Inflation v. Liquidity Trap

[Munger]

Very interesting thoughts from Professor Krugman re: creating inflation to combat a liquidity trap - and why it sometimes doesn't work:

It’s a curious thing that even now, when we are clearly in a liquidity trap, we still have a lot of economists denying that such a thing is possible. The argument seems to go like this: creating inflation is easy — birds do it, bees do it, Zimbabwe does it. So it can’t really be a problem for competent countries like Japan or the United States.

This misses a key point that I and others tried to make for Japan in the 90s and are trying to make again now: creating inflation is easy if you’re an irresponsible country. It may not be easy at all if you aren’t.

http://krugman.blogs.nytimes.com/200...ish/#more-1037

[FRED]

Re: Inflation v. Liquidity Trap

Very interesting thoughts from Professor Krugman re: creating inflation to combat a liquidity trap - and why it sometimes doesn't work:


http://krugman.blogs.nytimes.com/200...ish/#more-1037

The answer, then, is to become irresponsible, again. Take a page out of the Richard Nixon play book.

Step 1:

• Unilaterally "suspend temporarily" US participation in the global monetary system
• Promise to not devalue the dollar
• Promise a new monetary system that is more fair and provides equal treatment to all participants globally

Step 2:

• Make "temporary" US suspension in participation in the global monetary system permanent
• Devalue the dollar not once but twice
• Create a new monetary system that gives the US an enormous unilateral advantage over every other nation on earth by guaranteeing net positive capital flows into the US from all export trade partners because they all need to prevent the appreciation of their currencies against the dollar in order to export to the US

See video here.

[jk]

Re: Inflation v. Liquidity Trap

The answer, then, is to become irresponsible, again. Take a page out of the Richard Nixon play book.

Step 1:

• Unilaterally "suspend temporarily" US participation in the global monetary system
• Promise to not devalue the dollar
• Promise a new monetary system that is more fair and provides equal treatment to all participants globally

Step 2:

• Make "temporary" US suspension in participation in the global monetary system permanent
• Devalue the dollar not once but twice
• Create a new monetary system that gives the US an enormous unilateral advantage over every other nation on earth by guaranteeing net positive capital flows into the US from all export trade partners because they all need to prevent the appreciation of their currencies against the dollar in order to export to the US

didn't we already do all this, starting in 1971? [albeit the announcements were sotto voce]

[FRED]

Re: Inflation v. Liquidity Trap

didn't we already do all this, starting in 1971? [albeit the announcements were sotto voce]

Yes, that's why the videos of Tricky Dick!

That was back when the US was a net creditor. How to pull that off today as a net debtor? Ka-Poom Theory says this time the US can let its creditors devalue to the dollar instead of counting on "those evil currency speculators" to do it. How?

Step 1: Promise to never execute unsterilized debt monetization and promise full cooperation and coordination among US trade partners on the execution of policies to cope with the global crisis.

Step 2: Unilaterally execute unsterilized debt monetization.

[metalman]

Re: Inflation v. Liquidity Trap

Yes, that's why the videos of Tricky Dick!

That was back when the US was a net creditor. How to pull that off today as a net debtor? Ka-Poom Theory says this time the US can let its creditors devalue to the dollar instead of counting on "those evil currency speculators" to do it. How?

Step 1: Promise to never execute unsterilized debt monetization and promise full cooperation and coordination among US trade partners on the execution of policies to cope with the global crisis.

Step 2: Unilaterally execute unsterilized debt monetization.

hey, trust us! we wouldn't screw everyone.. for the fifth time in 100 years!

[ST]

Re: Inflation v. Liquidity Trap

Yes, that's why the videos of Tricky Dick!

Ah those damn speculators. They caused my Tricky self to overspend on wars and compelled Johnson to literally strong arm Martin into printing money:

(-NY Times link - "One version of what occurred, according to Richard Fisher, the current head of the Dallas Fed, who has studied the history, is that “Lyndon took Martin to his ranch and asked the Secret Service to leave the room. And he physically beat him, he slammed him against the wall, and said, ‘Martin, my boys are dying in Vietnam, and you won’t print the money I need.’ ”)

I really also enjoyed Dick's comments that inflation would not be a problem because Americans spend domestically. Reminded me of Bernanke's response to Ron Paul's questioning when Bernanke said that inflation would not be a problem domestically if/as the American dollar devalued.

Do you think Bernanke is aware that oil is priced internationally and not domestically? Testifying under oath used to mean something.

[grapejelly]

Re: Inflation v. Liquidity Trap

Hey, this could be the Fourth Great Lie:

1. I quit drinkin'
2. My truck's paid for
3. I was just helping the sheep over the fence
4. It's not a problem because we owe it to ourselves.

[Starving Steve]

Re: Inflation v. Liquidity Trap

Isn't the U.S. facing de-valuation now, especially since oil is almost getting too cheap? De-valuation trumps all liquidity traps.

Smelling de-valuation ahead, not just with the U.S. dollar but probably with the beaver buck too, I decided to improve my house on Vancouver Island.... At least the improvements to the house are tangible and real.

[GRG55]

Re: Inflation v. Liquidity Trap

...Step 2: Unilaterally execute unsterilized debt monetization.

As Prof Krugman said "...birds do it, bees do it, Zimbabwe does it..."

[marvenger]

Re: Inflation v. Liquidity Trap

I think the US is going to have to play ball with ROW more this time, if the US gets too irresponsible, they're going to have to learn to live without oil pretty quick. Some sort of new Bretton woods is needed but US isn't going running the show like it has.