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The Return of Depression Economics
Paul Krugman, winner of the 2008 Nobel Prize in economics, shows how today's crisis parallels the events that caused the Great Depression - and explains what it will take to avoid catastrophe.
In 1999, in The Return of Depression Economics , Paul Krugman surveyed the economic crises that had swept across Asia and Latin America, and warned that those crises were a warning for all of like diseases that have become resistant to antibiotics, the economic maladies that caused the Great Depression were making a comeback.In the years that followed, as Wall Street boomed and financial wheeler-dealers made vast profits, the international crises of the 1990s faded from memory. But now depression economics has come to when the great housing bubble of the mid-2000s burst, the U.S. financial system proved as vulnerable as those of developing countries caught up in earlier crises - and a replay of the 1930s seems all too possible.
In this new, greatly updated edition of The Return of Depression Economics , Krugman shows how the failure of regulation to keep pace with an increasingly out-of-control financial system set the United States, and the world as a whole, up for the greatest financial crisis since the 1930s. He also lays out the steps that must be taken to contain the crisis, and turn around a world economy sliding into a deep recession. Brilliantly crafted in Krugman's trademark style-lucid, lively, and supremely informed - this new edition of The Return of Depression Economics will become an instant cornerstone of the debate over how to respond to the crisis.
In 1999, in The Return of Depression Economics , Paul Krugman surveyed the economic crises that had swept across Asia and Latin America, and warned that those crises were a warning for all of like diseases that have become resistant to antibiotics, the economic maladies that caused the Great Depression were making a comeback.In the years that followed, as Wall Street boomed and financial wheeler-dealers made vast profits, the international crises of the 1990s faded from memory. But now depression economics has come to when the great housing bubble of the mid-2000s burst, the U.S. financial system proved as vulnerable as those of developing countries caught up in earlier crises - and a replay of the 1930s seems all too possible.
In this new, greatly updated edition of The Return of Depression Economics , Krugman shows how the failure of regulation to keep pace with an increasingly out-of-control financial system set the United States, and the world as a whole, up for the greatest financial crisis since the 1930s. He also lays out the steps that must be taken to contain the crisis, and turn around a world economy sliding into a deep recession. Brilliantly crafted in Krugman's trademark style-lucid, lively, and supremely informed - this new edition of The Return of Depression Economics will become an instant cornerstone of the debate over how to respond to the crisis.
- GenresNonfictionEconomics
ebook
Published September 24, 2015
About the author
Paul Krugman
361 books1,613 followersPaul Robin Krugman is an American economist, liberal columnist and author. He is Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs, Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times. In 2008, Krugman won the Nobel Memorial Prize in Economics for his contributions to New Trade Theory and New Economic Geography.
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Displaying 1 - 2 of 2 reviews
September 16, 2025
An early warning that depression economics, or demand-side crises, are back on the scene since the 1990s. We are seeing a return of crises which macroeconomic management cannot fix although it should be able to do so. Through a reconstruction of crises in Latin America and Asia in the 1990s, Krugman makes a powerful argument that conventional macroeconomic management was not able to fix certain crises easily, and contrary to common belief, new problems arose without any ready-made handbooks for economic policy makers.
What was the cycle of crises in these countries? Money poured in through global investments. The demand for the local currency went up, and trade deficits rose because of new investments. After some point, this would create problems. For Mexico for example, growth hampered, peronist politics were on the rise, and investors got scared. For Thailand, government had to increase its debt levels to buy back the baht it had just printed to keep the exchange rate fixed (it had printed baht to exchange with new dollars coming in as to avoid the value of the baht going up). In both cases, the reversal of fortune happened suddenly, and foreign investors started turning their back on the country after their so-called "miracle" turned sour.
What could the local policy makers do in such cases? They could either raise interest rates and try to attract new investors, while simultaneously choking zombie firms, but inducing a recession, or let their currencies fall in value. Most, Krugman argues, would prefer to do the latter. And mostly, a strict and decisive one-time devaluation would do the trick. But for Latin American and Asian countries, other rules applied. Moderate devaluations would eventually trigger a panic that upset the whole system, not only for the country involved but also all other countries in the region, and their capacity to defend the value of their currency was limited by their real reserves of dollars and euros in their central banks. When their dollar reserves were down, they were forced to turn to the IMF, who would only grant dollars if they could rewin trust of speculators (otherwise the money would be gone in a minute again!). Thus, these governments were forced to push through austerity during an economic recession, a 1930s thing Keynes thought we shouldn't be doing anymore.
