If the grip of monetary deflation and fiscal austerity isn't loosened soon, we may find ourselves in the first global crisis of the 21st century. If so, it will be a crisis created entirely by central bankers at the U.S. Federal Reserve Board and the Bank of Japan, by bureaucrats at international financial institutions like the IMF and the World Bank, and by national governments preoccupied with deficits and debt and afraid or unable to cut tax rates. The malefactors will insist that raising tax rates or keeping them high to reduce deficits and retire public debt is necessary to lower interest rates and increase saving and spur economic growth, although in reality these policies destroy incentives, destroy jobs and slow economic growth. They will protest that they had to raise interest rates and starve the world of liquidity in order to combat speculative bubbles and prevent too many people at work and too much investment from overheating the economies of the world. Monetary deflation and fiscal austerity create a self-fulfilling prophecy of economic pain and misery.
Deflation ultimately grinds away at the entire economy until all wages and prices adjust downward.
Government revenues decline, along with falling profits, fewer capital gains, and the declining fortunes of workers who lose their jobs or must take wage cuts. Politicians and IMF bureaucrats then rush forward and insist that tax rates be raised or kept high to reduce deficits, preserve surpluses and retire debt. The price of gold in Japan didn't rise on the central bank's announcement, which is a pretty clear market indication that deflation expectations will be hard to dislodge. The yen did weaken significantly against the dollar after the BOJ announcement and will continue to do so, in spite of Japanese protestations to the contrary, if the new policy succeeds in raising the yen price of gold and the Fed does not loosen U.S. monetary policy. Behind the gloom and doom, however, there is a ray of hope.