First up is the upbeat article Doom! Our Economic Nightmare is Just Beginning, by John Judis. Judis draws parallels between the current global malaise and the Great Depression and observes:
[I]n contrast to the ususal post-World War II recession, our current downturn, like the Great Depression, is global in character. . . . During the typical recession, a country suffering a downturn might hope to revive itself by cutting its spending. That might temporarily increase unemployment, but it would also depress wages and prices, simultaneously cutting the demand for imports and making a country's exports more competitive against those of its rivals. But, when the recession is global, you get what John Maynard Keynes called the "paradox of thrift" writ large: As all nations cut their spending and attempt to devalue their currencies (which makes their exports cheaper), global demand shrinks still more, and the recession deepens.The thing is, though, it is my understanding that today not "all nations" can devalue their currencies; this is because the EU nations have all joined in the Euro and no longer have national currencies to devalue.
Now, I do note that Judis's description of a typical response to a recession is to both devalue the currency and to cut spending; but what if we only did one? Is it possible to so devalue the dollar - through action by the Fed alone - that we can jump start the U.S.'s export economy by taking advantage of the individual EU nations' inability to control their own monetary supply? Would doing so even be legal, or would it subject the U.S. to sanctions for currency manipulation?
But setting those questions aside for the moment, here are some of the potential benefits I see:
First, increasing the money supply so as to devalue the dollar is doable - there would be no need, as there would be, say, with another economic stimulus bill, to try to get anything through the current do-nothing Congress.
Second, pumping sheer dollars into the system would devalue the dollar, causing domestic inflation to rise. If people - or, more importantly, corporations now sitting on about $2 trillion in cash - think that prices are only going to keep going up, that increases the pressure on those currently hoarding cash to spend money now rather than wait until later, thereby increasing national demand.
Third, if the dollar is devalued against the Euro, which lacks the ability to be devalued by any individual EU nation, then America's exports become more attractive to those nations and further increases demand for American goods and services.
Fourth, a jolt of inflation would reduce the real effect of the "overhang of consumer and business debt" described by Judis that also reduces effective demand. In other words, we could reduce the drag our current debt level has on the economy by repaying that debt with devalued dollars . . . freeing up more real money to spent on other goods and services, which also increases demand.
Fifth and finally, allowing for an inflation rate of - say - 4% would drive up nominal interest rates, which would provide a working margin in which the Fed could then subsequently work to increase or decrease real interest rates; as it is now, interest rates are too close to zero to allow the Fed much room to maneuver. See Karl Smith, Matthew Yglesias, and Keven Drum all writing in favor of this last point.
So, anybody? Is this a possible way out?
