For what it is worth for today's puzzles:I just read in Richard C. Koo's book, "The Holy Grail of Macro Economics" (the explanation for our Great Depression) that Milton Friedman may have got the cause of the Great Depression right -- shrunken money supply -- but Friedman and everyone else missed the key -- monetary policy is helpless to maintain (or expand) money supply as long as corporations are not borrowing, are paying down the balance sheet deficits instead of borrowing, which is what happened here in 1929 and in Japan in 1990.
When corporations stop borrowing for years while they pay down debt -- what Japanese corporations have been doing since the real estate crash in 1990; just coming out of the woods now -- is what happens. If you make 1000 yen and save 100 (typical Japanese) the bank normally keeps the 100 yen in circulation by lending it -- and somebody somewhere earns 1000 yen. If the bank doesn't, somebody somewhere earns only 900 yen and saves 90. Some other body earns 810 and saves ... etc.
So the Japanese government has been using fiscal policy since 1990-- borrowing vast sums and running a vast debt (commercial land prices in six major cities dropped 87%), but has avoided 1929; not that the Japanese government knew what it was doing according to Koo --to make monetary policy work. Took both Milton. Surprise; Milton was on to something.
So the way to avoid a depression -- in a contraction -- is for government to become the borrower of last resort? Hey; that's Milton Friedman (almost?) Republicans.
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