In this post, David Beckworth had this to say:
U.S. households during the 1920s acquired a vast amount of debt and began a deleveraging process during the Great Depression. Consequently, there was a “balance sheet” recession in the 1930s too. Monetary policy, however, was not impotent during this time.
At least when it was done the right way. FDR’s price level targeting from 1933-1936 sparked a robust recovery.
…Yes, deleveraging is a drag on the economy, but for every debtor deleveraging there is a creditor getting more payments. (And if the debtor is not making payments and defaulting then the debtor still has funds to spend.) In principle the creditor should increase their spending to offset the debtor’s drop in spending. The reason they don’t–creditors sit on their newly acquired funds from the debtor instead of spending them–is because they too are uncertain about the economy. There is a massive coordination failure, all the creditors are sitting on the sideline not wanting to be the first one to put money back to use. If something could simultaneously change the outlook of the creditors and get to them to all start using their money at the same time then a recovery would take hold. Enter monetary policy and its ability to shape nominal spending expectations.
But Krugman, always uptight about liquidity traps and balance sheet recessions tries to diminish its importance and relevance:
So I’m not clear why Beckworth needs to invoke some other story about coordination and all that. There is still a sufficiently low real interest rate that would produce recovery, but it’s a rate that’s hard to achieve.
Krugman ignores hard evidence about the indispensability of properly “shaping expectations”. This excellent post shows it clearly:
I wasn’t sure how serious to take this – a President talking about price levels to the public? Sure enough, here’s the second Fireside Chat, May 7th 1933 (Transcript, my bold):
Much has been said of late about Federal finances and inflation, the gold standard, etc. Let me make the facts very simple and my policy very clear. In the first place, Government credit and Government currency are really one and the same thing.
Behind Government bonds there is only a promise to pay…in the past the Government has agreed to redeem nearly thirty billions of its debts and its currency in gold, and private corporations in this country have agreed to redeem another sixty or seventy billions of securities and mortgages in gold…knew full well that all of the gold in the United States amounted to only between three and four billions and that all of the gold in all of the world amounted to only about eleven billions.
If the holders of these promises to pay started in to demand gold the first comers would get gold for a few days and they would amount to about one-twenty-fifth of the holders of the securities and the currency…We have decided to treat all twenty-five in the same way in the interest of justice and the exercise of the constitutional powers of this Government. We have placed everyone on the same basis in order that the general good may be preserved.
The Administration has the definite objective of raising commodity prices to such an extent that those who have borrowed money will, on the average, be able to repay that money in the same kind of dollar which they borrowed. We do not seek to let them get such a cheap dollar that they will be able to pay back a great deal less than they borrowed. In other words, we seek to correct a wrong and not to create another wrong in the opposite direction. That is why powers are being given to the Administration to provide, if necessary, for an enlargement of credit, in order to correct the existing wrong. These powers will be used when, as, and if it may be necessary to accomplish the purpose.
This picture, one of several, from a post of a few months ago that discusses the topic indicates that commodity prices (PPI) was at “striking distance” from FDR´s objective when the Fed, frightened of inflation “getting out of control” tightened MP! The second leg of the Depression (1937-38) followed suit.