Musings

Lisa Dusseault lisa@xythos.com
Mon, 15 Oct 2001 11:11:25 -0700


Further reading has shown me that some professionals definitely share your
worries that other countries (including the US) may share the fate of
Japan's liquidity trap.

"For if deflationary forces are as powerful as they are in Japan - and may
soon be in the rest of the world, if The Economist is right - there is no
middle ground. Either policy gives the economy the inflation expectations it
needs, or the economy will try to get that inflation via grinding
deflation - a proposition that sounds paradoxical but is actually a matter
of simple economic logic. Attempts to find a halfway house - to aim merely
for stable prices rather than sufficiently high inflation - will be doomed
to failure.

In short, if you really believe that deflation is now a global threat, you
should also believe that only policies that lie outside the realm of what is
conventionally regarded as responsible will contain that threat. And because
unconventional thinking is not what one expects (or, in normal times, wants)
from finance ministers and central bankers, there is now a real risk that
deflation will indeed become a global scourge"

http://web.mit.edu/krugman/www/deflator.html

If this stuff is right, then it makes sense that Japan was first to fall
into the trap.
 - Japan's demographics are more tilted towards this problem because of low
immigration, low birth rates, aging population.  Aging populations save more
than they spend, as they should, preparing for retirement.
 - Japan's banks already were making so many bad loans that extra money
saved has no place to go.

That doesn't mean that US couldn't fall into the same trap.

The Krugman recommendation is to allow a long-term higher inflation rate
(5%), which allows the monetary supply more flexibility (in fact, allowing
real interest rates to go below zero).

Has anybody seen a recommendation to increase immigration -- particularly
young immigrants, ideally with infants or planning to start families?  This
would certainly be a long-term fix, but if the problem is long-term, then a
credible effort towards this end would have a short term effect because of
the way information on this kind of thing is recycled back into investment
choices.

lisa