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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (2005)	3/14/2004 5:29:37 PM
From: CalculatedRisk	Read Replies (3) \| Respond to of 116555

The US compared to Japan. mish argues "Japan did not solve deflation by printing money and neither will the US." However, the opposite argument is that Japan did NOT print enough money! "What is wrong with Japan?" Krugman, '97 pkarchive.org Krugman argues: "The simple fact is that there is no limit on how much a central bank can increase the supply of money. Could the Bank of Japan, for example, double the amount of monetary base - that is, bank reserves plus cash in circulation - over the next year? Sure: just buy that amount of Japanese government debt." Krugman argues further: "It is possible that putting more cash in circulation will stimulate spending directly - that the extra money will simply "burn holes in peoples' pockets". Or banks, awash in reserves, might become more willing to lend; or individuals, with all that cash on hand, will bypass the banks and find other ways of investing. And even if none of these things happens, when the Bank of Japan increases the monetary base it does so by buying off government debt - and therefore makes room for spending increases or tax cuts." And in more technical terms: "Japan's trap" Krugman, '98 pkarchive.org And this recent paper by a FED economist indicates the FED's current thinking. He argues that Japan is not in a liquidity trap; just a failure of ideas. Whether we call it a "liquidity trap" or not, the solutions offered by both economists are the same - print more money! "Monetary Policy in Deflation: The Liquidity Trap in History and Practice" Orphanides, Jan, 2004 federalreserve.gov But even if Krugman is correct about Japan, the US is not the same as Japan. We are not a society of "savers". If we bought back the US debt, we would give money to 1) a very small group of individuals and corporations and 2) foreign countries (primarily Japan). Does anyone think Japan would sell the US dollar? And these wealthy individuals (in the US) are already sitting on huge stacks of liquid assets and currently unwilling to spend or invest these assets. If we gave them even more cash, wouldn't they just hoard that too? I believe we need a radical change in fiscal policy before monetary policy will be effective. I agree with mish, that deflation is the most probable outcome in the US, given the current situation. But I also believe the FED will do almost anything to avoid deflation. Whereas I think Japan might be able to overcome deflation using some of Krugman's suggestions; the same action in the US would be far less effective.