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Bernanke Is Heading Into His "Japanese" Phase
From The Daily Capitalist
Ben Bernanke should be relieved of his post.
I say this in response to Jon Hilsenrath's latest article in the Wall Street Journal on the Fed, "Fed Chief Gets Set to Apply Lessons of Japan's History." I would re-entitle the article, "Fed Chief Gets Set to Repeat Mistakes of Japan's History."
This is a fascinating article. Some tidbits:
As a Princeton professor in the 1990s, Ben Bernanke lectured Japanese officials for mishandling their economy. ...
Mr. Bernanke's mission, in part, is to make sure the U.S. stays off the path trod by Japan. Yet it's proving harder than he thought when he was offering advice to officials overseas.
Japan's stock market peaked in 1989 and its property bubble popped two years later. Since then, it has averaged annual growth of just 0.7%. Its national government debt has soared to more than 200% of its national output. And in seven of the past 10 years its consumer prices have fallen.
All this happened even though the Bank of Japan has held short-term interest rates at or near zero since 1999 and has taken other stimulative steps such as buying government bonds and short-term corporate debt.
The gist of the article is that back then Professor Bernanke chastised the Bank of Japan for failing to take bold decisive steps to thwart deflation. Among his recommendations was to do a lot more quantitative easing (QE) than they had been doing. They should have acted sooner with more QE, and they should have left interest rates low (basically zero) longer. He urged them to set an inflation rate of 1% a year until they rekindled inflation. But guess what: it didn't work. Nothing worked.
Japan's experience remains a puzzle. Japanese policy makers over time tried many ideas the U.S. academics promoted. They pushed interest rates to zero and committed to keeping them there until deflation reversed. Ultimately the Bank of Japan tried quantitative easing, increasing its holdings of loans, securities and other assets by 42% between 2001 and 2006.
For a time, the policies seemed to get traction. Japan averaged annual growth of 2.4% from 2004 to 2007. A long spell of falling consumer prices showed signs of abating. But then came the global recession of 2008. Japan's economy contracted 5.2% in 2009, and deflation was back.
"I don't think any model would have predicted the degree of persistence of Japan's problems," says Mark Gertler, a New York University professor and former coauthor with Mr. Bernanke. "It is pretty hard to account for."
Japan's deflation has turned out to be the deepest mystery of all. Economists expected that a little deflation would turn into an ever-more-dangerous spiral: As consumer prices fell, the burdens of rising real interest rates could worsen, damaging the finances of banks, households and businesses and sinking the economy even deeper, as happened during the Great Depression. ... Rather than spiral, deflation in Japan has stuck at around 1% a year.
Now the BOJ officials whom Professor Bernanke criticized are having their chuckle at Chairman Bernanke:
Kunio Okina, a former Bank of Japan official whose research was attacked by the academics, says they didn't pay much attention to the risks associated with such measures. Their stance was that the BOJ "should jump with its eyes closed," Mr. Okina says. "There is a big difference between when they were having a carefree discussion about the BOJ's monetary policy and when it becomes a real problem to themselves."
This should be a schadenfreude moment but the fact remains that Bernanke is in charge of our economy and he's doing all the wrong things.
In January, 2009 I wrote an article on this topic, The Japanese Disease, about the policies undertaken by Japan:
By looking at Japan in the 1990′s and early 2000′s we can see the results of a Keynesian solution to a set of facts almost identical to our present situation. The “solution” caused a 15-year (1990–2005) stagnation of the Japanese economy. ...
Here’s the Japanese experience which is startlingly similar to our present situation.
- They started with a huge credit expansion. Their discount rate was cut from 4.4% to 2.5% in 1986-1987.
- Real estate and equity prices soared.
- To counter the speculative boom, the discount rate was raised in 1989-1990 from 2.5% to 6% and their markets crashed.
- The Nikkei went from 40,000 in 1989 to 11,000 in 2005. Real estate values plummeted 80%.
- GDP grew at only 1.17% from 1992 to 2003.
- Unemployment went from 2.1% in 1991 to 4.7% by 2004 (a very high rate in Japan).
- Consumption and investment fell dramatically.
- Banks were not lending.
What was the response of the government to this crisis?
- In order to kick-start the economy, the government went on an infrastructure spending binge and cut taxes.
- From 1992 to 1995 they spent ¥65.5 trillion on projects and cut taxes.
- In 1998 they cut taxes ¥2 trillion.
- In 1998 they spent another ¥40.6 trillion on spending stimulus.
- In 1999 they spent another ¥18 trillion in fiscal stimulus.
