The intellectual groundwork is being laid for the next stage of the Money
Bubble, and it's going to be epic. Here are excerpts from two articles
that appeared over the weekend (and which should be read in their entirety).
Both deal with Japan, which went all-in on debt monetization, lost badly,
and now needs a new plan.
The first is from a University of Michigan economics professor:
Japan
should be trying out a next-generation monetary policy
Japan is wasting its time trying to raise inflation.
Japan may succeed at bringing annual inflation up to 2%; indeed, it has
made some real progress toward that goal. But suppose Japan succeeds in getting
inflation up to 2%; would that be enough? The US economy has struggled mightily
despite the fact that it went into the Great Recession with a 2% annual rate
of core inflation. Japan could try to target an even higher rate of inflation,
as Blanchard, Ball and Krugman recommend, or Japan could leave behind quantitative
easing and higher inflation targets to make the leap to next-generation monetary
policy.
The key to next-generation monetary policy is to cut interest rates directly
instead of trying to supercharge a zero interest rate by raising inflation.
Of course, cutting interest rates below zero pushes them into negative territory.
But Switzerland, Denmark, Sweden and the euro zone have already shown that
can be done. There is a widespread myth that cutting interest rates much
deeper than -0.75% would inevitably cause people and firms to do an end run
around those negative interest rates by taking their money out of the banking
system as paper currency. Not so!
It is easy to neuter cash taken out of the bank as a way to defeat negative
interest rates simply by removing the guarantee that the Bank of Japan will
take that cash back at face value. This is an idea I have taken on the road
that has withstood close examination and grilling by central bankers and
economists all over the world. A common reaction is surprise at how easy
the practical details are relative to the many much more difficult things
central banks already do.
This next one is from Paul Krugman, who's definitely feeling the momentum
shift his way:
Japan's
Economy, Crippled by Caution
...Japan is still caught in an economic trap. Persistent deflation has created
a society in which people hoard cash, making it hard for policy to respond
when bad things happen, which is why the businesspeople I've been talking
to here are terrified about the possible spillover from China's troubles.
So Japan needs to make a decisive break with its deflationary past. You
might think this would be easy. But it isn't: Shinzo Abe, the prime minister,
has been making a real effort, but he has yet to achieve decisive success.
And the main reason, I'd argue, is the great difficulty policy makers have
in breaking with conventional notions of respectibility.
Respectability, it turns out, can be an economy-killer, and Japan isn't
the only place where this happens.
...What's remarkable about this record of dubious achievement is that there
actually is a surefire way to fight deflation: When you print money, don't
use it to buy assets; use it to buy stuff. That is, run budget deficits paid
for with the printing press.
Deficit finance can be laundered, if you like, by issuing new debt while
the central bank buys up old debt; in economic terms it makes no difference.
Printing money to pay for stuff sounds irresponsible, because in normal
times it is. And no matter how many times some of us try to explain that
these are not normal times, that in a depressed, deflationary economy conventional
fiscal prudence is dangerous folly, very few policy makers are willing to
stick their necks out and break with convention.
The result is that seven years after the financial crisis, policy is still
crippled by caution. Respectability is killing the world economy.
Both authors make is sound so easy.
What they don't say is that we've arrived at this extraordinary point in history
-- when helicopter money, negative interest rates and the elimination of physical
cash are suddenly mainstream ideas -- by following the advice of these guys'
intellectual predecessors.
Their argument, as far back as the 1990s if not the 1970s, has been that it
makes no sense for government to allow markets to clear the detritus of bad
decisions. Instead, we should just borrow what it takes to satisfy all "needs" and
print what it takes to pay the resulting interest. People will buy lots of
stuff, "growth" will eliminate all imbalances, both moral and financial, and
the system will chug along in equilibrium.
Liking the way that sounded, the developed world broke the link with gold
in 1971, started borrowing heavily in the 1980s and bailed out everyone in
sight in the 90s and 00s. And here we are, with debts so massive that growth
under traditional policy options is impossible.
And right on cue, here comes a new batch of monetary theorists explaining
to the ignorant masses that governments just aren't being bold enough in their
borrowing and money printing -- and that with just a few little tweaks to our
notions of personal freedom (the war on cash) and common sense (greatly expanded
government borrowing on top of record debt loads), our problems will vanish.
If this sounds vaguely familiar, it's because it's been around in various
forms for thousands of years, bubbling up whenever governments borrow and spend
themselves into impossible situations. See Rome's
hyperinflation and price controls and John
Law's French excellent French adventure.
Another thing the authors omit is the "in a perfect world" disclaimer that
should accompany blunt-instrument proposals like sharply-negative interest
rates and massive new deficit spending. Here in the real world, where highly-emotional
people don't automatically obey unfamiliar and aggressive government edicts,
things tend to spin out of control when markets are hijacked by lawyers and
economists.
Anyhow, it's a virtual lock that some variation of the above will be tried
next year in most major countries because it's the only course of action that
doesn't involve an immediate slide into a deflationary abyss. That it probably
leads to something much, much worse will be viewed as a problem for another
day.
