Tuesday, December 16, 2008

You know that trouble we're in?

It's deep.

ZIRP! - Paul Krugman Blog - NYTimes.com

That’s zero interest rate policy. And it has arrived. America has turned Japanese.

This is the thing I’ve been afraid of ever since I realized that Japan really was in the dreaded, possibly mythical liquidity trap. You can read my 1998 Brookings Paper on the issue here.

Incidentally, there were a bunch of us at Princeton worrying about the Japan problem in the early years of this decade. I was one; Lars Svensson, currently at Sweden’s Riksbank, was another; a third was a guy named Ben Bernanke. I wonder whatever happened to him?

Seriously, we are in very deep trouble. Getting out of this will require a lot of creativity, and maybe some luck too.

I encourage the Japanese people to indulge in some schadenfreude. Really, we deserve it. Many Americans (not me though) were quite obnoxious during Japan's long deflation.

Pile it on, friends -- your scorn is the least of our injuries. I'm only sorry we're dragging Japan down to.

As to the creativity bit, I like my plan. But I would, wouldn't I?

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