- In 2000 they tried another ¥11 trillion spending package.
- They set up a ¥20 trillion fund to lend directly to businesses (the Financial Investment and Loan Program [FILP]).
- To try and push money into the system the Bank of Japan and Ministry of Finance bought more than half of existing government bonds from the private market at a cost of ¥2.22 trillion.
- Trying monetary policy, they lowered the discount rate from 4.5% in 1991, 3.5% in 1992, 1.75% 1993-1994, to 0.5% 1995-2003.
- They set up a $524 billion bailout fund in 1998 to buy stock in failing banks or nationalize them.
It is estimated that the Japanese spent about $1 trillion about (¥135 trillion) to cure their financial problems. But the problems lingered, banks remained weak, lending and investment was severely reduced, unemployment was high, government debt went to more than 150% of GDP, and the yen devalued. Nothing seemed to work.
Still nothing has worked and the Japanese keep trying the same failed policies over and over.
Now, there are substantial differences between the US and Japan which is why I believe we will not have prolonged deflation like they have experienced. In October, 2009 I wrote an article, "Will We Have a Lost Decade(s) Like Japan?" which explores the substantial differences between the US and Japan which, in my opinion, will not take us down the path of continuous prolonged deflation.
Yesterday the Fed published its minutes for its September, 2010 FOMC meeting and there was nothing that we didn't already know. They said that the economy is not doing as well as they expected, that it could get worse, and if necessary they will print money through QE, soon.
Bernanke will teach the Japanese a lesson in the proper way to run and economy. He will pump money until we have inflation because he fears deflation more than inflation. Because he doesn't understand the real lessons of Japan, we will have stagflation, and his successor will probably try the same failed remedies to save us from that too.
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Are we assuming that Japan was not a successful central banking operation? Law and order prevail. Banking system intact. Central bankers still have a monopoly on printing Yen. Government stooges still in office. Yes. Japan was a model of success depending on who you were. It was a GD masterpiece.
Quinvarius,
probably Japan was helped by the Americans borrowing away merrily during the last 2 decades!
"Because he doesn't understand the real lessons of Japan"
What is the real lesson from Japan?
That do not intervene and allow everything to take a beating and then wait for guys who have cash to scoop up the assets at pennies to the dollar and start the growth process.
If this is the lesson then no central banker has learnt it. I think they never learnt this over the last 2 decades because the Greenspan put was so effective. Bernanke put also is fannig the flames of stocks and commodities. Unfortunately the central bankers are running out of ammunition slowly due to this protracted correction. So it is likely that they will learn the lesson from Japan when they find the Bernanke put NO longer has the magic of Greenspan put.
Till then if you are capable make money from the markets, else stay out till it bursts, the timing of which is unknown
You've missed the thing that's that causing US deflation, and the same thing caused Japanase deflation 20 years ago. Demographics. A passing wave of baby boomers. Until this is understood people will always wonder why these economic theories just do not seem to fit with what is happening. Read Harry Dent.
Absolutely.
CBs are misdiagnosing and mistreating an issue of demographics and solvency as one of confidence and liquidity.
Now, Japan is not even replacing its own population. Its lost decades merely accelerated something that would have happened soon anyway. The US is about a decade behind Japan, demographically.
Given their cultural resistance to immigration, they have entered the event horizon.
So, why are we building more houses and strip malls, again?
The more I see and read, the more I realize that Hitler was right about everything, after all.
There is some things I agree with Krugman and somethings that I don't.
One thing that I strongly agree with him is calling Ben Bernanke very politely;"Bernanke-san"
Hyperinflation happens with a loss of confidence in currency. This would involve a complete loss of confidence in the system. The world is a different place from the weimar so the comparisons are lazy.
A loss of confidence would mean bank runs. Banks collapsing = businesses folding = hundreds of millions suddenly caught offside with no savings, no access to electronic money, no job...
There will be no wheelbarrows of money because it will all disappear overnight. This is a ponzi scheme perpetuated by printing and borrowing. If the u.s. goes down, the world's going down with it. Trillions wiped off the map.
I've read this too
The New Push for a Global Currencyby Llewellyn H. Rockwell, Jr.
The most interesting excerpt is this:
A world paper currency and world central bank would heighten the moral hazard and lead to a global inflationary regime such as we've never seen. There would be no escape from political control at that point.
My question is:
Global bankers in 1971 gained 40 years by shutting the gold window.
By issuing a global paper currency how many time they can gain?
It's an important issue, becouse it will be the lifespan of the new 1984 like regime.
