What government "own operations" occur in such a vacuum that the effects on the "larger economy" don't matter?
>
> And as for Japan, I say if they want cash, give 'em
> cash! The problem with Keynesian solutions is that
> people don't really, truly believe in them. So in
> major depressions like Japan's or the U.S. in the
> 30's, politicians always try half-assed measures, and
> the moment things start to get better, they do the
> "responsible" thing and balance the budget again,
> bringing everything crashing down. Just the other
> day, Krugman was musing on the fact that, with Japan's
> debt at such-and-such a level, there was nothing more
> that could be done on the fiscal side. Why not? What
> hard limit exists on a nation "borrowing" it's own
> currency?
Probably not many. The point is that it has real costs: to the degree that people don't believe that the inflationary course can be sustained, they will continue to hold cash, rather than buy bonds, and prices are likely to continue to fall. To the degree that it succeeds, and interest rates rise in response to inflation, falling bond prices are likely to further weaken the balance sheets of banks. Deficits and money creation are fine, good even, but I see no reason to ignore their possible downside effects.
Christian
.