If we need a constant stimulus then we need a constant stimulus. We have the capital in this country to do it and interest rates are insanely low.

From what I gather, Japan dealt with a liquidity trap in the 1990s (because its aging population saved too much, and even lowering interest rates to zero didn't do the trick), and when they tried direct government stimulus in the early 2000s it prompted a recovery.

http://en.wikipedia.org/wiki/Lost_Decade_(Japan)

Quote:Interpretations
Economist Paul Krugman has described Japan's lost decade as an example of the liquidity trap, a situation where consumers and firms saved too much overall, thereby causing the economy to slow. He explained how truly massive the asset bubble was in Japan by 1990, with a tripling of land and stock market prices during the prosperous 1980s. Japan's high personal savings rates, driven in part by the demographics of an aging population, enabled Japanese firms to rely heavily on traditional bank loans from supporting banking networks, as opposed to issuing stock or bonds via the capital markets to acquire funds. The cozy relationship of corporations to banks and the implicit guarantee of a taxpayer bailout of bank deposits created a significant moral hazard problem, leading to an atmosphere of crony capitalism and reduced lending standards. He wrote: "Japan's banks lent more, with less regard for quality of the borrower, than anyone else's. In so doing they helped inflate the bubble economy to grotesque proportions." The Bank of Japan began increasing interest rates in 1990 due in part to concerns over the bubble and in 1991 land and stock prices began a steep decline, within a few years reaching 60% below their peak.[6]

In response, Japanese policymakers tried a series of government economic stimulus programs and bank bailouts. A 2.4% budget surplus in 1991 turned to a deficit of 4.3% by 1996 and 10% by 1998, with the national debt to GDP ratio reaching 100%. In 1998, a $500 billion bank rescue plan was implemented to encourage bank lending and borrowing. The central bank also attempted to increase inflation (which devalues savings over time), to encourage consumer spending. Krugman wrote that by 2003, the Japanese economy began to recover, helped by imports from the U.S. and China that helped Japan achieve a real growth rate of 2%. He wrote the recovery was "provisional" and there was significant risk of a return to a liquidity trap.[6]

Economist Richard Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession." It was triggered by a collapse in land and stock prices, which caused Japanese firms to become insolvent, meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.[7][8]

Economist Scott Sumner criticizes Japan's very tight monetary policy during the Lost Decade.[9][10][11][12]

(06-04-2012 02:13 PM)Max Power Wrote:  From what I gather, Japan dealt with a liquidity trap in the 1990s (because its aging population saved too much, and even lowering interest rates to zero didn't do the trick), and when they tried direct government stimulus in the early 2000s it prompted a recovery.

Yes. Japan is exactly who we should emulate.

Japan's DEBT sustains deflationary depression

Quote:Last year, Japan’s gross government debt was 220 percent of gross domestic product, according to the International Monetary Fund, by far the largest ratio of any Group of Seven country. All governments lend back and forth among official entities so that their gross debt is bigger than the net debt held by non-government investors, and Japan does this more than other developed countries. Still, on a net basis, Japan’s government-debt-to-GDP ratio is rivaled only by Italy’s and leaped to 113 percent in 2011 from 11.5 percent in 1991.

Krugman is a bigger loon than Max.


But it's a virtual dead heat.

But Krugman unfortunately has influence so he is far more dangerous. We can simply dismiss Max with laughter.