Sunday, November 22, 2009

Newsflash: Posner Gets Japan Wrong

This post was off-base, in a number of respects.

First, Posner wrote: "Japan spent the 1990s unsuccessfully trying to recover from a collapse of the Japanese banking industry... despite aggressive monetary and fiscal policies."

Except the Japanese central bank has done little more than twiddle its thumbs for the last two decades... Yes, they did a grand total of $300 billion in Quantitative easing, then when things got slightly better, they rolled it all back. More deflation and recession promptly ensued. This is what Posner termed "aggressive monetary policy" -- which renders the term meaningless. (And, despite the large deficits, "aggressive fiscal policy" is also quite contentious.)

Posner gets into trouble again on sentence #2 when he writes: "As a result of those policies, Japanese national debt soared..." But, of course, with true QE, the BoJ would have just retired massive amounts of debt for good.

The obvious way out for Japan is simply to monetize large swaths of its debt. This isn't just killing two birds w/ one stone, it'd be more like killing a whole flock of geese with one stone. Let's think about it, printing money would 1) increase inflation expectations, thus reducing the real interest rate, 2) weaken the yen, 3) improve financial companies balance sheets, who hold assets in $ but liabilities in yen, 4) improve japan's net exports, 5) reduce the amount of future debt which Japan needs to repay.

Why it does not is that peculiar madness, and not reason, that rules the minds of conservative men.


  1. Because monetizing huge swaths of debt causes massive inflation and destablizes your economy. Far from reducing real interest rates higher inflation would cause people to refinance debt at higher rates, perhaps even adding a premium since the central bank can no longer be trusted to protect the value of their repayment.

    Trying to stiff bondholders through inflation is the fast path to becomming the buyer of only resort on treasuries, i.e. hyperinflation.

  2. Also, I've been to Japan. If you saw the massive waste their fiscal spending has wrought, you would certainly agree it was aggressive. Or are bridges to small fishing villages not wasteful enough? Should we build them into the middle of the sea?

  3. The fact that you could believe something like this leads me to conclude that a degree in economics is not only useless, but dangerous as well.

  4. You have absolutely no understanding of real life economics. If the BOJ did that, much of its corporate sector, particularly the financial companies, would go bankrupt along with anyone who uses the Yen for the carry trade.

  5. The only thing I agree with in this page is the title, i.e. fire Larry Summers.

    Print enough money and all your problems will be solved. Excuse me? Every time inflation has been tried in the past, it leads to misery for the masses and wealth for a select few, the ones who get first dibs at money. Why would it work now?

    I read this quote somewhere on the web "If printing money was the way to prosperity, Zimbabwe's street's would be lined with gold". Not having been to Zimbabwe I can't attest whether their streets are lined with gold or not but I have heard their economy isn't doing too well ;->

  6. Dear "Anonymous" -- First, I think you mean "every time" except the Great Depression. Countries that went off of gold sooner ignited inflation faster and recovered quicker. Countries that stayed on gold had deflation longer and recovered later. When the US went back to tight money in 1937, a recession ensued. I'm not saying print an infinite amount of money, just enough to generate 3 to 4% inflation...

    Re: Japan's debt. What happened was basically that revenue's tanked, and expenditures just kept increasing at a more-or-less the same, or a slightly slower pace. Think about it -- even absent the stimulus, the US deficit would have been $1.5 trillion in the past year, and this would be despite lots of budget cutting and tax increases at the local level...

    The key difference between Japan and Zimbabwe is that Zimbabwe never had deflation. I'm not saying it's "always" a good idea to print money, but it does cure the problem of inflation... If you've got moderate inflation, then of course you would not want to print money, and you would no longer be in a liquidity trap...

    --Thorstein Veblen

  7. The best way would be to use the $ raised from QE to fund big baby bonuses ($10k+)to help pick up the birth rate. This would be a win win as it would increase current demand and also be an investment in future demand...

  8. lol -- yes, i actually agree w/ that last post. I think it's generally a bad thing for parents to be too credit constrained... I think parents should get all kinds of tax breaks...


  9. A contributing factor to Japan's low birth rate is that giving birth is not covered by health benefits (either private or public insurance). This means families have to cough up approx. $5k in hospital fees for each birth... a baby bonus would go some way to addressing the disincentive.

  10. Lol... I did not know that. a baby bonus would be a great way to spur on their, er, economy...


  11. Cung cấp collagen chính hãng an toàn và chất lượng từ các nhà cung cấp dịch vụ tốt nhất green tea collagen
    fish collagen
    collagen de happy
    collagen shiseido enriched
    collagen nitta
    Maihada collagen