“Sir, “Can the Fed prevent Japanese-style deflation, a period of falling prices associated with economic stagnation, from taking hold ?” is a common refrain nowadays..
The US Federal Reserve’s obsession with Japan is pretty disastrous. First, Alan Greenspan opened the taps wide for too long, fearing Japanese-style deflation, which fuelled the housing bubble that led to the recent financial crisis. Now, fearing the lost decade plus, the Fed is probably going to keep easing until some different but unpleasant outcome is the result. Stagflation perhaps, or hyperinflation ?
This is so ironic, because for so long people have sneered at the Japanese for their inability to steer their economy to recovery. Perhaps because they have sneered so much, it is no longer possible to admit that after a huge housing bubble bursts, there is nothing to do except suffer many years of economic indignity.
The fixation with Japan was not helpful during Mr Greenspan’s watch, nor, I fear, will it be of much use this time. The Japanese may be different, but they were not stupid.”
- Takashi Ito, Tokyo, Japan, in a letter to the editor of the Financial Times, August 2010.
It is worth highlighting that phrase again: after a huge housing bubble bursts, there is nothing to do except suffer many years of economic indignity. The construction is wonderfully Japanese: delicate, understated, polite. As opposed to the social reality wherever austerity is now being practised or merely proposed, that is to say: riots on the streets. Not that Greece is in trouble because of frothy property prices. Greece is in trouble because of a systemic problem infecting the capital structure of the western world: too much debt, and not enough growth.
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