Krugman just came out with “The downgrade doom loop”:
It’s not the whole story, but something like this threatens to develop:
1. US debt is downgraded, sparking demands for more ill-advised fiscal austerity
2. Fears that this austerity will depress the economy send stocks down
3. Politicians and pundits declare that worries about US solvency are the culprit, even though interest rates have actually plunged
4. This leads to calls for even more ill-advised austerity, which sends us back to #2
Behold the power of a stupid narrative, which seems impervious to evidence.
Wrong! Should have said: “Behold the power of a stupid ONE SIDED narrative”. Amazingly, almost everyone forgets MONETARY POLICY. Apparently that exists only to “manage” inflation/deflation. That´s where a couple of decades of inflation targeting gets you. As David Glasner reminds us, that´s the problem in the Eurozone also!