Zygote, if you haven't already, I'd recommend checking out the updated edition of Krugman's The Return of Depression Economics. It's an easy read and gives Krugman's general position on the past crises in Asia and South America and how they relate to the current one. Even if you don't agree with much of it I thought it was pretty informative in at least knowing his stance on things.

Did you even read this thread?

i listened to a couple hours interviews with him and got some idea of what he thinks about the current crisis and brief remarks on past crisis in addition to a few blogs of his ive read. i also read a review of that book. The book doesnt look too long so maybe ill give it a shot. ill let you know what i think if you're interested.

Solution:

Private currency production. The cool thing about the coupons is I can write the IOU myself and create as much scrip as I want as long as people have faith they can redeem it, or better yet as long as people can "price" the redemption likelihood, e.g. if 50% chance I'll live up to the promise to babysit --> you take perhaps a "risk premium" of 3 or 4 additional coupons you can spend at various times. Real-world appreciation and depreciation of the coupons will incentivize this. For instance I will write and "sell" my coupons for 1.5-2 hours of your baby sitting once I notice the shortage. My coupon arbitrage will "smooth" inelastic demand.

public choice problem But imagine instead of having to back up the coupon production with actual babysitting later, instead I could make Frank babysit for me by taking his coupons when I needed them, and then giving them to you. There would be ENORMOUS incentive for me to pump a ****load of coupons into the market to buy babysitting for myself, or at least as much as I could get away with without completely destroying the value of the coupons. And why would I ever stop? I never have to "pay" (stay home, babysit) for the coupons I spend. Imagine also I have the power to imprison "alternative coupon" or "hard coupon" users and had the sole power to create new coupons. Imagine I barred statistics from issuing about how many coupons there are in circulation. Imagine if I was unelected by the members of the Co-Op, or the members of the co-op were located all over the country and faced intense collective action problems challenging my coupon production, or they were all ignorant about the effect of my coupon control because nobel prize winning economists convinced them by taking their babysitting hours and using them I was doing them a favor.

This is called a negative real interest rate and NEVER occurs in a real economy where people have recurring and immediate real needs, like, uh, eating. Also, I'd like to have a TV right now rather than in 9 years. But if it did, then the cool thing is that in a free market in coupons the person that likes going out in the winter the most/summer the least will do the consuming (e.g. coop has a dutch auction).

how does the central bank know the real interest rate? Krugman improperly analogies the central bank to the co-op board, which could just figure out that people want to consume more babysitting later than now by surveying its people. But Hayek taught us that you need prices to get aggregate and impound all those individual consumption preferences because of the sheer magnitude of the task of tracking ever changing consumption desires. What happens when, unexpectedly, the Nutcracker Ballet comes to town? What happens if we have a mild winter or a bee infestation problem in June? The problem is intensified when you can't price the capital.

Thread over.

Only if you assume that liquidity demand is completely inelastic and completely stuck at the roof, which is obv. false given the possibility of negative real interest rates.

Now in this case, you might have a problem because there is no custom of trading the coupons at various values but this is obv. solved in the larger economy.

Also, sticky prices cause arbitrage (which is imperfect) - for instance I can trade a band of coupon values, shorting and going long at various times, based on my macro knowledge of the "fundamentals" of the babysitting economy. I can go long on coupons during winter and go short during the summer, etc.

Another thing - if deflation causes consumers to sit on the sidelines why has there been such a boom in consumer electronics revenues over the last 20 years - why not wait for the 500GB iPod ?