a Fed easing is useless if liquidity trap conditions become prevalent. it doesn't help any to print a lot of money when there are no takers for it. and right now, there are none...to wit, credit spreads are now HIGHER than they were during the height of the '98 crisis...likewise, the spread between inflation-protected govt. bonds and the normal kind has been shrinking fast, to a new low. that indicates inflation expectations are waning fast.
and let's not forget that the Fed represents lenders rather than borrowers...it is obsessed with inflation for that very reason imo.
an attempt to inflate out of this morass, if it were seen to be potentially successful, would lead to a deluge of foreign selling of US assets, destroying the dollar in the process.
regarding Japan, i don't know what difference it should make that they were an external creditor at the time of their bubble denouement, except that there was little foreign selling pressure on the Yen. note that Japan's savings rate, which was already high when their bubble peaked, simply went even higher. but the Japanese at least have a choice, or rather their household sector has. the same can not be said of the US household sector with its negative savings rate plus the highest ratio of debt to disposable income (108% now) in history. likewise, the corporate sector's indebtedness is at record highs...it all points to the likelihood of an economic downturn leading to the deflationary cutback in consumption and capital expenditures that has already started.
one has to keep in mind, the Fed owns no magic wand...note the chart i posted earlier of the Fed rate cuts in the early 30's...in spite of those, the money supply contracted sharply, as no borrowers were able or willing to take advantage of the lower rates. a Fed easing has only an inflationary effect if it results in the creation of additional debt. |
