Krugman Speaks (in Vietnam)

Krugman thinks the danger of continued free fall may have passed but that recovery could take a long time. Comparing the world economy today to the stagnation of Japan's lost decade, he suggested recovery could take 5-10 years.

From Bloomberg:

Global Economy Free-Fall May Be Ending, Krugman Says

“All of the indicators are telling the same story,” he said. “Things are getting worse, but they’re getting worse more slowly.”

While the first year of the current global economic crisis resembles the first year of the Great Depression, further declines along the lines of the 1930s-era financial collapse are unlikely, Krugman said.

“I don’t think we’ve hit bottom, but the bottom is not too much further below us,” he said. “My big concern is that we don’t hit the bottom and bounce, we hit the bottom and stay there. It’s not obvious where recovery comes from.”

A global economic stabilization may hurt the U.S. dollar, as will external American deficits, Krugman said.

“The U.S. dollar is going to fall quite a lot, or at least significantly,” he said. “The demand for dollars has been temporarily inflated by the crisis. Good news is actually bad news for the dollar. If things stabilize, then the safe-haven demand for dollars falls off.”

China’s government in March suggested the creation of a new international reserve currency to replace the dollar.

“I view the Chinese agitation about a new currency as basically an attempt to have somebody rescue them from their own investment decision,” Krugman said. “China bought too many dollars. Now it’s looking at it and saying, ‘we’re going to lose a lot of money on this investment’.”