Last week, markets zoomed upon receiving the news that Japan was committed to "quantitative easing" or what we used to simply call inflation. What should give everyone pause is the reminder that we've been through this all before.
In a very accessible article, "U.S. Recession Policies: Nothing New Under the (Rising) Sun" in the Fall 2009 issue of The Intercollegiate Review, Benjamin Powell expertly compares and contrasts the response of Japan to their earlier recession that led to the infamous "lost decade."
Powell documents that the central banks of both Japan in the late 1980s and the U.S. in the 2000s increased the money supply and greatly lowered interest rates. In both situations housing and stock bubbles were inflated and then burst leaving a plethora of economic devastation in their wake. He uses Austrian business cycle theory to rightly identify the massive capital malinvestment that is at the root of the economic problems of both Japan and the United States.
Powell notes that the response in the U.S. has been both monetary and fiscal stimulus. He does an expert job explaining why it was just this sort of monetary and fiscal intervention that prolonged Japan's recover into what became known as the lost decade. Powell's article is an excellent piece of economic history documenting how not to recover from the Great Recession.