Revenge of the Glut

This Op-Ed piece by Paul Krugman appeared in The New York Times on March 1st and deals with the origins of the global debt crisis. I liked this column because it is from a reliable and trusted source who’s very fluent in economics (Krugman was awarded the Nobel Prize in Economics in October), but who can still write about the subject in a way that people who are not familiar with economics can understand.

In the column Krugman states that when Asian countries stopped importing capital after their financial crisis of 1997-98 and began protecting themselves by exporting capital, the world was “awash in cheap money,” looking for somewhere to go, with a lot of it going to the United States and European countries.

The inrush of capital created the illusion of wealth in small European countries, such as Estonia, Ireland and Iceland, just as it did for homeowners in the U.S. This created the bubble that would, at some point, have to burst.

Krugman is honest about not yet knowing exactly how we are going to get out of this financial crisis, but his account of how it began and still unfolds is interesting and informative.