"Any acknowledgement that stable dollar adjustments are a policy priority should help prevent a dollar run. "

Free Exchange with two points about earlier posts. First, the Tim Duy point that using the Great Depression as a guide in our current crisis might be of limited use, especially where Quantitative Easing is concerned:

"And Tim Duy speculates that because of the lingering current account deficit, America's shaky dollar could be approaching a dangerous adjustment. Enough downward pressure on the dollar could begin to affect Treasury rates. And the Federal Reserve, focused like a laser beam on preventing deflation and depression, might simply work to hold those rates down by buying Treasuries and plowing still more money into the economy. And then? Well, America could begin to have trouble financing its borrowing, and could then face the need to either pursue strongly pro-cyclical fiscal policies or hyperinflationary monetary policies.

There are a lot of ifs in all of that. It would be nice to have a probability distribution for all of the different potential catastrophic outcomes facing the global economy, in order to know which lesser evil to aim for. Had we one, I suspect this concern would turn up in far fewer die rolls than the standard depression outcome. Still, it seems worth paying attention to the conflict underlying the whole thing—that America's optimal policy choices now are not quite the same as they were in the 1930s, since America's role in the global economy has changed.

Because once that conflict is understood, American leadership can be proactive. Any acknowledgement that stable dollar adjustments are a policy priority should help prevent a dollar run. And more importantly, Barack Obama's economic team should begin to consider how best to cajole large creditor nations with current account surpluses to spend heavily on stimulus and boost domestic consumption.

There's no particular reason that America has to make policy in a vacuum, just hoping that trading partners don't do anything radically destabilising. Leaders globally need to understand that they have a mutual self-interest in unwinding global imbalances while also providing coordinated stimulus. And leaders among those leaders need to lead."

I've said much the same thing, only with less expertise.

Now, about Germany and the EU Stimulus:

"Jean-Claude Trichet, head of the European Central Bank, argued today in favour of European fiscal discipline and adherence to the Stability and Growth Pact. A noble sentiment, but one that's potentially troublesome given Mr Trichet's recent signals that the ECB is ready to pause in its rate cutting, and given Germany's reluctance to pursue bold fiscal stimulus. Germany said last night that no new stimulus plans would be forthcoming until it was clear what stimulus policies Barack Obama might pursue in office. Just why isn't clear. Mr Obama's stimulus is likely to be at least $500 billion in magnitude, and it's hard to know why the structure of the plan—tax cuts or local budget grants or infrastructure investment—would influence German choices."

I suspect that the wait for President Obama's Stimulus Plan is actually aimed more at domestic politics, since I concur in finding Germany's wait puzzling. But it is true that the amount of the US Stimulus might have an impact on how necessary a coordinated stimulus plan is, and how much each nation should spend. It could simply be prudence.

"The risk that this is not the relevant analogy for the US, and that policymakers are not prepared to accept such a possibility."

After saying that mining the Great Depression for clues on how to get us out of this current problem is of minimal use, I find this post by Tim Duy on the Economist's View interesting:

"But to be a real Dollar rout, we would expect to see Treasuries come under severe pressure, which has not exactly been a recent trend. So perhaps there really is nothing to fear. Indeed, I have argued that that if the stimulus is too excessive, that excess should reveal itself in the Treasury market, and policymakers can simply back off. No problem – ease away. Build those bridges.

This assumes that policymakers back off. What if rising Treasury rates encourage the Fed to double down, expanding quantitative easing to hold rates low and stimulative. What if years of research on the Great Depression have left even the best and the brightest with tunnel vision such that they could not accept that they were wrong?

Bottom Line: The Fed is headed to the zero mark, with another 50bp almost certain this week. It is widely expected that they will give some guidance as to their next steps, pointing us in the direction of an explicit policy of quantitative easing. Fed policy, as well as fiscal policy, assumes that the Great Depression is the most accurate analogy. This assumption ignores the external position of the US, which stubbornly refuses to adjust. If that failure to adjust is relevant, then recent Dollar stability was simply a head-fake. We should see pressure on the Dollar and, ultimately, Treasuries. Policymakers could adjust, but would they? With pursuit of the Great Depression case as the baseline scenario, it seems prudent to keep in mind the risk that this is not the relevant analogy for the US, and that policymakers are not prepared to accept such a possibility."

I think that Printing Money is simply the clearest option that we have. It has little to do with the Great Depression. The problems this could lead to are serious, and we'll be in for a rough ride. But the fact that the policy of Printing Money is Assessable makes it a good choice. I doubt that anyone in this mess is going to hold to a failing policy for too long. Rather, I would fear that we do not give these policies a chance to be assessed.

As to the point about the usefulness of the Analogy with the Great Depression, I agree.