Of course, we know that the stimulus wouldn't serve goals of the millions of people in the market, being a top-down decision. But moreso, it didn't serve the goals of the ones who demanded the stimulus.
It didn't bring any real price inflation. It didn't reduce the debt burden of heavily indebted firms in real terms. It didn't help lower real incomes in a way that wages fell below marginal product. It didn't make US exports so competitive that there would be a major export boom. Why didn't that happen?
Going through a few sources, I realized that Irving Fisher's theory of debt deflation is partially relevant. In a balance sheet recession, as the value of assets keeps falling as the debt owed remains constant, the debt burden keeps increasing - which causes more deflation, and which causes the value of assets to keep falling. This is a cycle of two simultaneous processes that influence each other - deflation increasing debt deflation and debt deflation increasing deflation.
Currently, you have heavily indebted households, heavily indebted firms, and insolvent "zombie" banks with many non-performing assets and losses that have not been written off.
In such a situation, stimulus money would simply have been money down the drain, emptying into the sinkhole of meeting perpetually greater debt obligations. It would not lead to inflation, because when there are so many heavily indebted people, they will only save up their money to meet debt obligations.
Regardless of what the government wants them to do.
Prateek Sanjay: In such a situation, stimulus money would simply have been money down the drain, emptying into the sinkhole of meeting perpetually greater debt obligations. It would not lead to inflation, because when there are so many heavily indebted people, they will only save up their money to meet debt obligations.
So Keynes has been wrong all along? No way.
HERESY!!
To be fair, Keynesians such as Axel Leijonhufvud, Hyman Minsky.etc have done much work on debt deflation and acknowledge the same.
Indeed, this is a hypothesis held by many Post-Keynesians.
Do these post-Keynesians distinguish between (1) bursting of a credit-induced bubble and (2) "debt deflation"? What's their medicine for "curing" such (an) abomination(s)?
Prateek Sanjay: To be fair, Keynesians such as Axel Leijonhufvud, Hyman Minsky.etc have done much work on debt deflation and acknowledge the same. Indeed, this is a hypothesis held by many Post-Keynesians.
What is their prescription to fix the economy if that is the case?
Would someone mind explaining what exactly a Post-Keynesian is?
Neodoxy: Prateek Sanjay: To be fair, Keynesians such as Axel Leijonhufvud, Hyman Minsky.etc have done much work on debt deflation and acknowledge the same. Indeed, this is a hypothesis held by many Post-Keynesians. What is their prescription to fix the economy if that is the case?
They believe in a special kind of financial reform. First of all, the zombie banks need to be dissolved, where in return for receiving any bailout money, they must write off all their losses, sell assets to meet liabilities, pay off depositors, and so on. With the money they receive, they must recapitalize and return to a more solvent position, if possble, in order that they not be dissolved. Secondly, something like Herbert Hoover's Reconstruction Finance vehicle might be constructed to raise funds privately and lend it to debtors on such terms that they begin paying off their debt, with repayment guaranteed by taxpayer's funds.
But don't take my word for it, because I believe I might be oversimplifying. Look up their works yourself.
I find their views interesting, because they have sufficiently explained why Japan was in a deflationary state for so long, despite huge fiscal and monetary expansion.
PS: Post-Keynesians refer mainly to British Keynesians who followed one set of Keynes' subjectivist ideas, not the same as the American Keynesians who made a blend of Walrasian and Keynesian economics. Both took what they wanted from Keynes, left the rest, and developed each in their own way.
It would not lead to inflation, because when there are so many heavily indebted people, they will only save up their money to meet debt obligations.
Prateek, I think if you would think about this for a minute, you would see how it hardly differs. The money will still end up being spent on goods; in this case, it's spent on debt obligations, since inflation favors debtors rather than creditors.
But when the obligation is paid, the money doesn't evaporate into thin air. It's still in circulation. The point is, once that money is out of the hands of the government and into the economy, there's just no way of knowing exactly what will happen with it, and so to say that it won't cause inflation seems incorrect.
Rcder:Would someone mind explaining what exactly a Post-Keynesian is?
Google/Wikipedia is your friend.
http://en.wikipedia.org/wiki/Post_Keynesian_economics