Krugman shows with well written summaries of these crises how the scramble for dollars, even in a post-Bretton Woods world flooded with global (petro)dollars, still set the rules of the game. The access to dollars makes or break an economy. Global finance's allocative power is telling. I would have expected an Arrighian divide between Latin American countries that remained debtors to the US over the 1990s and Asian economies turning into creditors to the US, but Krugman did not make such distinction. In contrast, it seems like these two blocs had similar paths in their currency crises, which surprised me.
Western countries, however, had a different path of "depression economics", which Krugman does not highlight enough. While the speculative attack on currencies (which was always less hostile for Western countries, after one devaluation speculation mostly stopped), alongside strictly conditional access to dollars, broke the back of countries in the Global South, the described crises of Western countries (Japan and US) had a different character. They more or less had problems of a real liquidity trap, indicating that no matter how much money they pumped in the system, it didn't kickstart new growth. That's a very different kind of crisis of macroeconomic management. In fact, 2008 showed the contrast best: while the US was pumping massive sums into the economy with no real effect, the central banks of the periphery had new troubles. While they had been building up dollar reserves to reduce IMF dependency after decades of humiliating austerity, their companies had built up dollar debts from American banks with an appetite for risk. When the fell, the companies' credit lines were cut off, and they turned towards their central banks for help, who now were faced with another round of dollar shortages.
What was the cycle of crises in these countries? Money poured in through global investments. The demand for the local currency went up, and trade deficits rose because of new investments. After some point, this would create problems. For Mexico for example, growth hampered, peronist politics were on the rise, and investors got scared. For Thailand, government had to increase its debt levels to buy back the baht it had just printed to keep the exchange rate fixed (it had printed baht to exchange with new dollars coming in as to avoid the value of the baht going up). In both cases, the reversal of fortune happened suddenly, and foreign investors started turning their back on the country after their so-called "miracle" turned sour.
What could the local policy makers do in such cases? They could either raise interest rates and try to attract new investors, while simultaneously choking zombie firms, but inducing a recession, or let their currencies fall in value. Most, Krugman argues, would prefer to do the latter. And mostly, a strict and decisive one-time devaluation would do the trick. But for Latin American and Asian countries, other rules applied. Moderate devaluations would eventually trigger a panic that upset the whole system, not only for the country involved but also all other countries in the region, and their capacity to defend the value of their currency was limited by their real reserves of dollars and euros in their central banks. When their dollar reserves were down, they were forced to turn to the IMF, who would only grant dollars if they could rewin trust of speculators (otherwise the money would be gone in a minute again!). Thus, these governments were forced to push through austerity during an economic recession, a 1930s thing Keynes thought we shouldn't be doing anymore.
Krugman shows with well written summaries of these crises how the scramble for dollars, even in a post-Bretton Woods world flooded with global (petro)dollars, still set the rules of the game. The access to dollars makes or break an economy. Global finance's allocative power is telling. I would have expected an Arrighian divide between Latin American countries that remained debtors to the US over the 1990s and Asian economies turning into creditors to the US, but Krugman did not make such distinction. In contrast, it seems like these two blocs had similar paths in their currency crises, which surprised me.
Western countries, however, had a different path of "depression economics", which Krugman does not highlight enough. While the speculative attack on currencies (which was always less hostile for Western countries, after one devaluation speculation mostly stopped), alongside strictly conditional access to dollars, broke the back of countries in the Global South, the described crises of Western countries (Japan and US) had a different character. They more or less had problems of a real liquidity trap, indicating that no matter how much money they pumped in the system, it didn't kickstart new growth. That's a very different kind of crisis of macroeconomic management. In fact, 2008 showed the contrast best: while the US was pumping massive sums into the economy with no real effect, the central banks of the periphery had new troubles. While they had been building up dollar reserves to reduce IMF dependency after decades of humiliating austerity, their companies had built up dollar debts from American banks with an appetite for risk. When the fell, the companies' credit lines were cut off, and they turned towards their central banks for help, who now were faced with another round of dollar shortages.
December 28, 2025
Possibly the best economics book I have ever read!
Displaying 1 - 2 of 2 reviews