I think Friedman would recommend igniting artificial inflation. He has written extensively about getting the funds rate to zero, bailing out banks, and pumping lots into the economy with non-traditional monetary methods like buying up mortgages and other assets to clear balance sheets.
Friedman’s famous “helicopter drop” of dollars via tax cuts and asset purchases which Bernanke later quoted and got the nickname Helicopter Ben from his 2002 paper that quoted Friedman on how to combat deflation.
Bernanke is kind of doing that now when he announced last week that he would let proceeds from the mortgage bond purchases “ride”. But this is half asses IMO and he needs to do more.
They both knew that with the funds rate at zero, any reasonably large amount of liquidity injection would not trigger an inflation crises. They most fear Deflation.
Once we are in deflation, we are screwed since the majority of the US carries debt in mortgages, autos, personal loans, student loans, credit cards, etc. Deflation will make these debts a hell of a lot more expensive to service. When we are barely able to service our debts, we have almost no disposable income to put into the economy through goods and service purchases and unemployment and deflation continue in a downward spiral.
Those without any debts? Well they just need to park in bonds and they will be on easy street.
“Once we are in deflation, we are screwed since the majority of the US carries debt in mortgages, autos, personal loans, student loans, credit cards, etc. Deflation will make these debts a hell of a lot more expensive to service. When we are barely able to service our debts, we have almost no disposable income to put into the economy through goods and service purchases and unemployment and deflation continue in a downward spiral.”
I agree. In fact I think about my own personal situation and cringe at the thought of deflation. My income would sink and my debt load and payments would not. Why? Because even though most of the loans I have are variable, which means they should be adjusting to the index, and thus falling, they won’t because they have a floor below which they are not allowed to fall.
Deflation could be made much more palatable if the fed were to pass some rule that would disallow that “floor” and let the interest rates on loans adjust to the prevailing rates, including negative rates.
This of course would not sit well with the creditors. But in a way I think they would be short sighted because they may end up losing everything as well if they insist on maintaining the floor. Even with falling rates they would still be making the same margin over the index.
Seems like a way to disarm the specter of deflation.