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QE Forever?

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Ambrose Evans-Pritchard, in a provocative column, argues that the monetary authorities are not going retreating from QE, and that might not be a bad thing. But in its current form, it probably is.

His key argument is that we might as well stop pretending that QE is about lowering borrowing costs. It can and should be about monetizing debts. He further argues, agreeing with a recent speech by Adair Turner, former head of the FSA, that the world needs more fiscal stimulus:

The policy is elastic, for Lord Turner went on to argue that central banks in the US, Japan and Europe should stand ready to finance current spending as well, if push comes to shove. At least the money would go straight into the veins of the economy, rather than leaking out into asset bubbles.

Today’s QE relies on pushing down borrowing costs. It is “creditism”. That is a very blunt tool in a deleveraging bust when nobody wants to borrow.

Lord Turner says the current policy has become dangerous, yielding ever less returns, with ever worsening side-effects. It would be better for central banks to put the money into railways, bridges, clean energy, smart grids, or whatever does most to regenerate the economy.

Now of course there is a wee problem, since in the US, Congress is in charge of spending, and Congress and our deficit-loathing President are not at all interested in increasing deficit spending, even if they grokked that the Fed could monetize rather than have the Treasury borrow.

Pritchard points out that extreme monetization isn’t necessarily a bad thing. The usual suspect is Weimar Germany, but that isn’t a great comparable to much of anything, since the monetary expansion also took place when the productive capacity of the country had been severely impaired via the provisions of the Treaty of Versailles, due to the loss of territory and reparations in the form of coal. Evans-Pritchard mentions another example:

Less known is the spectacular success of Takahashi Korekiyo in Japan in the very different circumstances of the early 1930s. He fired a double-barreled blast of monetary and fiscal stimulus together, helped greatly by a 40pc fall in the yen.

The Bank of Japan was ordered to fund the public works programme of the government. Within two years, Japan was booming again, the first major country to break free of the Great Depression. Within three years, surging tax revenues allowed Mr Korekiyo to balance the budget. It was magic.

The Japanese overnight announcement, of a pedal-to-the-metal commitment to further expansion, produced a monster rally in the Nikkei. But how much further will the yen be permitted to fall? China was the key actor in driving the yen to the nosebleed territory of under 80 to the dollar. It’s now below 95. I’d hazard it needs to get to 110 to put the Japanese economy on a decent growth path. I’m not certain any of its major trade partners will stand for that.

Mind you, even some Fed doves are signaling that they’d like to taper off QE, but this appears to be based on undue optimism about the labor market. In 2011 and 2012, the pundits were optimistic about recovery prospects based on first quarter readings, only to have them fizzle. Has no one figured out that first quarter seasonal adjustments are large, and appear to be misleading in a low growth economy? And did no one get the memo that we have just started putting a big fiscal brake on the economy, thanks to payroll tax increases and the sequester? Economies do not turn on a dime, but the fact that the effect was not immediate seems to have lulled some commentators into thinking there will be no impact at all.

Evans-Pritchard goes through a long list of negative indicators: commodity deflation, falling M2 levels and velocity, US consumption holding up only by virtue of dangerously low savings rates, contrasted with too high savings rates elsewhere, particularly China, and misguided austerity in Europe.

I think the US will find it very hard to end QE, but for different reasons than most pundits assume. The conventional view is that the Fed will be loath to raise rates because it will produce losses on its bond portfolio. In reality, this does not matter, at least up to a very high level. Former central banker Willem Buiter warned of the dangers of central banks expanding their balance sheets, but he stresses that they were not equity constrained, since they could monetize any losses, but they were inflation constrained. If a central bank was in danger of violating its inflation mandate, it would need to go to its Treasury for a capital infusion.

But I don’t see that as the immediate impediment. There’s one that is more immediate. Recall how we got in this mess. Whether the Fed said so or not, one of its big motivations for ZIRP and QE was to boost asset prices, not just that of housing to create a consumer wealth effect, but also of financial assets to flatter bank balance sheets, boost their (apparent) capital levels and make them more willing to lend. What has happened is that the central bank has pushed investors into all sorts of risk assets. Do you think the Fed is going to be very eager to impose losses on people it just enticed into the deep end of the pool? The Fed has increasingly come to take a very asset-fixated view of the world, and it is likely to be loath to lower the price of financial assets, save very cautiously. Mind you, like Evans-Pritchard, I don’t think the state of the economy will warrant that any time soon, but that means the Fed will continue to pump up asset prices in an increasingly-desperate effort to get transmission to the real economy. Japan in the late 1980s was the first central bank to deliberately goose asset prices to encourage spending. We know how that movie ended.

