle of this controversy, Ferguson called the scholar who won a Nobel Economics Prize “a vulgar Keynsian”.

    This discussion was begun in April 2009. The first time, they discussed about the U.S. bonds. According to Ferguson, the stimulus policy of the US government would make a massive quantity of U.S bonds. These things would cause pressure to raise interest rates. Finally it would make the value of the Dollar collapse. However, Krugman told that his theory wasn’t worthy. According to him, the present economic situation is in the liquidity trap in which any interest rates can’t be raised. It means that now there is the excessive liquidity in the monetary market, and the excessive liquidity is able to absorb massive quantity of bonds and makes global savings be expanded. Expanded global savings would prevent interest rates of bonds from being raised. However, he made a condition for his explanation. He said, “The only thing that might drive up interest rates is that people may grow dubious about the financial solvency of government.” Now, 18 months later from that time, the theory of Ferguson seems to be wrong even though Ferguson insists that interest rates suddenly would lift up, and the purchasers of U.S bonds like China were already scared of the risk.

    Now they debate not only the bonds but all economic things. According to Ferguson, the U.S.’ twin debts are very serious. The health care reform Obama administration has made would increase the huge debts more. Even the extremely positive forecast the White House made predicts the debts would be more than 100% of the U.S.’ G.D.P. It would make fears about the bonds to purchasers, so they would avoid buying the bonds. Then, interest rates of the bonds would go up, and the value of the dollar would collapse. Finally a hyper inflation will be come.

    However, Kurgman said all Ferguson’s thinking was extremely negative predictions, so it couldn’t be true. When a reporter asked him whether the logic of Ferguson has the weakness or not, he said, “I don’t find any specific weaknesses in what he said. As far as I can make out, it was all weak. Was there any argument there? It was all assumptions that terrible things might happen, in which there is no evidence.” According to Kurgman, the current economic situation is a repetition of the other financial crisises. Especially the current economic is very similar to the Great recession. Only shadow banking which means financial commodities are out of regulation like derivative is different from that time. Krugman focuses on the high unemployment which will make a deflation. To avoid the deflation, the government should use the stimulus policy. He said, “There are times, and this is one of them, when very simple Keynesian analysis is effective. The tragedy of policy in today’s world is that we have tools, but we choose not to believe them and choose not to use them.”

    In front of Krugman, Ferguson said, “If Keynes was here, I wish he were, he would say ‘don’t listen to this vulgar Keynesian with this remedy of printing money.” Ferguson thinks the current economic situation is very different from the Great recession. Only the U.S. is similar to that time, but the rest of the world are making up asset bubbles because of the influence of the stimulus policies of the U.S government. He said that even if the U.S government used a stronger stimulus policy, they couldn’t rescue a jobless person in Michigan from unemployment. He thinks solving the structural problems is more important. Therefore, the stimulus policy without solving the structural problem is just printing dollars that will bring other bubbles and fluctuation of currencies. Ferguson said Krugman, who ignored the complication of the real finance, retreated to a parallel universe where the theory of his economics core 101 class at Princeton is more important than the complication of the real financial world.

    Maybe there are many reasons why Ferguson and Krugman are extremely different. In my opinion, the thinking, which market is the most important to them, is the biggest reason. Ferguson focuses on the monetary market while Krugman concentrates on the unemployment rate. When Ferguson thinks printing money would collapse value of the dollar and birth inflation, Krugman thinks the high unemployment would bring deflation. However, in the real world, we can’t see both the inflation and deflation yet. In the real world, the financial and monetary markets’ situations are very good while the other markets face recession. The high unemployment rate proves the other market’s recession.

    In spite of the huge stimulus policies, why doesn’t the America economy get better? First of all, the money the Obama government input has escaped from the U.S to other countries because the consumers have been buying the commodities which are from China or other countries. As a result, the effect of the stimulus policies has been reduced. Secondly, the health care reform and investing education, the most important things of the stimulus policies, can’t make any effect in short term period. Even these things seem to waste money in a short term period.

    Moreover, the currency defenses of other countries disturb America to recover from the recession. In fact, during a recession such as the current American economy, prices of commodities should go down. However, now if the price of a commodity which is from a foreign country, Wall Mart sells, falls, the foreign countries governments drives their currency also go down. As a result, a company of the commodity can avoid damages. Low value of currency transfers economic damages to other countries. In additional, it motivates other countries also to do it. It is called Currency war. This would make every country die. This is the worst thing we can imagine. Kindleberger said the most important lesson of the Great Recession is that we should avoid the currency war. Now the Asian central banks who have huge dollars would rather have the stable economic than the profits of the U.S bonds because low values of their currencies in stable economic drive them do economic growth. That’s why the central banks of Asian countries don’t stop buying the U.S bonds unlike Ferguson’s prediction.

    There are many reasons that prevent deflation even though America has around a 10% unemployment rate. First of all, the world has gotten better since 1930’s, and many countries have good welfare systems. As a result, the impacts of the 10% unemployment now are smaller the impacts of it in 1930’s. If the price of a product falls, the supply of the product also would be reduced. However, the currency defenses of Asian countries disturb this progress. Moreover, the financial industry, the most important industry of the U.S, is making huge money in the other countries’ asset bubbles. In additional, the currency defenses of the other countries make investors expect that the value of the currencies will be raised. It gives them the potential profits. Therefore, I think that price system, was broken in this complicated situation.

    Then what should the U.S. government do? First of all, the U.S. government shouldn’t use the protective trade policies which means increasing the trade tax because if the U.S government did it, the other countries also would use it. These things would cause a trade tax war. The U.S. government should invest in education which increases the U.S. potential growth and is why money moving to the other countries is difficult. However, the current fiscal policies should be balanceable more like Ferguson said. The U.S. government needs the other policies that help reduce the debts. Yet, the U.S. government can’t use reducing the budget policies because reducing the budget means relatively increasing tax to the low and middle income people. Maybe this policy would make a very uncertainty economic situation, so the government shouldn’t touch the taxes of these people to reduce debts. Therefore, the U.S. government should increase taxes of the people who are making big money in the good economic situation like the financial industry and high income people.


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