Morning Must-Read: Paul Krugman: How Righteousness Killed the World Economy

…Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. Sometimes this happens explicitly: In the 1930s F.D.R. helped borrowers refinance with much cheaper mortgages, while in this crisis Iceland is outright canceling a significant part of the debt households ran up…. More often, debt relief takes place implicitly, through ‘financial repression’: government policies hold interest rates down, while inflation erodes the real value of debt. What’s striking about the past few years, however, is how little debt relief has actually taken place…. In major economies, very few debtors have received a break. And far from being inflated away, the burden of debt has been aggravated by falling inflation, which is running well below target in America and near zero in Europe…. But it has been very hard to get either the policy elite or the public to understand that sometimes debt relief is in everyone’s interest. Instead, the response to poor economic performance has essentially been that the beatings will continue until morale improves. Maybe, just maybe, bad news–say, a recession in Germany–will finally bring an end to this destructive reign of virtue. But don’t count on it.