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66 comments

  1. vlade

    BoE is not even inflation constrained if you compare acta with their verba.

    That said, the inflation in the UK is I believe one of the main reasons why the recovery is slow to nonexistent as it severely depressed real inome (even the average is still below 2008 IIRC, unlike say the US. Yes I know about the ver unequal distribution, but assuming the same distribution it’s still worse than the US. Either even the rich got worse of, or more likely the poor/middle are even worse of than the poor/middle in the US).

  2. PeakVT

    His key argument is that we might as well stop pretending that QE is about lowering borrowing costs. It can and should be about monetizing debts.

    No, we shouldn’t stop pretending, since that would cause people to put pressure on central banks to stop monetizing debt, which is what they’ve been doing all along, while calling it QE.

    And while QE is a poor substitute for what is needed – deficit spending – it’s only thing that can be done because the Republican House absolutely will not act to help the economy.

  3. David Lentini

    Can someone explain a bit more clearly what “monetizing debt” is and how it’s done? I only have a vague idea of these concepts. TIA.

    1. Ben Johannson

      Monetizing is a hold-over term fom the gold standard era. As the de facto currency was gold, debts were also de facto gold. If a government found itself unable to cough up sufficient assets to meet its debts (like Weimar Germany, which had severe liabilities in gold, coal and a few other commodities imposed upon it by the Allies) it might turn to the printing press to devalue its gold-backed currency or buy gold with those newly printed marks.

      Monetizing in the modern sense doesn’t really have much meaning, given all debts are “monetized” by definition and all spending by government involves creation of net financial assets (money). But iit more or less means the equivalent of turning on the printing press to settle liabilities.

    2. Adam1

      As Ben says, monetizing the debt is a relic of a term. All government deficit spending is funded by the FED. The only question is does the FED give the money directly to the Treasury or does it first give it to the banking system to “lend” to the Treasury. Sadly most people, who should know this, are oblivious to it or choose to not clearly point it out for self-preserving political reasons.

      Those that think QE is monetizing the debt just see the FED pumping massive amounts of excess bank reserves into the system. Excess reserves are what the Treasury borrows. However when the system does not have excess reserves, such as before QE, when the Treasury goes to borrow it causes the banking system to demand more reserves to fund bond purchases which cause the FED, in order to protect its policy rate, to add more reserves to the system. So with respect to funding deficit spending, all QE does is make it a tad more transparent of what’s going on – the FED is creating the capacity in the system to fund the spending.

        1. Ben Johannson

          The Fed gives banks the reserves they need ro buy those $13 trillion in securities. Adam1 is exactly correct in his description.

    3. Dan Kervick

      There are different ways in can be done. But, for example, suppose the Treasury sold short-term bills directly to the Fed to finance a deficit, and then sold more such bills to finance the redemption of the initial bills, and then a third round of to finance the repayment of the second round, etc. – ad infinitum.

      Managed properly, the result would just be a constant injection of some desired amount money into the the economy. without any additional taxes or debts to the private sector and its supposed bond vigilantes.

      A simpler way, I think, would just be to permit the Treasury general account to run a permanent negative balance.

    4. Alejandro

      Thanks for the question and excellent answers. I was under the impression that it was a debt-reset, i.e., a write-down to reflect reality. Maybe I’m confusing it with “liquidation” of debt. However, in the world of fictitious capital that’s just a dream or wishful thinking at best.

  4. financial matters

    It’s not surprising that QE hasn’t increased bank loans as it works the other way around. Banks loan money to people they feel are credit worthy (or especially pre 2008, those who they feel they can transfer the bad loans to others) and then the Fed provides the reserves to back these loans.

    The money is definitely going into asset appreciation rather than the real economy and this is a major problem.

    The world wants US dollars and wants to keep exporting to the US to get these dollars. We can run deficits as long as others want to accept our IOUs. We can print as many dollars as we want but ultimately we can only buy things that people will accept our currency for.

    Sovereign money gets its value from taxation as people have to accumulate it domestically to pay taxes. This currency is then free to circulate world wide. Ultimately the USD is tied to the productivity of the US. By neglecting our industrial base and instead fueling a FIRE sector which is extractive of the real economy we will erode the value of this currency.

