The Kroog Versus Harvey

Paul Krugman talks G-20, Austerity Hysteria, and the rate of insanity.

But even stranger, in a way, is the power of invisible bond market friends, who will reward you if you just scourge yourself hard enough. Consider this article in Reuters, which tells us that

A market backlash against countries seen to be dragging their feet on cutting debt and deficits has sparked budget cutbacks all over Europe as governments try to rein in spending.

This seems to imply that countries that haven’t dragged their feet have been rewarded, right? And this is often reported as something that has, in fact, happened — because it’s what’s supposed to happen.

But the rewards to austerity remain, well, invisible. Ireland’s risk spreads are worse than Spain’s, even though Ireland wasted no time on self-flagellation while Spain hesitated. Market confidence in Greece has declined since the government accepted the IMF austerity plan.

Strange: it’s as if bond markets don’t believe that short-term pain that doesn’t improve your long-run budget prospects, but does lead to depression and deflation, makes you a safe bet. But I’ve got an invisible 6-foot rabbit over here who says they’re wrong. Hello, Mr. Smith.

Sadly, it seems the G-20 has gone all in on cutting spending across the board.

Leaders of the world's most important economies agreed to ambitious targets for getting deficits under control, pledging to cut them in half by 2013, according to a statement made following the G-20 summit this weekend in Toronto. 

Republicans here of course will demand more, much more...and they will demand those cuts all come from spending.  The results will be another Hoover 1937 style plunge into the economic abyss.  The suffering will be brutal.

But it will come.