Dollar sank after FED's announcement. We already have a rate of 0%, what other tools can FED use to play? Printing Money? Are we going to be the next Japan? Can all these measures help deflation? Are we going to inflate our way out of the crisis?
With every new economic indicator showing the threat of a deflationary spiral to be increasing, all of this - the existing bailouts, the Fed measures, the fiscal stimulus - may not be enough. Some economists are now advocating the ultimate heresy - that we will have to inflate our way out of this crisis.
One of the few economists of note to advocate this policy out loud is Simon Johnson, who left the chief economist post at the International Monetary Fund earlier this year and is now a professor at MIT's Sloan School of Management. Johnson believes that only a significant nominal inflation - which will mean negative real interest rates - will provide sufficient monetary stimulus to reflate the economy. He is calling for the Fed to permanently expand the monetary base - and to let the world know it is doing so - enough not only to compensate for current deflation, but to generate some real inflation.
"We need to have significant inflation: 2% is not enough to improve solvency significantly, and we may experience 5-10% for a year or two," Johnson and Peter Boone of the London School of Economics wrote in a recent posting on WSJ.com. "Inflation has major drawbacks and creates its own risks, but compared to the alternatives, it would be a relief."
It is, in fact, precisely the policy that Paul Krugman, recipient of this year's Nobel Prize in Economics, urged on Japan in a famous 1998 paper, where he said the central bank must "credibly promise to be irresponsible" in allowing some inflation to occur.
From Mish's Global Economy Analysis:
From Mish's Global Economy Analysis:
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