On Oct 22, 2010, at 8:24 AM, Wojtek S wrote:
> But let's play a devil's advocate and put undesirable social
> consequences aside for a while. If gov monetary policy results in
> inflation of asset value, this does little to stimulate the economy -
> as the government stimulus sits unproductively. There seem to be only
> two ways out of this situation - gov switching to direct purchases
> (fiscal policy) - as Richard Koo and Krugman advocate, and deflation
> of assets to the point that it is more profitable to invest in
> productive activities instead. Since the former is politically toxic,
> the latter seems to be the only way out.
But asset deflation doesn't lead to investment - it didn't in the 1930s, and not even in Japan's mild deflation of the last couple of decades. It leads to a low-employment equilibrium that's really hard to get out of.
> From that pov, deflation is not bonkers - it is a real solution - one
> that is politically preferable by neo-libs.
Even the neolibs would be very uncomfortable with unemployment stuck around 10% - not to mention drifting higher.
Doug