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View the article online at http://citywire.co.uk/wealth-manager/article/a727821

Krugman: we've stopped hitting our heads with baseball bats

by Danielle Levy on Jan 14, 2014 at 11:29

Krugman: we've stopped hitting our heads with baseball bats

Nobel prize winning economist Paul Krugman has attributed an improving economic backdrop in the US to the government's decision to no longer do 'stupid things' to itself.

Nonetheless, he says the threat of deflation and stagnation remains very real in the US and Europe in spite of economic improvements.

Commenting on the state of the US economy, CNBC reported Krugman's comments to a conference in Sweden: 'We've been hitting ourselves over the head with a baseball bat. We've now stopped hitting ourselves over the head with a baseball bat. So we start to feel better,'

Krugman predicts a 'pretty decent' year of growth ahead for the US, as there is less of a focus on significant spending restraint. This follows the automatic spending cuts as a result of the sequester and the recent 2% rise in the payroll tax that funds social security.

'We've reduced the deficit too fast. It's been a major source of slowdown in growth. We think that the fiscal austerity in the US has subtracted between 1.5 and 2 percentage points off growth in 2013,' he said.

'If you stop doing stupid things to yourself, your situation improves.'

In Europe, meanwhile, he has long-term concerns. He takes the view that austerity packages imposed on some of the peripheral nations may have worsened the situation.

For example in Ireland, Spain and Italy, he notes that where governments have cut spending, this has not only stalled economic growth but has also worsened debt to GDP ratios in spite of spending cuts.

'All of the troubled countries have in fact seen their debt rise as a percentage of GDP,' he said. 'The whole situation in Europe has been contained, I would argue primarily because of the ECB.'

He also has deflationary concerns about the US and Europe. where he says the two areas could be falling into a 'secular stagnation'.

'All of our economies are operating far below on what we thought we could produce. We've seen this movie...the western world is very much following the track of Japan in the 1990s,' he said.

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