Thanks for posting this excellent article. I read every word of it and found it both prescient and ominous.
At least on my initial reading, the only point at which I had some resistance to the author’s ideas was his theory of reflation. My problem is not with the theory; theoretically, it appears logical and a well-founded antidote to the debt-deflation spiral.
However, is reflation workable? IOW, how, practicably, could reflation be implemented in today’s real economy in the U.S.?
Another thing to muse on: the author points to when debtors’ attempts to reduce debt actually increase indebtedness as the point at which the economic boat is more likely to capsize than to right itself. But it is also a fact that you can’t “stimulate” confidence. IOW, now that people have had the pajamas scared off them, the contraction in consumer spending will continue until it ends, IOW regardless of price stability (though I agree that deflation sucks even more confidence out of consumer spending over time).
So it seems to me that there is a point at which the dearth of confidence cannot be restored through reflation.
Then what?
Fast-forwarding to today, central bankers say if a deflationary spiral takes hold, it will be an economic “perfect storm.”
http://www.newsdaily.com/stories/tre49n5vu-us-financial6/
Sorry to respond to a 1-month old post, but I just came across this. Congrats, you officially understand economics better than many central bankers. As I just posted elsewhere...
Krugman and Bernanke studied the Japanese problem of the 90's about a decade ago. Their conclusion was the same as yours - that reinflating does not end the debt deflation spiral because it is not a deflation caused by money supply, it a a deflation caused by collapse of the money multiplier and velocity. In our case, both the multiplier and velocity have been gradually losing momentuum for several years, and the M1 multiplier plunged to 1 in October. So $1T of freshly-printed money adds exactly $0 into price and output increases.
So they admit that reinflating money supply is futile, and that restoring confidence is very difficult. Their approach is instead to undermine confidence in the other direction. Krugman says the Fed needs to "credibly promise to be irresponsible"... in other words to convince the general public that the Fed is about to destroy the dollar, so you should prob just spend them already and buy stuff.
Links:
* http://krugman.blogs.nytimes.com/2008/11/15/macro-policy-in-a-liquidity-trap-wonkish/
* http://krugman.blogs.nytimes.com/2008/12/16/zirp/