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Paging Richard Koo: We Need A Shirakawa Translator
We are having some temporary trouble translating the following statement by BOJ's Governor Masaaki Shirakawa "We are serious about ending deflation. It will take time and
it's not something the BOJ alone can achieve. But we will be
doing all we can." We are confident that there has to be some context here, rendered into logical argument by Richard Koo, as otherwise all those thousands of pages of powerpoint slides, filled with Nomura-produced charts demonstrating that sooner or later Japan will pull out of the quicksand, just a few more quadrillion of yen stimuli, mix and boil, will have been for naught. Alternatively, thousands of Zero Hedge posts will not have been for naught if and when Fed Chairman Bernanke utters some variation on a theme by Shirakawa.
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Since Japanese citizens either do not or cannot spend, the only way BOJ can inflate is to subsidize the industrials to bid contracts oversees. They can copy Korea which subsidized their nuclear industry by underbidding, by a wide margin, the French and the Japanese in building three nuclear reactors in Abu Dhabi.
Japan can hope that when time comes to repatriate dollars or euro, the yen will be weak. Thus, making up for some of the subsidy.
Build, build, build, get paid later.
I've heard of companies building plants with deferred payments with 2%-3% interest. Utilities need not secure financing. Japan export bank and the industrials can join and use this model.
If I'm a utility I would say: "Where do I sign?" Start collecting after they collect revenue.
enter Ben stage left..
Print money and give it to people, no questions asked. This will generate inflation, raise interest rates above nothing, and government finances will explode. The resulting currency crisis will generate enough inflation for a generation or two, and snap that cultural tendency to save. Spend it or it's gone!
Maybe twenty years from now, when the Fed Funds rate is still at zero, the U.S. monetary authorities will finally realize that zero interest rate policies cause deflation and not inflation.
Granted, it is counter intuitive, which is why it will take several decades of evidence for them to believe, but here is the why of it all: Taking away everyone's interest on their savings causes huge psychological damage. This causes even more retrenchment, more savings to try to compensate, and less spending.
Ultimately, psychology is the chief failing of Keynesian economics (even though its adherents believe it's the primary advantage).
In theory, what should it matter if 1,000 individuals make private decisions regarding working, saving, investing, borrowing, spending, etc, or if a collective entity representing their aggregate behavior (called the "state") perform the exact same functions on their behalf?
Simple: individual behavior is dictated by fear & greed, whereas collective behavior takes self-interest out of the equation. This is most evident in both money velocity & the debt multiplier. If debt was growing as fast as public debt is right now, but what was being created privately by individuals, what would it tell you? It would tell you there was a massive surge in positive sentiment, perhaps even a manic bubble (ie 'get in on the ground floor').
But what do we have instead? Everyone sitting around kibitzing about the world, waiting for the other shoe to drop. Meanwhile, the state continues to incur additional debt loads with practically nothing entering the market to the exception of paying gov't employees and supporting welfare recipients.
"In theory, what should it matter if 1,000 individuals make private decisions regarding working, saving, investing, borrowing, spending, etc, or if a collective entity representing their aggregate behavior (called the "state") perform the exact same functions on their behalf?
Simple: individual behavior is dictated by fear & greed, whereas collective behavior takes self-interest out of the equation......"
1. 1,000 individuals have the potential to make 1,000 different decisions. Government gives one choice and one set of outcomes. In other words it will always stifle innovation. Of the 1,000 things the 1,000 individuals try, maybe 990 of them suck, but guess what that leaves? 10 different great ideas produced by 1,000 people. Which is ten times greater than government.
2. "...takes self interest out of the equation."
People are different.
Its wierd that the Japanese cannot do... what comes so naturally to the Argentinians!
Just lower taxes, and print money mto fund govt expenditures. I believe Milton Friedman called this -- "a money financed tax cut". But cut-the-cord of low, low rates. Rates at 5%, but actually start printing the real money -- from the treasury side.
This is kinda the bridge to typical ZH craziness. The system might be much better off at higher rates (5-10%) but in order to get that, we need a massive growth in the printed money supply (not credit). What would that be, M0?
paging dr common sense
read this: http://tr.im/On4m
I don't care how serious they are about stopping/ending deflation they can't and won't succeed. Unions are pressured for wage concessions, the unemployed are taking part-time jobs or jobs paying 1/2 of what they made 2 years ago and states, counties and municipalities are furloughing employees, freezing wages and making wholesale cuts in services, salaries and pensions.
The result is without wage inflation there can be no price inflation. Instead, what we have is wage deflation. This is not temporary. It is permanent and it is not over yet. Trying to prop up prices when real wages are decreasing is a barren policy. Housing is simply becoming less affordable for new buyers and forcing more existing homeowners into default.
The one thing that would help, but which the banksters have successfully fought, would be to give Bankruptcy Judges the power to reduce principle - the so-called "cram-down" provision. Of course, it would force more banks into insolvency as the value of their real estate portfolios drop but we are getting close to the time when it is either "them" or "us."
There are well run banks out there that can fill the lending void and do it without gouging or over-reaching. Setup a system to let these larger banks divest themselves and either restructure or go out of business. Controlled deflation is possible ... and necessary.
Very well put, psquared-- and exactly right.
Don't you think it's ironic that Richard Koo recommends a prescription for the U.S. very much like that of Japan? Japan spent goverment money and printed it like crazy... and over a decade later, the Finance minister declares they can't beat deflation without 'help'.
No matter what authorities do to prop up asset prices, the debts are still there. Unfortunately, many of the debts are predicated to be paid based on lower wages-- which really makes the problem that much more acute.
While I'm almost resigned into believing that our Fed will follow the neo-Classical, flood-at-almost-all-costs model-- the only efficient solutions are ones that involve cutting debt out of the system. If we can't decline aggregate debt levels, we are just spinning our wheels and keep our heard above water in the deflationary whirlpool.
It's a pity sensible statements like these will go completely unheard by those in positions to make a real difference.
At least somebody gets it...
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