Today I’ll consider the first liquidity trap, which spawned that mutant monster known as Keynesian macroeconomics.  But first you need to wade through more of my rantings on politics.
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Those interested in politics may enjoy this excerpt.  But first, a few interesting items from the blogosphere:
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Tyler Cowen called on bloggers to list the books that most influenced them.  As soon as I started looking at other lists I got worried that I wouldn’t be able to come up with anything respectable.  Yes, I am familiar with A Theory of Justice,  The Structure of Scientific Revolutions, Guns Germs and Steel, The Bell Curve, The Road to Serfdom, etc, etc.  But have I read them?  Well, 30 years ago I read The Road to Serfdom, but I really don’t remember the book at all.
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One day after striking back at Ryan Avent, Paul Krugman posted another essay on the Chinese yuan, and this one’s actually very thoughtful.  In the end I still don’t agree, but I think he makes his case much more effectively.  We seem to mostly differ on how we interpret two issues:

1.  Nominal GDP determination (or AD if you prefer that terminology) in the US, and in particular what should be held constant when thinking about policy options.

2.  The disparity between East Asian and American savings rates, and who’s to blame.
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When you read this you’ll see why I couldn’t resist falling off the wagon.  Paul Krugman has again called for the US to pressure the Chinese to revalue the yuan.  The reasoning is even more puzzling than usual:

Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared “” absurdly “” that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”

As you may recall, back around 2005 a number of Congressman were insisting that the Chinese revalue the yuan by 27%.  In fact, they did revalue their currency by 22% over the next 3 years.  But now we are told they need to do another 20% to 40%.  And people wonder why the Chinese are so frustrated with the West.  Does this game ring any bells?  I seem to recall that back around 1970 the US government kept insisting that the Japanese trade surplus was caused by an undervalued yen.  Then the yen was revalued 20%, but the “problem” continued.  Then another 20%, then another 20%, then another 20%, then another 20%.  The yen has now gone from 350 to 90 to the dollar.  My math isn’t very good, but that sure seems like a lot of 20% revaluations.  And the Japanese still run a current account surplus that is more than half the size of China’s surplus, despite having less than 1/10th China’s population.  I think it’s fair to say that international economists have become increasingly skeptical of the notion that simply by manipulating nominal exchange rates you can eliminate current account imbalances that represent deep-seated disparities of saving and investing.  But I guess hope springs eternal.  Maybe this time it will finally work.
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