The prolonged Japanese economic slump is not due to price deflation but is the product of aggressive fiscal and monetary policies aimed at arresting the general fall in prices of goods and services. Contrary to the popular view, as a rule, price deflation is always good news for the economy. Thus, when prices are falling in response to the expansion of real wealth, this means that people's living standards are rising.
While assorted financial journalists, market pundits, policy wonks, Fed governors and even mainstream macroeconomists have been thrown into a panic by the slight whiff of price deflation they detected in the last few months in the U.S. economy, they have almost completely ignored the wrenching confiscatory deflation that is now going on in Argentina
As the history of America's Great Depression is one long regret of political follies and blunders that aggravated the suffering, so is the story of the Japanese recession from the 1990s to the present. The Japanese government tried to spend its way out of the recession, but instead merely prolonged it and created a mountain of debt.
Economists are fond of writing open letters to politicians in attempts to lead them down "proper" policy paths. In 1930, a thousand economists signed an open letter to President Herbert Hoover asking him not to sign the infamous Smoot-Hawley Tariff. Hoover signed it anyway, creating one more disastrous policy mistake that ultimately created the Great Depression.
According to the popular view, the revival of some important economic indicators has raised the likelihood that the aggressive lowering of interest rates by the Fed will invigorate the economy. The irony is that the very same loose monetary policies that are expected to energize the economy in fact undermine its main source of strength.
In attempting an outlook for the year ahead--and those of the Austrian School firmly believe all such endeavours are an exercise in futility--Sean Corrigan sets out a brief theoretical framework, predicting likely market phenomena and official policy actions, and presenting factors that could derail his predictions.
In its original meaning, "crisis" signifies a turning point that can either lead to improvement and recovery or to more severe deterioration. In the case of Argentina, with the future of the Argentinean people in mind, one must hope for the abandonment of its interventionist economic system, with its reliance on a bureaucratic apparatus and its self-chosen dependency on foreign credits.
Since it takes some time to say for sure that we are in recession, by the time we know we are in recession, we are already most of the way through it. This time, it took eight months--from March until November 2001--to determine we were in a recession. Here we are, in December 2001, and there are some signs that we may soon start to recover.
Economies do not subside because demand wanes--we could all use a shiny new car, or a beautiful new house pretty much any time. However, in a world where means, unlike wants, are not infinite, we have to be able to offer something in exchange. We do that by first profitably producing things other people require, at a price they are willing to pay, not by stamping our feet and making demands like a petulant 5-year-old.
Making the boom continue at home and abroad has been the prime focus of U.S. monetary policy for quite some time. But among the unintended consequences emerge the broadly based lowering of perceived risk levels in the financial markets and a global spread of careless investment activities.
