Economist Paul Krugman – Substack: “Last week was a scary time in U.S. financial markets, and the danger may not be over. I’m not talking about stocks, whose fluctuations often tell us nothing at all. What had me and others rattled were developments in bond and currency markets. Interest rates on long-term government debt rose sharply even as the perceived risk of a recession, which normally pushes rates down, rose. And the dollar went down against other currencies even though interest rates went up. These moves weren’t normal for an advanced country like the United States. However, the combination of rising interest rates and a falling currency as the economy slumps is something often seen in emerging markets facing a financial crisis. The chart at the top of this post shows an example: Indonesia from 1997 to 1999. Obviously we haven’t seen anything that severe for the United States. But suddenly I and many others are wondering whether we’re looking at the early stages of a U.S. financial crisis. So this seems like a good time to post a primer on the economics of financial crises. However, this is a big topic, so I’ll do it in two parts. This week I’ll discuss the logic of financial crises. Next week I’ll discuss policy responses and recent developments in the United States — although God knows where we’ll be by then. Last week I posted Part I of a primer on financial crises. Although the post was motivated by the wild market action after Donald Trump unveiled his Rose Garden tariffs, it was getting too long, so I promised to address current events today. To be honest, I was also hoping that the situation would become clearer after a week. It hasn’t. We seem to have stepped back a bit from the ledge, largely because Trump scrapped his original tariff plan and replaced it with something markets perceived — wrongly — as less extreme. But things remain deeply unsettled. Rather than wait for a resolution that may be a long time coming, however, let me continue the primer by talking about how policy interventions [Part II] can sometimes act as circuit breakers that help avoid financial crisis. I’ll follow that with an attempt to make sense of where we are now and discuss what the future may hold…”