    Foreign exchange markets which determine what real commodities can be bought with what currency will favor a currency with a more realistic base.

    1. from Mexico

      financial matters says:

      Ultimately the USD is tied to the productivity of the US.

      I think it’s more complex than that. The USD is tied to:

      1) As you say, industrial might, but also to
      2) Financial might, and
      3) Military might.

      These three are inextricably intertwined and interact in ways that are for the most part unknown and therefore unpredictable. The situation is made even more complex by the fact that the outcome depends not only on what we do, but what a multitude of other peoples do as well. Then there are scientific and technological discoveries, whose advent cannot be controlled or predicted. Then on top of that are layered phenomena that are not even human-willed or human-made.

      It seems to me nothing short of chaos theory would be able to incorporate all the moving parts.

      1. financial matters

        True enough but I think military might has its limits as when kings burned the imprint of coins on their subjects foreheads to get them to treat their currency seriously. Also misused military force can be very counter productive.

        Financial might can lead to the house of cards that we now are getting to know well and are feeling its instability.

        What seems to work best are ‘coercive’ things like paying taxes or going to jail or having people accept your currency for essentials such as food and water. This is where tax evaders harm economies very much by limiting the value of their currency. Military might is definitely useful to ensure a flow of commodities but is best used as traffic cops are useful to have safe traffic or as good regulators should allow fraud free business. Abusive police forces/regulators lead to distrust and unstable systems.

        1. from Mexico

          I tend to agree.

          However, I think we must realize that ours is a dissident position.

          Our ruling class is convinced there is no problem that cannot be solved by a sufficient application of the state’s intruments of violence — the police and the military — in combination with defictry and debtcraft along with mobocracy for themselves.

      2. Ben Johannson

        I think financial matters has the right take on military power. I think the way in which having a powerful army aids a nation in sustaining trade deficits is by reassuring exporters the country from which they are saving won’t be conquered and is therefore a more safe “investment”.

        On the other hand if a given country is under significant military threat it might not be a good idea to hold onto their currency.

    2. Cynthia

      QE is extremely regressive, but the same is true for all monetary policy in the post-Bretton Woods era. The transmission mechanism of pumping up M2 disproportionately benefits banks, financial sector, bank assets.

      Steve Keen’s QE for the public (i.e. QE without the Cantillon effect) may be “cute,” but it’s the only serious proposal I have seen that can significantly reduce the total debt burden without either huge inflation or full-blown liquidation.

  5. Conscience of a Conservative

    What a scary notion. Q.E. forever along with negative interest rates for savers. What’s wrong? Plenty.

    First this transfers wealth from savers to those with primary access to capital. Not so much people looking to take out a mortgage, but banks and Corporations who can borrow in the Capital Markets directly such as IBM, GE & Coke.

    Second it produces huge misallocations of capital, loans which cannot be money good and potential bubble lending. Two examples se see today are Subprime auto loans where issuers even today predict 1/4 borrowers default while they pay 20% and higher interest rates, A second example is the CLO and High yield Credit market which often produces little real economic growth, but enables leveraged buy-outs and enables companies to engage in Financial Engineering on its balance sheet as opposed to true product development.

    Thirdly, Savers by being deprived on an interest rate or rent on their money, feel poorer and cut consumption. Michael Pettis writes about this in China, and while everyone acknowledges the Income effect, it’s ignored in today’s economic thinking.

    QE forever. It’s scary when we have respected writers in the London Times saying it’s a good idea.

    1. Jim Haygood

      ‘Savers by being deprived on an interest rate or rent on their money, feel poorer and cut consumption.’

      Right, that’s what one group of savers does — the old school, if you will.

      The others decide they’re going to get the investment returns they’re entitled to, through buying junk bonds, tech stocks, leveraged forex … whatever it takes.

      The Federal Reserve’s economic model can be expressed in two words: SERIAL BUBBLES.

      One could see ‘Benny Bubbles’ Bernanke making his exit next January the same way his hero Johnny Law left France:

      Law ultimately fled the country disguised as a woman for his own safety.

      http://en.wikipedia.org/wiki/John_Law_(economist)

      1. steelhead23

        EUww! Ben’s not much to look at as a man, but dolled up as a woman… get me to the vomitorium!

        I suspect Ben will part the Fed just as soon as Jamie departs his seat over at JPM.

