As the United States and other major countries prepare to combat the threat of deflation and recession with interest rates fast approaching zero, a five-year policy experiment in Japan shows how important it is to act quickly and boldly.
Japan fought its way out of deflation after a property and stock bubble burst in the 1990s with quantitative easing, a policy measure that involved flooding banks with far more cash than was needed to keep short-term rates at zero.
It was a groundbreaking experiment and took a long time to work because the Bank of Japan was slow to employ the entire gamut of policy options and spell out its goals in credible fashion.
These lessons are now acquiring a special relevance to the U.S. Federal Reserve, facing the risk of a Japan-style deflationary spiral after a mortgage market meltdown that battered the banking system and resulted in the worst bear market for stocks since the Great Depression.
Deflation is a serious short term problem that could cause real harm. However I would council keeping one eye on the longer range radar. We have been printing money for the last eight years as fast as the paper and ink could be loaded into the machine. With the public treasury essentially bankrupt I expect the incoming administration, which has ambitious spending plans, to continue this policy.
Long term this is likely to cause inflation not deflation.
Under the mercy,
[url=http://ad-orientem.blogspot.com/]John[/url]
An [url=http://www.youtube.com/watch?v=Gj4pUphDitA]Orthodox [/url] Christian
Deflation enables the wage-earning class to take shelter in falling prices from the recessionary storm. People who consider falling prices a problem can compensate by just paying more.
Byzantine,
I think you are missing an important point. Deflation is indicative of a sharp decrease in demand for goods and services. When you have deflation it’s because people can not afford to buy things and those who can afford to buy things are afraid to do so. This causes business to contract or go under which produces more unemployment which further aggravates deflation and then the cycle repeats itself.
Deflation is a symptom of a gravely ill economy. It normally occurs during periods of high unemployment and extreme fear on the part of consumers. The last time we saw a severe round of deflation was in the 1930’s. This is a very serious problem.
Under the mercy,
[url=http://ad-orientem.blogspot.com/]John[/url]
An [url=http://www.youtube.com/watch?v=Gj4pUphDitA]Orthodox [/url] Christian
Falling prices are the correction of prior errors. We are finding out that townhomes put up everywhere and anywhere are not actually worth $600,000, or even $300,000. The recession wipes out activities that were unsustainable absent continuous infusions of new money and artificially cheap credit. In the boom times, everyone and his brother got their real estate licenses when the economic reality did not support it. When economic reality asserts itself, everyone and his brother need to find other lines of work, not have the government block the profit-loss signals which indicate where capital can be put to productive uses.
Basically, we find ourselves confronted with the reality that we were not as rich as we thought we were. Printing money and setting interest rates regardless of the actual supply-demand curve for loanable funds does not create wealth, and the game of musical chairs must inevitably end. In fact, we can’t afford Escalades and granite countertops because we haven’t saved enough to fund such consumption, so Honda Civics and laminate will have to do.
I’ve heard some major economists dispute this idea completely. They argue that despite everything the Japanese did, nothing really worked. The bad news for us may be that there’s little we can do but suffer through this — and it may take quite a bit of time. This evening on the News Hour the governor of South Carolina pointed out that the way out of excess spending over the past ten years may NOT be to engage in yet more deficit spending.
Re # 6
This sounds like the advice Herbert Hoover was given. It certainly sounds like the policies he pursued.
Ad Orientem,
Herbert Hoover actually did not pursue a [i]laissez faire[/i] policy. If he had, and without FDR’s zero-value, make-work projects and outright wealth confiscation, the Great Depression–which finally ended when productive men returned from war and Congress junked the price controls, rationing, etc.–would have been known as the Short, Sharp Recession.
When economic reality asserts itself, the experts wring their hands and proclaim that something must be done. There is nothing that can be done–the iron laws cannot be broken. As someone else said on here, debt does not equal money does not equal wealth. The bubble activities enabled by new money and artificially cheap credit distort prices all up and down the chain of production. When the money printing and absurdly low interest rates end, as they always must, we are left with absurdities like car lots full of $60,000 vehicles and empty townhomes advertised for $600K. Recovery begins when the unsustainable activities are liquidated and the supply of loanable funds is replenished. This means falling prices and less spending. The principled response to prior errors is to accept the consequences, not pass the tab on to your children and children’s children.
I am used to seeing FDR regarded as the Great Evil Ones on these threads, but I really have to protest the “zero-value make-work” description. More than two decades after the Great Depression, I went to school in a WPA building that replaced a decrepit wooden structure with no plumbing. That building is still in use as are several other WPA school buildings in my community and *countless* other similar buildings around the country. Building these schools was not a “zero-value make-work” project – many of those buildings have had 6 or so decades of use and continue to benefit the communities in which they are located.
I have spent many happy nights in CCC-constructed cabins in state and national parks around the country – modest little structures still serving an important function from Yosemite to Roosevelt State Park.
We have incredible photos that are in themselves works of art and are important historical documents of the 1930s because of these “zero-value, make-work” projects.
The music of America’s heartland is preserved for us today in recordings made under New Deal programs. Federal Writers Program guidebooks give us important snapshots of America at the time – often preserving information that would have been lost. The project also nurtured important American writers from Zora Neale Hurston to John Cheever – Hurston herself recorded elements of black history that would have been lost to time without her going into the turpentine camps, etc. National Resettlement Authority farm buildings continue to be in use in this area, and most of the young farmers who were brought to those farms stayed and have provided their communities with a second and third generation of solid citizens.
Say what you want about FDR and the New Deal, but don’t say that all the projects were “zero-value” and “make-work” – because that is patently untrue. Many, many projects of continuing value were accomplished through the New Deal. To say nothing of the lives that were changed at the time, the hope that was given in a very dark time.
Stepping down from the soapbox …