Mounting unemployment and layoffs are leading to greater and greater angst. When will this economic slump end? Doubts about the unprecedented monetary and fiscal stimulus have Americans suspecting we are in for a long struggle like the historic Great Depression or the more recent Japanese asset bubble. In both crises, a troubled financial system set off a decade long downward spiral of deflation, wealth destruction, and escalating unemployment as government appeared ineffective at restoring growth. But what tends to go unnoticed is that after the initial and painful recessions of both crises, each economy was apt to recover and respond to monetary and fiscal stimulus. However, specific miscalculations by the U.S. in 1937 and Japan in 1996 thwarted the recoveries and prolonged the downturns.At the root of their miscalculations, policy makers maintained a bias to err on the side of holding inflation in check when the real public enemy was deflation. In the midst of zero interest rates and fragile growth, policy makers put the brakes on expansive monetary policy at the first signs of an upturn in inflation. This reignited deflation and threw each economy back into a steep downturn. These great mistakes are the reason both crises lasted… Read full this story
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