      2. Conscience of a Conservative

        Only the very very rich can engage in forex, high yield and stocks. This is a tool primarily for the 1% to either make money or get burned. For the rest of the saving class, the amounts may be smaller, but the importance is more and they can’t take the risk of loosing it all, so they lose out on the income.

    2. Cynthia

      QE has been remarkably effective at saving the TBTF banks, consolidating their power, taking out competitors and unleashing even more unaccountable power over the muppets. In that respect, QE has worked. If you think it was aimed at helping the American people in general, then you deserve to have your money confiscated by the Klepto-O’bombercrats and transferred to the Federal Reserve Banking system. Even if they don’t outright steal from your savings account, they will steal the value of it through the inflationary bomb they are riding on like the bomb that Slim Pickens rode on in Dr. StrangeLove!

    3. jrs

      Yes it’s disasterous, never mind if retail inflation ever appears, because that’s kind of a sidetrack. Asset inflation is *itself* a problem every bit as much as retail inflation when assets are things you need to live, speculation in various commodities could do this, but what is doing it now is housing. Investors are buying up much of the single family homes in certain parts of the country. This is bad, feudalism, yes fine, kind of, everyone renters. Now there is nothing wrong with being or choosing to be a renter, but this *as* policy … that is problematic. QEing as it is done now is mostly benefiting the 1% who use it to speculate in everything, the wall street casino and all it’s corruption, housing so that the plebs can’t buy it, etc.. I can’t possibly approve of any kind of QE that goes through and seem to largely benefit the 1%. QE directly to the poor, the lower class, the ordinary, joe schomoe, that’s a QE that wouldn’t make my blood boil. But a QE that does nothing for income inequality and may make it worse? This sucks.

  6. R Foreman

    So how does this play out? We slide into the singularity, keeping the most at-risk people on life support (to satisfy our genteel sensibilities), making sure the elite are the last to suffer losses. No sudden changes, we get the slow burn into nothing. The formerly affluent get slowly consumed by the super-wealthy.

    Global wealth continues concentrating into a tiny pinpoint of humanity, the masses turned into energy-generating devices.. fields Neo, endless fields where people are no longer born, they’re grown.

    Then when.. 150 years have passed the people figure out they’ve been duped and we get that crash..

    1. Sierra7

      No……
      It “ends” when those who have gotten so thoroughly screwed find the pitchforks in their basements……..and use them!

    2. jrs

      “Global wealth continues concentrating into a tiny pinpoint of humanity, the masses turned into energy-generating devices.. fields Neo, endless fields where people are no longer born, they’re grown.”

      Yes well, the elites might need to plan for peak oil (although IMO that takes place after the planet is already fried), if you can’t use “energy slaves” (ie machinery), there needs to be someway to reinstate human slavery, or at least a very close equivalent.

  7. Conscience of a Conservative

    The Correct Policy would have been and still is for write-downs on the balance sheet and where there’s no equity force debt holders to convert to equity. All this chicanery that is Q.E. is turning us into a Japan where we will face years of sub-par growht. If we had taken our medecine like we should have back in 2008 we would have had a bit more short term pain but would be experiencing far more growth now than we are. Q.E. is a great deal about propping up the old world Financial order.

    1. Lee

      Using collective pronouns such as “we” and “our” is often misleading in a society marked by great inequality. What could possibly constitute “our medicine” in such circumstances? Seems to me a lot of people have taken the medicine of foreclosure, job loss, and so forth already. Similarly, we might throw in sacrifice on the battlefield.

      Just what medicine for the good of all are you proposing? A Swiftian solution, perhaps?

  8. Jefemt

    “….to fund the public works program…” Seems to me the QE in 2013 is funding paper asset bubble shuffle, and very little planned domestic on the ground spending. There are a lot of domestic roads, bridges, trails, parks, public works that are in deferred maintenance status, and a lot of folks who would like to work, be productive, earn money, feed their famlies and start to save again. Mr Market seems to be mis-allocating Helicopopter Ben’s largesse, or he needs a new bomardier and target defined. The computers and traders on Wall street are only a few jobs, and their productivity, being and doing Gods Work, is falling flat, as far as my measuring stick goes. We’re going to print and spend, for the foreseeable future…. maybe since it doesn’t apparently matter, its all fiction , paper, and zeros and ones on computers, we could cut taxes to zero, and let folks save for a change. Going nuts in the oil patch

  9. slim

    “Do you think the Fed is going to be very eager to impose losses on people it just enticed into the deep end of the pool?”

