In a credit crunch, lending, spending, and borrowing all contract. The Japanese found that lending money even at a zero percent interest rate didn’t revive the ‘animal spirits’ of a booming economy. Deflation wins, in other words.
But that doesn’t stop central bankers and central governments from trying. In this space yesterday, we reported a guess from Bridgewater Associates that the credit crunch could take $12 trillion of credit out of the economy. The authorities will try to make up this amount with a combination of fiscal and monetary policy. But you see, the amount is too great. And it doesn’t include the natural tendency of people in hard times – to draw back and save. If Americans suddenly started turning Japanese, and began to save money like the Japanese, it would take another $1 trillion out of the consumer economy every year.
So the U.S. economy is probably in for some rough handling. But we keep pointing out that the United States is not Japan; it’s not as healthy. And the world economy has changed in a fundamental way in the last 20 years.
When the Japanese tried to stimulate their economy with zero percent interest rate loans, the money often ended up in speculative bets on the US stock market in the ’90s…or new factories in China. Now, when the feds try to stimulate the US economy, the speculators turn to oil and commodities. Prices rise, forcing Americans to pay more for imports…and driving up consumer inflation rates all over the globe. Result: inflation wins too.
And so, the poor American takes it from both sides. He gets smacked by inflation…and booted by deflation as well.
Markets and Money