Must-Read: Paul Krugman: Cheap Money Talks

Must-Read: Paul Krugman: Cheap Money Talks: “Late last year the yield on 10-year U.S. government bonds was around 2.3 percent, already historically low…

…on Friday it was just 1.36 percent…. Some… blame the Federal Reserve and the European Central Bank, accusing them of engineering ‘artificially low’ interest rates that encourage speculation and distort the economy… largely the same people who used to predict that budget deficits would cause interest rates to soar…. They’re not making sense….‘Artificially low’ mean[s]… excessively easy money… [what generates] out-of-control inflation. That’s not happening…. If anything, developments in the real economies of the advanced world are telling us that interest rates aren’t low enough….

But why? In some past episodes… the story has been one of a flight to safety…. But there’s little sign of such a fear-driven process now…. Most famously Larry Summers, but also yours truly and others… [say] weak demand and a bias toward deflation are enduring problems… [no] return to what we used to consider normal…. Low short-term interest rates for a very long time, and [so] low long-term rates right away….

Raising rates in the face of weak economies would be an act of folly…. What policy makers should be doing, instead, is accepting the markets’ offer of incredibly cheap financing…. There are huge unmet demands for public investment on both sides of the Atlantic…. This would be eminently worth doing even if it wouldn’t also create jobs, but it would do that too…. Deficit scolds would issue dire warnings…. But they have been wrong about everything for at least the past eight years, and it’s time to stop taking them seriously. They say that money talks; well, cheap money is speaking very clearly right now, and it’s telling us to invest in our future.