    I completely agree. Withdrawal now would damage the bond portfolio for sure, but imposing the resulting loses on small investors who have been pushed into risk assets again would be… revolution provoking.

  10. Paul W

    I agree they will not withdraw QE because they don’t want to burst all the bubbles they are creating. However it is not because they care about the investors they’ve conned into their latest pyramid scheme. It is because they fear the entire system will collapse if they stop inventing more money. The game plan is to keep things going, buy as much time as they can, to steal as much as they can for themselves and their crony buddies. Four years and counting, they’ve done very well. I wouldn’t be surprised if they think they can keep this going indefinitely. But they are doing it for their own enrichment. Why would anyone think that those cannibalizing the entire system care about anyone else?

    1. Jim Haygood

      ‘I wouldn’t be surprised if they think they can keep this going indefinitely.’

      BINGO. You nailed it, Paul. Working with crude equilibrium models (a condition rarely encountered in real life), the Fedhead eggheads imagine that markets will adjust in the same gradual, graceful arcs that the economy does to their policy initiatives.

      Nothing could be further from the truth. Markets are ruled by the passions of the mob. One day after financial markets have reached the sky (and beyond!), some little kid will blurt out, ‘Mommy, the emperor has no clothes.’

      And it all comes tumbling down in a trice, to the shock and horror of the PhD morons. No one could have seen this coming.

      1. Gerard Pierce

        Today the story has a more modern ending: The little kid gets his butt whipped and is sent to bed without supper. The emperor announces a $25,000/ head fashon show and lives happily ever after – to the cheers of his loyal subjects.

  11. from Mexico

    QE is destined to fail.

    It grew out of the delusional and simple-minded thinking of Milton Friedman, who believed that monetary policy was an elixir that could cure any and all ills, and this in the absense of sane, prudent fiscal and regulatory policy.

    What much of QE amounts to is the federal government’s program of exchanging cash for trash. The first step in this process was to make the government’s guarantee of agency debt, which had been implicit, explicit. The second step was to allow private banks to trade agency MBS, which are not all that fungible, for US government money, which is highly fungible. Or in Stephanie Kelton’s “hierachy of money” explanation, the banks are being allowed to trade in inferior private money for government money, which sits at the top of the monetary hierarcy. As wiki explains:

    In late November 2008, the Fed started buying $600 billion in Mortgage-backed securities (MBS).[46] By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy had started to improve, but resumed in August 2010 when the Fed decided the economy was not growing robustly. After the halt in June holdings started falling naturally as debt matured and were projected to fall to $1.7 trillion by 2012. The Fed’s revised goal became to keep holdings at the $2.054 trillion level. To maintain that level, the Fed bought $30 billion in 2–10-year Treasury notes a month. In November 2010, the Fed announced a second round of quantitative easing, or “QE2″, buying $600 billion of Treasury securities by the end of the second quarter of 2011.[47][48] A third round of quantitative easing, or “QE3″, was announced by the Federal Reserve in September 2012. The third round includes a plan to purchase US$40 billion of mortgage-backed securities (MBS) per month.

    QE thus for the most part amounts to more money for the criminal banking cartel, for it to use as it sees fit, with no strings attached, no regulation and no overight.

  12. Mcmike

    I dont see how they could possibly stop.

    Can anyone imagine an exit plan that ends well?

    1. ftm

      yeah i’ve been curious about the exit too.

      If there is never +2.5% inflation then QE forever will work.
      But with inflation, the fed will want to unwind. It has the cashflow cushion of interest payments and maturing securities principal payments to absorb moderate losses but if it needs to take quick action it could run into a negative cashflow situation.

      THen it will either need to borrow from the treasury or use measures other than bond sales to fight inflation. Raising the rate it pays on reserves to try restrain lending will might help but this also reduces cashflow. The only thing I can think of is to simply raise reserve requirements to ration bank lending and then let its balance sheet runoff to avoid taking losses.

    2. rubato22

      The exit strategy is called “The Final Solution”. It’s being implemented in the sequestration budget, but that’s just the overture. Generally, the plan is for the super-rich and TBTF multinational corporations to pauperize the labor force; put a pillow over Granny’s head; buy up assets at firesale prices with (almost) free Fed credit; allow infrastructure to crumble, and let nature take its course.

      Typically, the Final Solution involves overseas adventures that usually end badly. Thermonuclear ones go especially awry.

      Not a happy picture. But not seeing any forces on the horizon to reverse it.