I think that the moneybags (aka Financial Elite) that has controlled how the Goverment and Fed works is already deinvesting from the US. Therefore the evil hobbits Ben "Bimbo" Bernanke and Tim "Fraudo' Geithner are mostly on auto-pilot mode now. They still have an obligation before their masters to eek out that one last drop of wealth from the revenue/liquidity stream for them, but pretty soon they will be left to waddle in their own shit. November will be just a breather distraction.
Most of the Japanese problem is external, ie: technological advances and a shift away from fixed investment has significantly suppressed the prices of Japanese goods.
A Japanese outcome would be the best case scenario for the USA, and would be quite desirable. But I think Zimbawbwe is far more likely.
I've got it figured out ... BB drives the dollar to 72 by the end of the month and Obama says BB (a Republican) is Bush's man and he is trying to bring the country down to win the elections for the Republicans
.
One thing about the japanese economy, is that they are a bunch of savers. But here in the US we don't we just keep consuming. Another difference is Japan didn't gut it's manufacturing base as the US did. Then you take in the demographics and Japan as with the US is getting older, but in Japans case they fight to not let many people into the country that would help to take the place as young workers. I truly think that Bernanke and company is trying to have inflation on one hand but not to much. And on the other hand they are trying to keep stagnation from setting in buy by doing things to try to kick start the economy. He is doing something that has never been accomplished before "both inflation and economic stagnation are occurring simultaneously and no macroeconomic policy can address both of these problems at the same time".
It's inevitable, we are walking a tight rope of early stagflation and since we are a reserve currency and have so much money out their, we might make history and have HYPERSTAGFLATION happen. We are in really uncharted waters and are making the pain worse by not taking our fiscal medicine.
But then I don't watch my spelling as much as I would like, either.
..my two cents on the economic modelling is obstruse upon the situation:- a missundestanding of inflation, how it influences price expectations. ..price expectations tend to rise because there is at least a vaguely known reason why some particular item will cost more in the next period. Then..importantly..suppliers can charge higher prices..because customers will pay them. Then there's more money flowing and so, a rise in the money supply is useful. ..But going the other way- raising the money supply- when customers are not expecting specific item price hikes means there isn't the budget for it. And suppliers, first and foremost will charge at a profitale level which the market will bear. ..commodoties have risen, that's where inflation fits prices..but wages have no reason to rise, especially if the expansion in the money supply is confined to the financila markets.
What I don't undersand very well is how the chairman of the Federal Reserve can not see with his own eyes the damage he is doing?
Oh he's into his "phase" that's for sure. More like "phase shifting" tho. One moment "he's on the couch" the next moment "he's in the bedroom." One moment "he's in the office" the next moment "he's ridin' the limo." This guy can be at any time becuase he's discover how to move through space and time SIMULTANEOUSLY.
http://www.youtube.com/watch?v=gEmJ-VWPDM4
and for a new twist on that 1HW...
http://www.youtube.com/watch?v=_xxcmf0oeZM&feature=related
It seems disingenuous to regard Japan as a sort of closed system which tried QE etc and it didn't work and then to turn around and say, "Now Ben is doing the same thing with the US." It seems more likely that at least some of Japan's failure might be due to the US. For instance, you say, "But then came the global recession of 2008. Japan's economy contracted 5.2% in 2009, and deflation was back." That's not necessarily Japan's fault but rather due to the effectively planned collapse of the US economy. Now with the currency "war" underway they are experiencing even more deflation.
I'm not supporting Bernanke--I think he's a borderline psychopath--and I detest the Fed which merits all the abuse it gets from ZH. However, national economies are not little experiments in vacuum sealed jars. How much right do the Japanese have to blame explicit US policies for their moribund economy?
Japan is an American nation state; we conquered them, imposed our system upon them, and our military is stationed there, raping their daughters.
What they do, is directed by (you know who) Bernake, tiny Tim and Obama. All of their money minipulations, etc., etc., are at Ben Shalom's mandate. Period.
The last President who wanted to do away with the Fed was JFK--killed, zip--message sent. Several years later, JFK's brother and his Attorney General was campaigning to run for President, in agreement with JFK's ideas--killed, zip--message sent and message received. To my knowledge, no other President, ever, has toyed with doing away with the Fed or allowing his aides to discuss it.
RIP JFK and Bobby.
You forgot the President of Vietnam who they ordered to be assasinated. Moreover we know this to be factually true.
From WSJ article:
'Mr. Bernanke urged Japan to commit to keeping interest rates low until it got more inflation, and he defended novel ideas like buying government bonds with the understanding that fiscal policy makers would use the money thus raised to finance tax cuts to boost consumer demand.'
