How the US economy is being 'Japanised'

Federal Reserve policy is taking a worrying turn towards monetarism. This can only result in an American 'lost decade'

Chris Payne
guardian.co.uk, Thursday 12 August 2010 15.00 BST

In 1963, Milton Friedman and Anna Schwartz wrote a seminal piece on the Great Depression (A Monetary History of the United States, 1867-1960), parts of which have become accepted wisdom in monetary policy and theory ever since. Friedman and Schwartz's argument is that what turned a recession into a depression in the 1930s (where output dropped by 30% and unemployment rose to 25%) was a collapse of the money supply, as banks were forced to call in their inter-bank loans, creating a domino effect of collapsed banks and lost savings.

Tuesday's policy announcement by the Federal Reserve can be understood as yet another nod to Friedman and Schwartz: "whatever happens, let's keep the money supply from falling." It is also, as I shall explain, yet more evidence that the US is going the way of Japan, meaning that it is entering into a protracted era of low economic growth.