THE DEFLATING UNIVERSE :

Credit Crunch Time : Cash-strapped businesses are what's ailing this economy. (Larry Kudlow, 8/15/02, National Review)

The classic solution to a deflationary problem such as this is to pour new cash into the economy. Immediately following the terrorist attacks on September 11, the Fed seemed to be appropriately stepping up their creation of new money. Not surprisingly, economic recovery took hold nicely in last year's fourth quarter and this year's first.

Lately, however, the Fed has lapsed into its historic obsession with short-term interest rates. Instead of lowering the fed funds rate this week - a move that would have allowed it to buy Treasury bills and inject more cash into the financial system - the Fed decided to hold the rate at 1.75%. The rate has been at this "low" level since November, but the Fed mistakenly believes that a low and steady fed funds rate infers an easy cash policy. Paradoxically, this rate-targeting led to a significant decline in the Fed's cash-creating operations right when businesses needed the money the most.

[O]ur central bank must get in on the corporate-stimulus act. The Fed must relinquish its interest-rate targeting, let the fed funds rate go where it goes, buy back Treasury bills, and get a substantial amount of fresh money moving toward cash-strapped businesses in need of a boost. Higher prices for gold and industrial commodities will tell the government bank if they are succeeding.

This seems sound other than his lingering "gold-bug" tendencies. One wonders though if the coming population implosion and the globalized economy may not make inevitable a long term deflationary trend? With ever less people chasing goods that are produced more and more efficiently and with prices continually getting hammered by competition from everywhere on Earth, where would the upward pressure on prices come from? Posted by Orrin Judd at August 15, 2002 7:21 PM