Naked Capitalism has the article The New Abnormal: “Disequilibrium Flirting with Deflationary Depression”.
The first ingredient of the New Abnormal is the fact that the mediocre growth that has been achieved over the past few years has depended on unprecedented and progressively more aggressive monetary policy initiatives. Meanwhile, fiscal policy, after the emergency easing of 2009-10, has been largely side-lined as a stabilisation tool. High levels of public debt have led most governments to calculate that they have little scope for fresh fiscal stimulus, notwithstanding the sustained fall in the yields on government bonds.
Several factors and actions are intermingling in a way that adds to the confusion of exactly what is going on. The neoclassical economists are worried that the increased Fed’s pumping of liquidity into the market will cause inflation. In fact there is no consumer price index inflation anywhere to be seen. The Fed is trying to create a little inflation, but cannot seem to do so no matter how much liquidity they pump in. In fact inflation has been created, but it is in the stock market and in asset prices, not in consumer prices. The inflation of stock market values is applauded by the capitalists because it appears to increase their wealth. As the article suggests, the problem with this view is that stock prices are artificially inflated. The new wealth could easily disappear if the market adjusts by having a stock market crash.
The proper prescription for what ails the economy would have been fiscal policy rather than monetary policy. A fiscal policy of investing in infrastructure and direct job creation would seem to mean more government deficits which the public has been convinced are bad things.
The real issue is not so much government deficits as it is an issue of what those deficits have been used for. Recently those deficits have been used to finance tax cuts for the wealthy. The wealthy use that money to inflate the stock market and asset prices without creating new jobs and higher wages in the economy. There is no creation of physical assets that would benefit the economy.
If the deficits had been used to invest in improving infrastructure rather than tax cuts, we would have more and better physical assets to increase the capacity of the economy, keep people employed, lead to higher wages, and produce a higher standard of living for the bottom 99%.
In normal times, increasing taxes and lowering deficits is associated with putting the brakes on the economy. This adds another level of confusion to what is currently happening. When taxes previously have been cut to put money into the hands of the wealthy where it is ill used, there may actually be an economic benefit to taxing this money out of the hands of the wealthy and putting that money to good use instead of bad. In this case, increased infrastructure spending might not lead to as enlarged deficits as it normally would.
Instead of using indirect measures like government deficits, stock market growth, and interest rates to judge what policy we should promote, we need to look at wages, employment, inflation, income distribution, and standard of living.