Krugman is a fool. His approach is what Japan followed, and look where it finds itself today: http://www.scribd.com/full/27462738?access_key=key-4s3y4h3awiy5kjr3twu http://www.nytimes.com/2009/02/06/world/asia/06japan.html?_r=3&hp=&pagewanted=all Any nation following Krugman's advice will eventually see the destruction of it's currency and ruin. Then you'll need gold for bread, just like in Zimbabwe: http://www.youtube.com/watch?v=7ubJp6rmUYM "An increase in the quantity of money or fiduciary media is an indispensable condition of the emergence of a boom. The recurrence of boom periods, followed by periods of depression, is the unavoidable outcome of repeated attempts to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. The breakdown appears as soon as the banks become frightened by the accelerated pace of the boom and begin to abstain from further credit expansion. The change in the banks' conduct does not create the crisis. It merely makes visible the havoc spread by the faults which business has committed in the boom period. The dearth of credit which marks the crisis is caused not by contraction but by the abstention from further credit expansion. It hurts all enterprises not only those which are doomed at any rate, but no less those whose business is sound and could flourish if appropriate credit were available. As the outstanding debts are not paid back, the banks lack the means to grant credits even to the most solid firms. The crisis becomes general and forces all branches of business and all firms to restrict their activities. But there is no means of avoiding these consequences of the preceding boom. Prices of the factors of production both material and human have reached an excessive height in the boom period. They must come down before business can become profitable again. The recovery and return to "normalcy" can only begin when prices and wage rates are so low that a sufficient number of people assume that they will not drop still more." Ludwig von Mises
While I sorta disagree with Krugman, there's really very little logic in your statements above. Japan and Zimbabwe are two outcomes that are about as diametrically opposed as they could be. So how exactly do you argue that Krugman's advice leads to both conditions?
Because that's what happens in a deflationary environment, the currency appreciates. Until the deflation has run its course, at which point the economy flips into massive inflation and the currency plummets. Japan isn't there yet, but they're getting close...
As I have remarked many times on Japan, this is a rather common "received wisdom". On what metric is Japan "getting close"? What do you make of the fact that people have been warning of Japan "getting close" for about 20 odd years now?
Because the money that was borrowed at ridiculously low rates in Japan and invested in the US, Australia, etc, is heading back home.
On the metric that they are running out of domestic savings to fund their debt issuance. As Japan increasingly needs to go to the foreign credit markets for funding, they will have to either raise interest rates or monetize the debt. And with their debt already standing at over 200% of GDP, it won't take very long to reach a tipping point. The same thing I make of the folks who were warning as far back as the '90s that we were headed for another depression and credit crisis here in the U.S. Just because they were early doesn't mean they were wrong, it just means they underestimated the lengths and duration which governments and central banks can manipulate markets to keep them propped up or the "illusion" of stability alive before the tipping point is reached. Nature can be delayed, but never denied. And one of the biggest mistakes most people make is to project the recent past into the indefinite future. Many people believe that because Japan has been mired in deflation for 20 years, it will continue indefinitely simply because that's what they've gotten used to seeing in Japan over the last 20 years. Big mistake.
Since 2002? How long does this phucking take? Or are you only counting the increasing strength from 2007?