Thursday, January 22, 2009

If We Can't Replace The Dollar With Beef, Can We Print More Money?

Back in 2000, I ran a now-long-defunct financial news parody site called DonkeyBusiness. (Whether that has anything to do with the name of this blog is unclear even to me.) It was basically The Onion for the financial news.

My first article was "Japan replaces Yen with Beef." There actually was an economic argument for doing this. Japan was stuck in a liquidity trap -- the economy had been sluggish for a while, so the Japanese were securing themselves for an uncertain future by saving their money, so there wasn't enough spending, so the economy just stayed sluggish. My thinking was that if they replaced their currency with a perishable meat like beef, people would have to spend it immediately and the liquidity trap would end.

I was looking at this graph from Paul Krugman today, and I was wondering if we need to take similarly extreme measures. Interest rates can't go anywhere below zero, but the Taylor Rule seems to dictate an interest rate more than 600 basis points below zero. We need super-easy money and there basically isn't any way for conventional monetary policy to generate it. This is why people are talking about enormous fiscal stimulus packages.

Not that I actually believe we should do this, but let me ask: what would happen if we printed more money and spent it? This would be wildly inflationary, but if I understand that chart, it's telling you not to worry about inflation. Just throw money into the economy quick!

As far as I can see, the big problem is that it sounds so Zimbabwean that the resulting loss of faith in our currency and the government's monetary authority would be disproportionately large, compared to the actual amount of stimulus we would generate by spending the money. Is that the big reason? Or are there others?
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