Fareed Zakaria GPS – CNN 07-29-12

Salient to Investors:

Paul Krugman at Princeton:

  • US economy is terrible with 4 million out of work for over a year, causing devastation to families and damaging to the economy’s long-term future because its harder for them ever to re-enter the workforce.  The whole private sector is paying down debt, and if everyone tries to do that at the same time, we fail.
  • The private sector and investors are begging the government to issue more debt – at an interest rate of minus 0.6 percent. The Fed signalling its willingness to tolerate higher inflation would be really helpful.
  • The fiscal cliff is a game of chicken – if Obama is re-elected, there’s a substantial chance that for a month or two we actually will go off the cliff, which doesn’t do that much harm.
  • The half-life of Europe’s solutions keep shrinking, so we are heading toward a moment of truth, but it’s hard to know exactly what it is. Greece will run out of money causing a run on the Greek banks and a domino effect with bank runs in Spain and Italy. Greece is a lost cause.

Ken Rogoff at Harvard:

  • The government has done nothing in terms of fundamentals – didn’t fix the tax system, half-baked fix to health care. The energy bonanza here means the price of gas is one fifth of Europe’s, and manufacturing may be come back.
  • The U.S. is more divided, making it hard for long-term business planning. The Fed should be willing to have a higher inflation rate for a while – this is a once in 75 years problem.
  • The fiscal cliff is unlikely to happen. though not sure because it’s so divisive. Have no idea which direction they’re going to turn if they don’t go off the cliff.
  • Europe might be a slow-motion train wreck – their response doesn’t get ahead of the crisis. Spain will next need a program bigger than anything we’ve seen, because it’s a much bigger economy. The only solution is a political union because a single currency is not going to work.

Read the transcript at http://transcripts.cnn.com/TRANSCRIPTS/1207/29/fzgps.01.html or view the show at http://globalpublicsquare.blogs.cnn.com/category/gps-episodes/