Barry and I have updated our graphs here.
To recall: the red lines show what happen when governments respond to a worldwide economic crisis with monetary and fiscal stimulus. The blue lines show what happens when governments stick to monetary and fiscal orthodoxy. All very purgative and morally satisying no doubt, except that it led directly to the election of Adolf Hitler (something that I have been meaning to blog about for a while, but now I have to prepare for class..)
The first graph in this post is really quite alarming. (It would of course have been nice if there had been Irish data!)
For an individual country, ‘internal devaluation’ is the optimal strategy in our situation. (Optimal given our constraints that is — it is an incredibly lousy option relative to nominal devaluation, or being able to run a counter-cyclical fiscal policy.) But if everyone is doing the same thing, then it becomes collectively self-defeating.
This is a European problem, and requires European solutions designed to support demand and prevent continent-wide deflation.
Paul Krugman is alarmed here.
This is a truly dreadful story which should concern all academics (HT 9th Level Ireland).
Congratulations to Philip for being the joint winner of the 2010 Bhagwati Award, together with his co-author Gian Maria Milesi-Ferreti. Their work has been extremely influential, and this recognition is richly deserved.