I am not sure printing money will get you out of deflation. Deflation is more a state of mind. People are fearful of losing their jobs, so they cut back on spending, economize. That leads to a drop in demand, plant closures, more job losses and more retrenchment. It is a vicious cycle.
I'm sure the government could print enough money to hire all of the unemployed, send them all to school, give them the money, or do whatever else it wants with it. There is no limit as to how much money the government can print beyond access to the paper, ink, printers, and workers to work the presses. We could match and even surpass the Weimar Republic within a month if we really set our minds to it. I'm sure a busy busy printing job would change people's minds quickly enough.
Now, since you have a habit of interpreting my ideas to their extremes, I'll clarify right here right now that no I'm not proposing that such inflationary printing would be a wise idea, but merely that in the event of a deflationary spiral, there would be nothing stopping the government from printing however much money it needs to to pull us out of that spiral.
Add to that that if the government should adopt a consistent policy of aiming the currency towards a pre-set value, and act on that policy, then the public would know from experience and a trust built in the predictability of successive governments that should the currency rise to above the target value, the government will take measures to inflate it back to its original value and vice versa. This trust that would be built through consistent government action would also prevent any deflation from getting out of control. Public education could help too. If people worry about a deflationary spiral, the government would merely need to educate them about the wonder of the printing presses and how easy it would be to print our way out of such a spiral.
How is printing money by itself going to change peoples’ psychology? How is that going to stimulate demand?
Of course I'm not suggesting that the government print the money and then put it under a pillow, but rather that they put it out into the economy by either paying off debt with it or spending it. Clearly putting more money into the economy will lower its value or at least slow down its rise. Are you telling me that if the government would print large amounts of money and put it into the economy that that would not at least slow down any deflationary trend?
It works better the other way. If there is inflation, you increase interest rates. That makes borrowing expensive, people borrow less. So they have less money to spend, resulting in a drop in prices, or at least slowing down of the price increases. This is again mob psychology. If people see that it will cost them to borrow more, they will borrow less.
And the government pays more interest on its borrowed money too. So then we're merely trading inflation in for debt. How does that improve anything in the long run?
The other way, however, is not that clear cut. Let us say interest rates are already close to zero. Then government starts printing money. How is that going to stimulate demand, cause people to spend? How is that going to cause people to borrow? They had deflation during the 30s depression, and FDR did precisely the same thing. And it worked, but it took years to work, it was a slow and painful process.
The US was also very cautious in printing money. We have more experience behind us now to know how much money we'd need to print. And again, if we do print too much, with interest rates down to zero, we wouldn't need to raise them by much to put the brakes on inflation. If we're experiencing inflation already along with high interest rates when recession hits, then we don't have much leeway but to inflate even more or raise interest rates even more in our bid to increase or decrease inflation.
We have that one experience with deflation, and it was not pretty. That is why no government wants to get into deflation. Inflation is much easier to control, deflation is very difficult. A slight inflation is much better than the possibility of deflation.
Most historical accounts of deflation and recession are not conclusive. There have been many cases of recession coupled with inflation or deflation coupled with growth. Though the two do influence each other to a degree, there are other factors to consider too. We can't simply conclude that we can always just inflate our way out of recession. Inflation may solve demand-deficient unemployment, but it does not solve structural unemployment such as skill-deficient unemployment (where only education can solve the problem) or geographical unemployment (where only breaking down barriers to the free movement of labour can solve the problem).
As long as we avoid a deflationary spiral, the demand-deficient unemployment is essentially solved overall unless we want to save the buggy industry. Otherwise it would be wiser to tackle each kind of unemployment head on.
As I explained, printing money by itself will not get you out of deflation (though that may be the only remedy available). FDR tried that in the 30s and it took years.
The US, like Canada, had also turned to protectionism, which exacerbated the depression, and was very slow to react to the depression too, with the government resisting any kind of intervention until the depression was already well under way. No comparison with today.
OK, at least we are agreed on this one thing, no government in its right mind is going to flirt with deflation. According to me, for very good reason, they don't want to risk depression. According to you, that is because they are afraid of losing power.
But whatever the reason, no government is going to try it and the discussion is purely academic.
Perhaps. I should clarify though that I see nothing wrong with short-term deflation as long as it is eventually counterbalanced with inflation to bring its value back to the original set value, and of course vice versa.
I do want to clarify though that while empirical evidence does show that a drop in the inflation rate can contribute to short-term recession and an increase in the inflation rate can create short-term employment, the effect of inflation over the long-run waters down as the economy becomes addicted to it as it is now, requiring a further increase in the inflation rate to achieve the same result.
To take an example, if we went to long-term zero inflation, that would certainly create a temporary recession as the economy adjusts to the new reality. Over time though, things would e as they are now minus the inflation once the economy adjusts to the new reality, one difference being that savings would likely be proportionately higher since people can trust in the value of their savings, thus ensuring that future growth would be slower but more sustainable with less likely hood of repeated recessions, or at least milder recessions, and with the mildest of inflation being able to pull us out of recession since it would be a drug used sparingly and not a constant fix like it is now.
