Arnold Kling  

Deflation-fighting and Depreciation

PRINT
California Energy Regulation... Sowell on Health Care...

Continuing the discussion that began with the thread Liquidity Trapped?, we can add opinions from Richard Berner of Morgan Stanley and Victor Canto of the Cato Institute.
Canto writes,


The data make a compelling case that we are on the verge of deflation. While no one can hold Alan Greenspan and the Federal Reserve solely responsible for the economic slowdown, they certainly deserve some of the blame. More, the Fed is solely responsible for the threat of deflation today. If inflation/deflation is a monetary phenomenon, there is a simple solution to the deflation threat: PRINT MORE MONEY.


Alan Greenspan is not doing as good of a job as he did during the 1990s.


Berner writes,

Indeed, the Fed's resolve to fight deflation risks in my view is a key factor that will help with what I call the rebirth of pricing power ... First, the continued exit of capacity from glutted industries will restore pricing power -- except in technology. In addition, I think an anti-deflationary monetary policy and the weaker dollar that accompanies it will stabilize inflation expectations in Corporate America.

The dollar has declined in value recently, which should help to ease fears of deflation. Assuming that the dollar stays weak or weakens further, our trade deficit should start to decline next year. Our trading partners could respond by trying to weaken their own currencies, but this would mean lowering their interest rates, which would not be a bad thing given the sluggishness of the world economy.

For Discussion. Do you agree with Canto that the Fed performed poorly in the past few years by not pursuing a more expansionary policy?



COMMENTS (1 to date)
Eric writes:

That's what my favorite economist, Larry Kudlow, says as well. The money supply has not grown the way it should since Y2K.

Still, I believe the original question was about the liquidity trap, and the fact that interest rates cannot go below zero. Isn't the growth of the money supply quite independent of short term interest rates? Doesn't the money supply grow only when the Fed starts buying more bonds?

Comments for this entry have been closed
Return to top