10 Pages Posted: 25 Aug 2011 Last revised: 23 Sep 2011
Date Written: August 24, 2011
Japan since 1990 and the US since 2008 have a zero interest (or “Liquidity Trap”) environment. Bankers’ DNA contains: (1) Inability to charge money instead of paying interest for deposits, (2) double entry book-keeping, and (3) inﬂation-aversion. I show that this DNA is responsible for the inability of monetary policy (QE1, QE2 or further real interest rate reductions into negative territory) and ﬁscal stimulus to promote American recovery and growth. As a unilateral remedy, the US should “print” about $500 billion, without adding to debt or taxes. If single entry printing is impossible, I suggest a fresh “allocation” of $500 billion in special drawing rights (SDR) to the US, Japan and the Euro-zone via an international agreement. I also indicate the taxing and spending discipline needed to avoid tripping market expectations. However, without it we run the risk of multiple dip recessions and world-wide Japan-style decades long stagnation.
Keywords: Quantitative Easing, Inflation aversion, Liquidity trap, Zero interest
JEL Classification: E58, E62, E44
Suggested Citation: Suggested Citation