I don't think cancelling the bush cuts would be considered a cut and therefore the plan will be modified. There will be no TAX CUTS! Will this still increase GDP? It was a key part of his plan.
If I were a conspiracy theorist I'd say things are going as planned.
Quite well.
Well, until someone gets the idea to throw his ass in a van and start sending body parts to the world media press release style.
I don't know about mailing away body parts, but I do think the little gnome should be impeached ASAP. He is a cancer plain and simple.
http://www.activistpost.com/2010/10/after-fed-solutions-debate-begins.html
Unfortunately, he has 3 more years to go in his current term. Wonder if the new Congress next year can do something about him.
Japan is actually probably the *best* case we could hope to accomplish.
During its first lost decade, Japan had the advantage of:
- Cheap energy, with oil bottoming at $12/b in September, 1999.
- Huge export surpluses and a strong manufacturing base
- An export-driven economy during a period of broad worldwide growth.
- The ability to devalue its currency at will without serious reprisal
- A high individual savings rate
- Low unemployment (as you noted, up to 4.7%)
- A crash centered in commercial real estate, which had far less impact on consumer balance sheets.
- The intangible advantage of relative cultural homogeneity.
The United States begins its lost decades with none of these advantages.
American style collapses are a whole magnitude higher, aren't they! Gold 5000 and LOVIN' IT!
Gold 5000 what? Dollars? When the system collapses, they will pay you a 12 gage buck shot to the face for your gold
Exactly, neither Hyperinflationary...
Very true Zack.
Huh, Bernankes ideas for massive super printing to paper over all economic havoc didnt work in Japan, so USA is his new testing grounds for his insane Keynesian 'never before worked anywhere else and ends in disaster' theories? Wow, millions of lives placed into the hands of some lunatic 'scholar' with ideas that have already lead to world wars and millions of deaths world wide, so the insanity definition 'doing the same thing over and expecting different results' we're living thru it, and on the cliffs edge! Cans of baked beans over a hobo fire, bitchez.
So, Ben learned nothing about the perils of keeping zombie banks going from the japanese experience?! Great.
I agree with you on some points, but the conclusion that we'll have stagflation is pretty odd. Are you operating under the assumption that stimulus will outpace private (and at the state and local level, possibly public) debt destruction?
Yes. Stagflation seems to be the new cop out of choice, but no one wants to define it. It implies pain, but relative stability. Where would the stability part of the equation come from?
The stability part is a function of brazen fraud and shameless lying.
I dont know where people will find stability in bank runs, food riots and starvation, and murder in the streets. Trying to put old 1950's economic definitions onto this present day nightmare is like bandaids on a severed limb.
"Ben Bernanke should be relieved of his post."
Yes, you're putting it mildly Econophile. I'm not a lawyer, but isn't the Coinage Act of 1792 still on the books? See chapter 16, section 19 as to the penalties for debasement of the currency. Of course, currency meant gold and silver at the time. The address is below for those interested.
http://nesara.org/files/coinage_act_1792.pdf
When hyperinflation occurs, will the defense be that the public used Federal Reserve Notes at its own risk and that they were not technically government issued money? No criminal penalties because it is a privately owned bank? Any thoughts?
I think you are on the right track. I was reading the other day that the reserve notes have no government guarantee on them. sneaky indeed??
One might also point out that Bernanke was completely ignorant of the existence of the housing bubble, thought housing prices would not fall, could not imagine unemployment going over 8%, and has been taken by surprise at *every* step since his inauguration as Fed Chairman.
For an "expert", one cannot help but notice that he has been consistently wrong -- and has gone on record with each and every one of his wrongheaded notions.
Ben Bernanke should be relieved of his head!
In olde England, counterfeiters were boiled in oil.
He is demonstrating what most psychologists would refer to as insanity. But, that's his job as Fed Pres.
With luck, he will fully assimilate the culture. Then when total failure is imminent (about 24 months) he can commit ritual self - disembowelment on the lawn of the economics department at Princeton.
Someone get him one of those nice swords like they had in the "Kill Bill" movies for Chanukah.
The benranke top is in TODAY
http://www.youtube.com/watch?v=8NOUqw0aJ7w
Bingo.
Rolling Stone McChrystal and 0 Adviser seppukus signal we may be about to lose Afghanistan, Iraq and Pakistan and deflate the financial military media industrial complex thanks to fraud at home with runaway education, energy, food and medical prices.
May be Vietnam 1974 to 1975 Dow 1051 to 577 deja vu.
http://www.jubileeprosperity.com/
Afghanistan and America 1776 the graveyard of empires.