    3. Bill Smith

      The Exit Plan – Act 1

      The Fed takes a step towards the door, Someone yells “FIRE IN THE THEATER”, and a mob runs over the Fed towards the Exit door sign.

  13. b2020

    Hussman argues the Fed cannot raise rates without undoing QE, which in turn would put the pretend economy right back where we started.

  14. Glen

    Does the US really have any other choice? So long as China, Japan, et.al. continue to exports excess savings and import demand the US must use QE. That or except very high unemployment.

    The real answer is for China, Japan and Germany to create domestic demand. Since doing so would not come with a heaping of sanctimony, I doubt we will see it.

    1. washunate

      We do have options. TINA (There Is No Alternative) has been the mantra all throughout the bailout era.

      The problem is not foreign nations – it is entirely domestic public policy.

      We bail out financial crooks and war criminals instead of imprisoning them, and we waste money on crony capitalism (security/healthcare/agribusiness/oil/etc.) instead of investing it in the public commons (infrastructure, social insurance, etc.).

    2. Lune

      Glen-

      There is absolutely an alternative. The huge global imbalances are not some natural force like the tides that can’t be changed. They are the deliberate and intended effects of a series of policy decisions. Reverse those policies and the imbalances will resolve as well.

      For example, implementing protectionism for labor & environmental interests as opposed to protectionism for capital and intellectual property interests (calling the former protectionism and the latter free trade is merely good marketing) would see a marked reduction in the portion of that imbalance stemming from labor and environmental arbitrage. Similarly, eliminating tax incentives for shipping jobs abroad would help.

      Really, this idea that we’re helpless against the rising tide of globalization needs to go away: those tides are man-made, with the purpose of advancing specific interests and goals. If those interests don’t align with the majority of a country’s citizens, then those citizens certainly have the power to change what are essentially political decisions, rather than be left merely trying to compensate for the end-results.

      1. Jmd

        This is a very cogent analysis; if there are no new jobs being created here, please refrain from sending existing ones abroad. Limit immigration on the H-1 visa. Let the smart foreigners work remotely if they are so knowledgable that their intelligence simply cannot be forgone.

      2. Glen

        My initial comment should not have said we do not have a choice but rather if anything other than the current response is reasonable to expect from either ruling party. I am becoming jaded with age. While democracies have limits to how much punishment they will endure before correcting themselves, they will endure tremendous damage before doing so.

        What you articulated with such economy of words is not commonly heard. I tip my hat to you.

  15. Jackrabbit

    This post should be read in conjunction with the “Fiduciary Duty to Cheat” post.

    The corollary “cheating” activity for the Fed is this: The Fed must keep the rigged casino open – and look the other way via ‘extraordinary forbearance’.

    Cost of capital to Banks = 0 Banksters in Jail = 0
    Cost of capital to people = 15-30% Real Unempl. = 12.5%

    TBTFail = TBTManage = TBTRegulate = TBTJail = Tyranny

    Thankfully, social & political “leaders” know how to deal with troublesome questions. Some examples:
    - Hillary: At this point, what difference does it make? (STFU)
    - Michele: Change takes time. (STFU)

  16. Andrew Watts

    “Less known is the spectacular success of Takahashi Korekiyo in Japan in the very different circumstances of the early 1930s. He fired a double-barreled blast of monetary and fiscal stimulus together, helped greatly by a 40pc fall in the yen.

    The Bank of Japan was ordered to fund the public works programme of the government. Within two years, Japan was booming again, the first major country to break free of the Great Depression. Within three years, surging tax revenues allowed Mr Korekiyo to balance the budget. It was magic.”

    The rather unique case of the Japanese economic recovery in the 1930s had little to do with fiscal and monetary policy. It had more to do with imperialism. This is what ultimately led to Japan’s disastrous decision to resort to war in the Pacific. This is where the dismal science fails spectacularly at understanding events. But by failing to consider geopolitics and the political policy carried out by governments it fails even harder at anticipating events.

    The Sino-Japanese War left Japan flush with large reserves of foreign currency. While it’s victory over Czarist Russia left it in a position to economically dominate Korea, Manchuria, and to a lesser extent China. These military investments that included Japan’s entry into the first World War and it’s subsequent seizure of German colonies and economic interests yielded Japan a high rate of return on it’s investment. It also planted the seeds of Japan’s destruction in the second World War. Especially so since none of their military adventurism so far had resulted in any significant disadvantages.

