I’m trying to understand why the US won’t follow Japan’s fate (that is, of falling prices despite monetary expansion) but instead suffer inflation / hyperinflation (monetary expansion triggered price rise). I remember hearing Peter Schiff making some points regarding that issue as well (specifically what is different about Japan and the USA), but I can’t find it now and anyway, his explanation didn’t “work” for me then (I need some elaboration to understand this one).
If you can, please direct me to some sources, this is a “thorn” in my understanding
A panic and crash sets in and prices fall as consumers switch from spending to saving and banks close. That is the only time prices fall and it is brief. After that prices can only go in one direction. Up, up and away- into the sky as it will eventually be in the American case.
It has something to do with the fact that the Japanese had savings, and were a creditor government, as opposed to the U.S. people who are in debt, and the U.S. government which is a debtor government.
When people talk about “prices” rising, you need to ask prices of what exactly. Often the figure that gets quoted for “price inflation” are figures for prices of “goods in the shops”. But if a nation is stubbornly refusing to go and buy stuff in the shops (because they are worried about their future/jobs) then it may be that all newly created money gets spent on other things like housing or stocks and rises in the price of those things won’t show up in the CPI.
Whether the US suffers hyperinflation or not will depend largely on Ben Bernanke. If he did nothing then there would be massive deflation on the short and medium term as the flow of money back to lenders (money destruction) combined with defaults (also money destruction), outstrips the flow of new borrowing (money creation). His stated aim is to create just enough new money to counteract that deflation. Whether Ben can succeed or not is a tricky issue.
You have to remember that money is just like every other commodity, in that it follows the laws of supply and demand. Increased supply won’t do anything if demand increases. Ultimately, we do not know what will happen with the economy. My best guess is that we will continue with moderate price inflation until a second banking/financial crisis hits, at which point the demand for money will skyrocket, throwing us into a second price-deflationary spiral. The government should be able to restore inflation as long as it remains credible itself. As soon as there is doubts in the Treasury market regarding the ability of the US government to repay its debts, we will be forced into a classical “liquidity trap,” where nothing government does can reduce the value of the dollar.
