I may not post much for the next week, but if you are interested you can tune in to my debate with Lee Ohanian at CBSMoneyWatch.com.
I just posted my first column, and three more are planned. Professor Ohanian will also provide three responses. I should mention that I was restricted a bit by the format. I did slightly run over the 500 word limit, but I was also asked to take the side that “deflation is a currently a bigger risk than inflation.” As you may know, I am more worried about prices rising at too slow a rate than too high a rate. However I also think that outright deflation is less likely than “disinflation.” In any case I don’t have much fear of high inflation, so I decided to take the “deflation” side of the debate. It also needed to be written at a level for the average educated reader, not economists, so it wasn’t always possible to quickly sketch out these subtle distinctions. In any case I did the best I could under those constraints, and will have two more shots. There is much more I would have liked to say (and have said throughout this blog.)
Today’s news was full of reports that Japan just experienced its worst deflation in modern history. I don’t have any specific complaints about news stories like this one:
“It looks like Japan is heading for another lengthy period of deflation,” warned Macquarie Securities economist Richard Jerram.
Against this backdrop, the Bank of Japan looks set to hold its key interest rate at the current low level of 0.1 percent for “a lengthy period,” he added.
What bothers me is the sort of implicit assumption in many of these stories that deflation is some sort of mysterious malady that simply fell on the poor benighted country of Japan. And we don’t know what sort of medicine will solve the problem. BTW, since deflation causes low interest rates, if I was Japanese I would not be reassured by the forecast that rates will remain low for a long time.
One thing that is so interesting about these news stories is that the finance ministers of medieval kings have laughed at the claim that deflation was a difficult problem to solve. The “foolproof escape from a liquidity trap” (to borrow Princeton Professor Lars Svensson’s term), was to debase coins. In the modern context, that would mean devaluing the yen. This could be done by gradually making the yen a smaller and smaller fraction of the dollar. Unfortunately, not only has the yen not been debased, its value has actually increased in the past few years. BTW, I am not recommending that Japan target exchange rates, it’s just that I find it amusing to read press reports written as if the BOJ had somehow lost the mysterious secret known to all medieval finance ministers. I’m pretty sure they know how to generate mild inflation, but they don’t want to.