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Helicopter Ben's Japan Fix-ation
originally published April 10, 2006
A debt deflation is not merely likely for the U.S. economy but inevitable, and that is why I no longer debate the issue in this forum. If the inflationists don’t “get it” by now, they probably never will. However, the timing of economic Armageddon is another matter, and there is still room to argue whether Helicopter Ben will be able to delay its onslaught for a few more years. If you want to understand why he thinks he can – thinks, in fact, that he will not merely postpone deflation but prevent it – then I highly recommend Paul McCulley’s superb essay at the Pimco site. It is the most insightful piece I have read concerning the new Fed chairman’s thinking about the Japanese deflation.
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As McCulley documents, Bernanke strongly believes that Japan needn’t have suffered a deflation -- that the central bank could have nipped it in the bud with a double-barreled blast of fiscal and monetary stimulus. Perhaps. But it is worrisome that Bernanke evidently believes that a U.S. deflation would be much like Japan’s, and that we could therefore head it off by administering essentially the same remedies but in bigger doses. It doesn’t seem to have occurred to him that, fiscal stimulus aside, Japan had one thing going for it that we will not – i.e., the U.S. consumer, with his insatiable appetite for imports. Bernanke should ask himself how Japan might have fared in dealing with inflation if Toyota and Honda had been in the parlous condition General Motors and Ford are in now; or if Japanese household savings growth had been negative, as it has been for some time in the U.S.; or if the Japanese economy had been wafting along on the vapors of a broad-based boom in residential real estate and mortgage refinancing. We are not Japan, as shall eventually become clear, and any deflation we experience that draws its power from dollar-denominated debt will be many orders of magnitude larger than the one which the Japaneses economy has barely survived.
When will it occur? No one can say, although the statistically phony U.S. economic “boom” has gone on a great deal longer than many of us would have anticipated. I think it will end sooner rather than later, but here’s a thoughtful essay from my redoubtable colleague “Capt. Hook” that takes another view. The essay is in response to a piece I published here a while back by my friend Jas Jain, the deflationist’s deflationist. Capt. Hook thinks Bernanke can keep the economy afloat for at least a few more years before deflation finally sets in. I hope he’s right, since it would give repentant debtors more time to get their respective houses in order.
originally published April 10, 2006
A debt deflation is not merely likely for the U.S. economy but inevitable, and that is why I no longer debate the issue in this forum. If the inflationists don’t “get it” by now, they probably never will. However, the timing of economic Armageddon is another matter, and there is still room to argue whether Helicopter Ben will be able to delay its onslaught for a few more years. If you want to understand why he thinks he can – thinks, in fact, that he will not merely postpone deflation but prevent it – then I highly recommend Paul McCulley’s superb essay at the Pimco site. It is the most insightful piece I have read concerning the new Fed chairman’s thinking about the Japanese deflation.
----View Picture Below----
As McCulley documents, Bernanke strongly believes that Japan needn’t have suffered a deflation -- that the central bank could have nipped it in the bud with a double-barreled blast of fiscal and monetary stimulus. Perhaps. But it is worrisome that Bernanke evidently believes that a U.S. deflation would be much like Japan’s, and that we could therefore head it off by administering essentially the same remedies but in bigger doses. It doesn’t seem to have occurred to him that, fiscal stimulus aside, Japan had one thing going for it that we will not – i.e., the U.S. consumer, with his insatiable appetite for imports. Bernanke should ask himself how Japan might have fared in dealing with inflation if Toyota and Honda had been in the parlous condition General Motors and Ford are in now; or if Japanese household savings growth had been negative, as it has been for some time in the U.S.; or if the Japanese economy had been wafting along on the vapors of a broad-based boom in residential real estate and mortgage refinancing. We are not Japan, as shall eventually become clear, and any deflation we experience that draws its power from dollar-denominated debt will be many orders of magnitude larger than the one which the Japaneses economy has barely survived.
When will it occur? No one can say, although the statistically phony U.S. economic “boom” has gone on a great deal longer than many of us would have anticipated. I think it will end sooner rather than later, but here’s a thoughtful essay from my redoubtable colleague “Capt. Hook” that takes another view. The essay is in response to a piece I published here a while back by my friend Jas Jain, the deflationist’s deflationist. Capt. Hook thinks Bernanke can keep the economy afloat for at least a few more years before deflation finally sets in. I hope he’s right, since it would give repentant debtors more time to get their respective houses in order.
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