deflation
It was amazing yesterday that the Fed included in its report the possibility that we might enter a deflationary period. Granted, it's a fairly remote possibility, but I've thought for a while that a deflation-recession spiral is a possibility, mainly due to the Japanese example. Also, at this point I believe we are in the liquidity trap, where the cuts in nominal interest rate will not stimulate the economy. At this point, monetary policy ceases to be effective. Only fiscal policy will be able to pull the economy out of the liquidity trap, because monetary policy is effectively "pushing on a string".
Right now we are approaching an effective zero percent short-term interest rate. The only government action that can help is fiscal stimulus through spending or tax cuts. Preferably, through increased spending in that this creates a greater multiplier effect for the stimulus. Unfortunately, the administration is not interested in fiscal stimulus. Instead, they are interested in a long-term tax cut that will provide minimal stimulus, while telling the people it will provide stimulus. I wonder if this is the case where they actually know that their policies are counterproductive, or if they are getting really bad advice. I know what Paul Krugman thinks. But I haven't been writing as long, and I'd like to think that it's a genuine error that can be corrected if pointed out. Oh, wait, someone has already pointed it out. And this policy would result in him getting re-elected if it did provide genuine stimulus. Oh well, I guess I can put up with it for another year. Let’s just hope that the loony judge nominations will be held up.
If you are genuinely interested in understanding liquidity traps and deflation, go to Paul Krugman's website. Even if you think his columns in the New York Times are "shrill", you can read his academic articles which lay it out in amazing interesting academic prose. Especially interesting, since most economists cannot write in an interesting manner to save their lives. And if you want to invite him over for karaoke, he includes the number for his agent.