1. I am not sure if that is so.
2. If it is so they were foolish to follow our orders–any mild trade sanctions would have hurt them less than deflation
3. We were stupid to tell them to do so, as it doesn’t really help our trade balance
4. Even if you’re right, it would still support my point that their was no Keynesian liquidity trap–it would be like the constraints of the gold standard that I discussed earlier. No non-Keynesian would argue with the proposition that if a central bank is browbeaten into adopting a tight money policy, it may not be able to escape deflation.

These arguments aren’t necessarily directed against your point (as I’m not sure your view of the liquidity trap), I just wanted to make sure other readers didn’t get the wrong idea.

You are right that gold was hoarded due to devaluation fears. But it was not fear of devaluation against goods and services, it was fear of devaluation against gold. The 4 episodes of gold hoarding in the Depression; late 1931, spring 1932, early 1933, and fall 1937 were all motivated by devaluation fears, and all were deflationary.

Your last point is a very good question (I guess it is one Karl Popper would ask.) It’s hard for me to answer, but I’ll try:

1. If my futures targeting idea didn’t make nominal GDP growth more stable.
2. Assuming idea 1 is a nonstarter, then if ordinary NGDP targeting didn’t make real GDP less volatile than under the current discretionary regime.
3. If the most sensible predictions one could make about nominal GDP growth from various market indicators (stocks, commodities, bond spreads, etc) did worse than the Fed’s prediction of nominal GDP growth. (Although this is less essential.)

Regarding the specific issue of liquidity traps; it’s hard to think of evidence that allows one to distinguish between my view and Krugman’s view. I’d guess that he’d find my interpretation of the Japanese case less than convincing. The problem is that it is very hard to distinguish between a central bank that is sincerely trying to create a bit of inflation, and one that is merely accommodating higher money demand from its previous overly contractionary policy. But I did the best I could in the post.

Was Japan the exception or the rule? The Fed in 1934-1937 managed to create inflation, as have the vast majority of stimulative (monetizing) central banks facing output gaps following debt crises. Against this weight of evidence we have one example of stubborn deflation in the face of large monetary stimulus: Japan.

Gold is hoarded for a reason. Why hoard gold over paper currency? The latter is easier to store and vastly easier to exchange for goods. You would only do so if you expect paper currency to decline in value.

I think its helpful to find a set of indicators that can tell you when your view of the world is wrong. If yields continue falling along with gold, then I would admit mine is. On the other hand, if gold and yields continue to rise in the face of declining output…

David, One problem with this blog is that I am 4 months too late. You are right that deflationary expectations have moved to roughly 0% inflation expectations. But I still think that 0% inflation in this monetary regime is just as painful as negative three percent under the gold standard (where 0% was the norm.) I also pay more attention to nominal GDP than inflation, and nominal GDP is still falling fast.

Lot’s of people think the big increase in the monetary base means inflation in the future, but that didn’t happen in Japan (which also had big fiscal deficits in the 1990s.) And I think our MB data is even less meaningful than Japan’s as the payment of interest has artificially ballooned bank reserve holdings. The Fed will quickly reduce reserves if inflation picks up–indeed they have already begun doing so (prematurely in my view.)

BTW, the monetary base rose rapidly between 1930 and 1933.

Yes, T-bond yields have backed up somewhat (and that may reflect long term monetization of the debt worries) but they’re still very low. Gold prices may reflect extreme uncertainty, not inflation expectations. Gold was hoarded during the deflationary early 1930s.

For what it’s worth, yesterday Bernanke said he expects inflation and real growth to both come in below normal for years to come. Unfortunately, I think he’s right.

KJR, I agree that monetary stimulus is preferable to fiscal stimulus. I am fighting a battle on two fronts; some say we don’t need more stimulus, as we will soon face high inflation. Others say we are in a liquidity trap. If I was a conservative who was a bit worried about inflation being somewhat higher than desirable, I still might support monetary stimulus because:

1. Some stimulus is inevitable
2. A small monetary policy error is better than throwing trillions into fiscal stimulus, bank bailouts and nationalization. We won’t have hyperinflation–the error might be 5% inflation instead of 2%–in other words back to 1988-89. That doesn’t look so horrible right now. And I don’t even think that will occur.

I think we actually agree here, I am just fleshing out my reasons a bit more fully. I also agree that if we must do fiscal stimulus, then Mankiw’s payroll tax cut is a much better way of reducing unemployment than pork barrel projects.