Paul Krugman Answers Mark Thoma

Question: Mark Thoma: Many predicted international imbalances and the crash for the dollar, why hasn’t that happened yet?

Paul Krugman: Well, I actually, you know, I was… I thought there were two big things, the imbalances and the housing bubble, and the international imbalance has not been at the core of it at all, and there’s this weird thing which has happened, which is that as the financial systems have come apart, what people want is safety and safety still mean US Treasury Bills. It’s a really surprising thing, in a way, because you might think there would be some concern about that, but, you know, one of the lines was the only thing some people are willing to buy right now are US Treasury Bills and bottled water, and the T Bills, you know, why not euro [short term debt], but apparently that still doesn’t, is not, that is not yet an asset of collateral in times of great danger, so… And in some sense, I guess it makes sense. You know, the US government debt is the safest asset in the world not because we have the most responsible government in the world but because if the US government goes, so does everything, so there are situations in which the US doesn’t honor its debt are also situations in which world civilization collapses, so it’s your ultimate safe asset. And, in the crisis, people are scrambling for Treasury Bills again, so instead of the dollar falling in all of this, the dollar has been rising.

Producer Brett Dobbs asked economist Mark Thoma to submit a question for Krugman. Here it is.

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