Krugman Sounds the "All Clear"?

Reuters reports that speaking in Abu Dhabi yesterday, economist Paul Krugman suggested that the world economy is stabilizing and that, having avoided "utter catastrophe", should register modest growth this year, further noting that

I would not be surprised to see flat to positive GDP growth in the United States, and maybe even in Europe, in the second half of the year.

He went on to argue, however, that this does not mean all is well. In fact, we may face a protracted stagnation similar to Japan's lost decade is sufficient action is not taken. In particular, he noted that export led growth is not an option as the entire global economy is in the same fix and we cannot "export to another planet".

Nevertheless, this is another Minsky moment. We have had an economic near death experience that has been rather quickly averted by both the automatic stabilizers of large government and by, in this case, unprecedented fiscal and monetary interventions.

And it seems clear to me that, particularly in this instance, with $2 trillion dollar deficits in the U.S. and massive increases in the money supply, in the medium term we will face much higher inflation and interest rates than we have seen in a long time coupled with, as Krugman noted, much tighter export markets. And for Canada, this could mean a return to the "stagflation" of the 1970s. Not a recession, but surely miserable.