-Paul Krugman has a new post on his NY Times blog in which he criticizes those who criticize expansionary monetary policy right now. He thinks that first the target was fiscal policy, but now the vitriol has shifted to low interest rates – for a change, I disagree. Those who I know to be big critics of experimental monetary policy have always identified the Fed as the biggest problem, with huge budget deficits simply one consequence of an accommodative central bank. In any event, Krugman’s position is that these “sado-monetarists” are inconsistent. They argue that you need to let the market operate, which is not allowed to happen with Fed interventions, yet seem oblivious to the fact that the market is so easily duped by a low interest rate regime. So much for laissez-faire.
I think there is a two-part response to his criticism: (1) lower rather than higher interest rates are much more likely to lead to speculation and Ponzi financing because of increased liquidity and easier credit (and you rarely hear about the Fed trying to keep rates too high); and (2) for those who disapprove of Fed actions, the position is never that we would go without downturns in the alternative, rather that we would be able to fail faster and fail smaller because no one is trying to prop up zombie institutions and perpetuating instability over and over again. Even Hyman Minsky acknowledged that we have deferred to inflation and greater volatility by allowing the lender of last resort to prevent any failures from occurring. So, as we persist in this habit of never allowing anything bad to happen, each time the economy invariably cracks up, the pain is that much greater and harder to deal with.
-I discovered the blog Asia Confidential recently, written by James Gruber and with a heavy emphasis on Japan. In this week’s article, entitled “Protecting Yourself From Japanese Insanity”, he tackles the most recent big announcement from the BOJ and outlines what he views as the possible outcomes from the global money printing experiment. They are:
(1) Only moderate inflation and economic recovery.
(2) Inflation but central banks are able to respond early and cause a recession.
(3) Recovery but with inflation that gets out of hand.
(4) A deflationary depression because the stimulus is unable to get the velocity of money going.
Gruber thinks that (3) and (4) are the most likely outcomes, and gold performs well under both scenarios because confidence in fiat money deteriorates. As for his expectations for Japan specifically, he is not convinced that the BOJ can successfully achieve its 2% inflation target, but they will still absolutely destroy the Yen in their attempts.
