The US Treasury reportedly will begin strict examinations of the 20 biggest American banks’ balance sheets starting this week. If anything close to current asset values are used to evaluate those books, and they should be, many of these banks will need public capital injections or closure. The reluctance to pull the trigger appears to […]
Yesterday, Secretary of State Hillary Clinton told a Chinese television audience that they and their government are "making a very smart decision by continuing to invest in Treasury bonds." Legitimate point. It is true, President Obama’ s package to rescue the economy, including the stimulus plan and one hopes capital injections to the banks, will […]
Some commentators have begun suggesting that the Federal Reserve should announce an inflation target now, with the idea that it will prevent inflation arising from the coming massive fiscal stimulus. In my opinion, it couldn’t hurt. As I argued with respect to Japan in 1998 [pdf], or as Ben S. Bernanke, Frederic S. Mishkin, and […]
Getting agreement on general language in support of all countries undertaking counter-cyclical macroeconomic stimulus measures at the upcoming G20 Summit will be easy, especially now that China and the United States have signaled plans for their own major fiscal packages. Getting a commitment to specific common policy actions will be difficult, as past summits have demonstrated.
Suddenly people are worrying about deflation risks to the US economy. While the Fed was quite right to set aside inflation concerns when it lowered its benchmark interest rate this week, recent data on the outlook and the global slowdown does not indicate that we are at risk of deflation. It is unrealistic to think that we are.
First, asset price declines—even large and widespread ones as in US housing markets—almost never result in broader price declines. As I demonstrated in a paper [pdf], the bursting of only 2 out of 44 stock or real estate bubbles led to instances of consumer price index (CPI) deflation (and 16 out of 18 prior episodes of deflation in advanced economies were not preceded or accompanied by asset price busts).
Should the United States be concerned about ending up like Japan in the 1990s? There are signs that American policymakers are worried about just such a development. By this they and other economists mean the threat of an extended recessionary period of sub-par growth, and an inability to sustain a recovery, apparently because of bad assets weighing down the economy’s financial system. Last week’s lock-up in the US commercial paper and short-term lending markets for solid non-financial corporations, reminiscent of what preceded the real economy nose-diving in Japan in 1997-98, made the prospect all the more real.