Another good argument in favour of a price-level target is that it helps repair balance sheets, so the financial system can work properly.
The Japanese problem of the past 20 years, together with the American and European problems of today, boils down to one fact: the economics profession has never considered a recession that could be caused by the private sector minimising debt in order to repair balance sheets after a debt-financed bubble in asset prices.
Both consumers and governments in the U.S. and Britain are going to have to repair their balance sheets.
As important as it is to restore the liquidity of the financial system, it is equally imperative to help economically viable households repair their balance sheets.
Following the bursting of the real estate bubble and the financial crisis that ensued thereafter, businesses and consumers have begun to repair their balance sheets by paring back their debt levels.
But the shared appreciation concept also offers a way to restructure existing loans so that they provide benefits for both lenders and households and allow households to de-leverage and repair their balance sheets.
Recoveries from debt-driven busts always take years, as households and banks repair their balance-sheets.
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As American households repair their overextended balance sheets it is pretty clear that high and rising U.S. trade deficits are a thing of the past.
Deficit reductions, households needing to repair t heir balance sheets and the compelling notion that the great recession might not be over since the US economy has never returned to its peak previous to the 2008 crisis.
Likewise, the bear market in equities in the developed world has wiped out trillions of dollars in valuation, resulting in rising savings rates as consumers, especially those close to a wanted retirement, try to repair their leaking balance sheets.
Banks' reluctance to lend as they strive to repair their overstretched balance-sheets is impairing the effectiveness of monetary policy.
If this happens, in short order China will once again have to repair and rebuild bank balance sheets, either by directly recapitalizing the banks, or by forcing savers to subsidize profits, or, most likely, by a combination of the two.
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