Shuddering memories of macro-economics classes: Although an economist by education, I quickly abandoned the "dismal science" for the pursuit of righting wrongs, and bringing justice to the downtrodden...banks that I represent as a lawyer. In any event, the Ricardian Equivalence was a nice trip down memory lane. I only quibble with Garth's use of Japan as a model.

The situation in Japan is a bit of a pet project of mine; not that I pretend to know how to solve the problems over there, but that I follow the story quite a bit and am fascinated by the decline of its once great economy. As many know, Japan's dominance in the 80s was fueled by two main factors (obviously there were others, but this isn't a book - and this is not to discount the rampant corruption that wracked the Japanese government): 1) rampant land speculation; and 2) keiretsu, or the unique inter-locking of manufacturing, lending and marketing interests in an otherwise "free market" economy. Land got hot, and was used, over and over again, as the collateral for more and more loans by Japanese companies, who in turn used that money to buy all of Hawaii (remember those fears?), plus movie companies, etc. The banks were happy to lend because a) they bought into the hype, and b) they often had aligned themselves with the very companies they were lending to. [Not only was keiretsu widely utilized, it was government-sanctioned.] Well, as with all speculation, it has to end. And it only takes a couple bad deals for the whole pyramid to collapse. Once the banks start looking to cash in on their collateral, lo and behold, there's no value (remember too the great art purchases by Japanese companies). And when the banks start failing, it's time to get out of Dodge (IN 1998, it was estimated that the total amount of bad loans in the banking system exceeded $1.1 billion - not counting the write-offs!).

This wide-scale collapse turned Japan on its ear. From a world-beater to egg-on-the-face, beaten. Not only did the country lose its capital, it lost its confidence. Once guaranteed jobs for life evaporated; unemployment actually hit double-digits where it once was effectively eliminated; and the yen didn't buy quite as much as it did before. The government tried to buoy the market. Fiscal package after fiscal package went out the door with little return. By 1998, it was estimated the government had spent almost $650 billion in public spending packages. The consumers, already expert savers, began to save even more - Keynes called this the "liquidity trap".

What it came down to was that the Japanese didn't believe their government would let them fail. It turns out, the government had no say in the matter. Despite all the collective hand-holding (centralized banking, lifetime employment, keiretsu), there was little one could do for the other. In fact, the Randian ideal of every man/woman for him/herself was only strengthened.

My long, long-winded point is that it's not entirely a good idea to compare the effect of monetary policy here based on its results in Japan. These people, even before the boom, were saving more than we ever have. Plus, our model has always been different. Lastly, the difference in confidence between the Japanese and us is equally dissimilar.