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Not Everyone in Finance has Their Head Buried in the Sand….

Paul Krugman asks an interesting question this morning:

“The question is why so many people in finance gravitate toward that view [that emphasizes the dangers of deficits and monetary expansion], and cling to it despite what is at this point overwhelming evidence that it’s wrong.”

He goes on to cite how so many in the world of finance thought that high deficits and QE would lead to higher interest rates, a potential solvency problem in the USA, high inflation, etc.  He goes on to argue that you didn’t need to understand the financial asset world to understand what was going on, but needed a macroeconomic understanding of the liquidity trap concept.  But this can’t be right because there were lots of people in finance (like most of the readers of this website) who understood that the aforementioned concerns were legitimate. And we understood those concepts through an operational understanding of the monetary system, not an understanding of “liquidity traps”. For instance, I’ve consistently, for 5 years, pointed out:

These were important predictions.  And I know lots of other people in the financial world who understood the concepts perfectly well without having to understand what a liquidity trap is.  In fact, all that was required was a basic understanding of the monetary system.  As to why so many people continue to believe these things are problems despite the overwhelming evidence otherwise – my guess is politics rules over reason….

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