This slide, from Richard Koos’s excellent discussion of the balance sheet recession in Japan, ought to scare anyone who thinks there is an easy way out of this recession.


Ok, I had to stare at it a bit to get the message.  The point is that twice in their long slump the Japanese chose to try to reduce their deficits.  Both times, it seemed to increase the deficit because it mullered the economy, where businesses were still trying, desperately to save.

It is not necessarily to same with us.  We have stronger companies, weaker households, a deficit not a surplus, a global not a national problem, a weaker currency.   Every situation differs.  What we need is a leadership able to see the situation, not arrive with their dogma all ready to unpack.

Update: Another slide worth looking at. Debt goes up.  Debt servicing costs fall.


Moving on.  I hate to unload too much Scott Sumner on everyone., but this post is worth reading.  To the finish: there’s  one of the best poems ever, Yeats, one I took on holiday and which can be about whatever you want it to be about.

More to the point, I am beginning to half-agree with Sumner. His views become more nuanced with time.  I don’t agree about “the Fed could have prevented the recession” – there I think Cochrane nails him, as does Cowen: the Fed does not have the power to ‘push’ the money out there into Nominal GDP, not during a financial crisis at any event.

But he is exactly right in his criticisms of the central banks, fretting about inflation, and in their fretting, so damaging expectations of their future policy pathways that they prevent the stimulating possibilities of their policies from actually taking effect.  Have I got that right?  I’ll never know, because I seem to be the only British person reading Sumner.

I only half agree with Sumner: I personally find his blogs all too full of passionate intensity myself.  But ultimately I think a combination of Krugman and Sumner is needed at the zero bound/deflation trap stage.  Typical muffling liberal, me.  But without the populace gaining the smallest fear that government deficits will start being monetized, expectations of higher future NGDP will never get settled.  No amount of asset purchases can do that – not safely, at any event.


4 thoughts on “How cutting the deficit can increase the deficit

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