    When Japan entered the Great Depression well before the Great Crash of ’29 it still retained those advantages. Thanks to the falling yen and it’s ability to supply the world economy with low cost goods Japan entered into an economic recovery. Though the double digit growth of Japanese exports to other countries caused no small amount of resentment. Which resulted in the implementation of protectionist policies. These policies further convinced Japan that military investments were desirable so it could acquire colonies and a degree of self-sufficiency. It must’ve been a very appealing policy considering Japan’s lack of natural resources.

    At least history doesn’t ever repeat itself though, right? If it did we would have to be worried that Japan might try to use it’s underutilized military potential and it’s alliance with the United States to make similar moves against China. Thankfully the yen is stronger then ever! And it’s not like Japan is trying to pick fights with China over pieces of economically valuable territory.

    Isn’t it great that we’ve all learned so much since the 1930s?

    1. Andrew Watts

      Of course I could be wrong. It really could’ve been magic!

      I believe that further elaboration is required so bear with me for being off topic.

      1) The Russo-Japanese war was very much over the question of who would dominate Korea. As a matter of Japanese security a Russian military presence in south Korea (heh!) would’ve been an unacceptable outcome to an independent Japan. Any military presence on the Korean peninsula that is not in direct alliance with Japan is equally unacceptable. This fact hasn’t changed over the last century.

      2) Japan’s monetary policy hasn’t changed much in the last century either. Japan’s national economic survival is intimately tied to it’s ability to export mass quantities of goods. This was why Japan proved so willing to enter into a state of war with the United States that it’s military leaders knew they could not win.

      3) The accumulation of foreign currency reserves is also a high priority for Japan. By holding foreign currencies in reserve it helps suppress the value of the yen. Which is so vital to it’s national prosperity.

      4) The natural inability of Japan to forge it’s own destiny will probably result in Japan forging a close alliance with China sometime in the future. That’s assuming that the influence of the United States continues to decline.

      1. sufferinsuccotash, moocher

        That could be why Japan is being rather cagey about the Everybody-But-China TPP that’s being discussed under such hush-hush conditions. Staying on the fence may be smart money (yen) under the circumstances. If the US is really cruisin’ for a bruisin’(in the Middle East, for example)then a Sino-Japanese Axis would be absolutely unbeatable.
        Of course, HG Wells saw all this coming as far back as 1907.
        http://www.amazon.com/War-Air-H-G-Wells/dp/1604242248

        1. Andrew Watts

          Nobody knows for sure, but I suspect that the TPP is the United States’ answer to the Shanghai Cooperation Organisation which it unsuccessfully applied to join in 2006-07. It’s almost on the level of the secret alliances that led up to the Great War.
          You’re probably right though. The Japanese may want to keep their options open. Whether China allows that is something else entirely though.

          “Of course, HG Wells saw all this coming as far back as 1907.”

          The idea of a Chinese-Japanese-Korean triple alliance was actually quite popular before Wells published that book. Reformers within the Qing dynasty as well as the Meiji oligarchs thought it would successfully resist western imperialism. Even the King of Hawaii favored the idea.
          Not to besmirch the well-earned reputation of H.G. Wells.

    2. Susan the other

      This is true enough, but if we replace our imperialist-free-market-capitalist predisposition for environmentalism (not nazi environmentalism or bankster environmentalism, but real, scientific environmentalism) we could create a functioning world. Imperialist economics is just another manifestation of Minsky’s theory. I mean, you just get so darn overextended…

      1. Andrew Watts

        I can appreciate those sentiments. Even though I sincerely doubt the possibility they will be realized on a nation-wide scale. Still it’s a distinct possibility for the United States due to the plentiful bounty of natural resources it still possesses. It would be desirable and even beneficial to wisely ration their use. Not solely for the environmental benefits it would yield either.

        In a country like Japan where only a third of the land (or so) is capable of producing food to feed the population that is not a distinct possibility. As one Japanese gentleman told me a long time ago; “You Americans, always the rich man crying poor.”. He couldn’t have been more right.

  17. Susan the other

    To blame Bernanke for misallocation of QE is irrational. He’s doing the only thing he can do under the system. The system was set up to preserve the banks. QE isn’t doing the rest of us much good. A little but not alot. We need an infusion of money that is targeted to accomplish something and create good jobs. Like a good long term project to create better, cleaner public transportation. There is no lack of things we could-should be doing. The fault lies entirely with Congress. They are stupid and stubborn beyond belief. They actually listen and nod to the idiotic rants of Paul Ryan et.al. We need MMT not QE.

