Perpetual stimulus is not possible, any more than perpetual motion. It only works if it changes the economic environment, not if it is merely a constant.
I am attracted to Freidman's idea of having monetary growth track GDP. I fear it might be too mechanical a formula, but I am inclined towards it, if not convinced.
Easy money is a good formula for encouraging speculation, and is as close as one can come to a perpetual stimulus. The problem is that it also encourages more frequent and deeper busts, because of the recklessness of investment, and the number of defaults sharply contracts the money supply, leading to deflation. The same sort of thing happened after WWI: easy money, rampant speculation, and then a big crash, followed by a credit crisis which led to the Great Depression. Actually, the period after WWII was, at least, somewhat more stable, although it did lead to stagflation before the Reagan shake- up.
The low inflationary period began about 20 years ago, and has continued through two business cycles. China was not, in the mid- 80s, yet a manufacturing power house. I give the phenomenon a primarily monetarist reading: the Fed has been pretty tight with money during the last 20 years, and average growth has been fairly high, even including recessions. I also think that the growth in productivity has affected inflation. by reducing production costs ubiquitously. |
