Federal Reserve Governor Ben S. Bernanke made an interesting speech last week, asserting the Fed's imperative to fight deflation by any means necessary. He also pointed out what is generally considered a basic economic fact:

[T]he U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Now, this would appear to be simple, inarguable common economic sense. But there are a couple of seeming exceptions that might give one pause. First there's Japan: after years of budget-busting Keynesian fiscal stimulus, the country is still mired in a deflationary slump, and the government--printing press and all--appears helpless to do anything about it. Many Japan commentators claim that it's bureaucratic incompetence, not lack of available means, that's hamstringing the government and preventing the necessary economic repairs, but the measures these pundits typically advocate--such as reforming the banking system, and allowing large but hopelessly debt-ridden concerns and banks with humongous portfolios of nominally-performing-but-effectively-deadbeat loans to go under--sound like they have nothing to do with simply running the presses and printing away deflation. Why, then, aren't they (apart from Paul Krugman, who has been pushing the inflation solution to Japan's ills for years now) all just advocating the obvious?

Well, perhaps Japan is an exceptional case--its savings rate is astronomical, the economy lacks transparency, the culture is inscrutable, etc. etc. etc. But there's another puzzling exception that hasn't been mentioned much in this context. It's a bit like Sherlock Holmes' famous "incident of the dog in the night" that didn't bark, and hence passed unnoticed despite its oddity. I refer to the case of the US over the last five years.

From October 1997 to October 2002, broad money supply (M2) in the US rose more than 44 percent; the broadest measure, M3, rose 55 percent. These are rates not seen since the early eighties, when inflation was much higher. The printing presses seem to have been running full tilt, but inflation has still been low enough to prompt worries of impending deflation. Where has all the money gone?

It turns out that more money does not always create more spending. As Stephen Roach of Morgan Stanley points out, "[newly generated] money must go somewhere, but initially it might be channeled into balance sheet repair, paying down debt, or a restoration of saving before it ends up in the real economy or the price structure. There are no guarantees of instant policy traction near a zero rate of inflation." This is particularly true of post-bubble economies like the current American one, where indebtedness is high, savings are low (and hence have much room to rise), and an investment-minded culture pumped full of cash may be perfectly happy to pour the surplus funds into yet another asset bubble (some suggest that urban real estate may already be playing that role, now that high-tech stocks have lost their luster). It would be comforting to think that Japan's malady is sui generis, and can be easily cured should it occur elsewhere. I just wish I were convinced....