    1. Susan the other

      QE is like the “free-market” solution to the black plague. Only the rich escape.

  18. Don Levit

    An interesting article entitled “Shut Up Savers,” can be found on the Apr. 2nd edition of economistsview.typepad.com.
    The author states that “most Americans have more debt than savings.”
    Thus, lower interest rates on debt provides more disposable income than higher rates on savings.
    I think the main theme of this article was not even hinted at: We are overindebted, with unsustainable debt.
    What you owe, you owe.
    What you own, you may not own.
    don Levit

  19. allcoppedout

    Lot of sense there Susan – I expect, given Berknacker’s job I’s sing from the same spreadsheet and content myself with stashing the vast salary and perks before retiring to a Caribbean beach with Sky TV for the cricket coverage. No brain work or courage required in either condition.
    I see the problem as how we deleverage from militarism. The rest is noise.

  20. washunate

    “He further argues, agreeing with a recent speech by Adair Turner, former head of the FSA, that the world needs more fiscal stimulus”

    I think that’s the heart of the matter. Do we need more fiscal stimulus – or different fiscal stimulus? In my view, the problem is the latter. We have spent huge amounts of money; the problem is, we’ve spent it on the wrong things.

  21. kris

    QE has absolutely nothing to do with the job market or real economy. QEs are simply tools to supply primary dealers with money so they can keep paying losses on CDSs and not default. The only problem: Since money is going to winning counterparties (hedge funds, state owned chinese and russian banks I would speculate), this money is piling up on commodities, hence hyperinflation in crude oil we are experiencing.

    Here’s the structure:

    1) Primary dealers in USA, Europe and Japan have CDS swaps payments to do due to losses on those swaps.
    2) The Fed/ECB/BOJ/BOE buy little worth bonds from them at full price, thus providing them with money they need to do the payouts.
    3) These primary dealers are still engaging in Interest Rate Swaps by being on the fixed side of the swap. World companies and hedge funds are on the variable side.
    4) If Fed/ECB/BOJ/BOE stop buying most of the new gov bond issues, these swaps will blow up since interest rates will spike immediately.
    5) Seeing that these world primary dealers are leveraged at 1:500 or 1:1000 or something like that, it’s quite easy to understand why the central banks keep doing QEs.

    Conclusion: QEs have got nothing to do with the real economy. But if they don’t the swaps will blow up and a lot of primary dealers will collapse. That’s exactly what happened with Bear Stearns, Lehman, AIG etc,etc,etc.

    However, crude oil price serves as cap for QEs. I can’t see how they can continue this much longer since the economy is getting worse and worse due to extremely high oil price.

    I was expecting them to taper QE down during March meeting. It didn’t happen. I’m strongly expecting that the May meeting will produce QE tapering, otherwise, boy oh boy…

  22. Chris-Engel

    Why doesn’t BoJ just create hidden subsidies (in line with WTO) to produce a synthetic 110 USD/JPY, which Yves is saying would be the sweet spot for solid growth.

    I don’t see why Japan wastes all this money to intervene in the FX market when they could use it to just directly subsidize their big industries (actually even less).

    At this point BoJ talk alone isn’t moving FX markets, they need to deliver to sustain the modicum of credibility they have remaining.

  23. Sanctuary

    Yves, you wrote: “The usual suspect is Weimar Germany, but that isn’t a great comparable to much of anything, since the monetary expansion also took place when the productive capacity of the country had been severely impaired via the provisions of the Treaty of Versailles, due to the loss of territory and reparations in the form of coal.”

    However, can’t you argue the US has a similar productive capacity impairment due to neoliberal globalization of our manufacturing sector? I remember when the stimulus was being put together in 2009 and people kept commenting that the problem with deciding what to build or what was a shovel-ready job largely flowed from the fact that so much of the money would be diverted outside of the country through foreign contractors or into nominally American businesses that do their manufacturing in China. Yeah, we can say we “produce” things but when they are actually physically made in another country, how is that not the same effect as if we had factories and natural resources here that produced products and raw materials that were primarily diverted abroad? The monies and resources are still flowing outside of the oountry instead of in it. If you re-envision Weimar Germany as a forcibly globalized country, it seems to me the same problem would happen here if the Fed decided to outright monetize our entire national debt.

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