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Guest Post: Japan’s Easy Money Tsunami
Submitted by David Howden of the Ludwig von Mises Institute,
The Bank of Japan has embarked on one of the most inflationary policies ever undertaken. Pledging to inject $1.4 trillion dollars into the economy over the next two years, the policy is aimed at generating price inflation of 2% and further depreciating the Yen. The idea is to fight “deflation” and increase exports.
The end result of this policy will be an assuredly larger balance sheet at the Bank of Japan (projected to nearly double to $2.9 trillion). Despite being lower than it was 25 years ago, the Japanese Stock Index has increased by 70% since November of last year. However happy people have been about higher stock prices, eventually the economic effects will be harmful; indeed the recent stock price crashes foreshadow still more troubles to come.
In my own contribution to Guido Hülsmann’s recent edited book The Theory of Money and Fiduciary Media, I take a critical look at these exact policies - expansions of the money supply aimed at stimulating output by way of manipulating the exchange rate. At the 100-year anniversary of the publication of Ludwig von Mises’s The Theory of Money and Credit, we can see that Mises had already grappled with the issues of currency depreciation in a manner superior to modern monetary economics. Furthermore, with the refinement of his business cycle theory in his book Human Action, we find that Mises also outlined the detrimental effects of such expansionary monetary policies.
The exchange rate determines the price a foreigner will have to pay for a domestically produced good. Increases in the money supply will generate inflationary price pressures that will in turn increase prices. This leads to a higher exchange rate, which means it takes more domestic currency to purchase a unit of foreign currency. This makes it cheaper for foreigners to buy our goods so exports increase. Conclusion: countries can stimulate exports and increase the number of jobs in export industries by inflating their money supply.
Unfortunately, this is not the end of the story.
Depreciating your currency does make your export goods cheaper for foreigners to buy. However, it also makes it more expensive for you to buy imported goods. This helps to close a trade deficit and reduces foreign investment in your economy. However, if the goods you sell to foreigners are composed of many inputs that you have to purchase from foreigners the effect will be to drive up your cost of production.
Therefore, Japanese exporters will pay more for the inputs that they will need to import to construct the same goods they intend to sell to foreigners. This effect is especially noticeable in countries with large export markets, but only a small ability to supply the inputs for goods destined for export. No other large economy fits this description better than Japan.
Mises’ key insight was in looking at the long-term effects of such a policy, and in the process he examined the logic behind the short-term results as well.
The ineffectiveness of the policy in the long run is apparent when one understands how prices – both domestic and foreign – interact to determine exchange rates. Exports will be promoted in the short run, though the effect will be cancelled in the long run once prices adjust.
If the policy is ineffective in the long run, Mises demonstrated that the short-run gains are illusory. The same monetary policy aimed at depreciating the currency to promote international trade will reap domestic chaos.
Higher monetary inflation will reduce interest rates. One result of this policy will be greater consumption expenditures – what Mises coined “overconsumption” – as consumers save less and spend more. The other result of reduced real rates is what Mises referred to as malinvestment. Production plans must supply not only the amount of goods consumers want in the present, but also orient these production plans to produce goods in the future. The interest rate is what coordinates all these plans over time and is what entrepreneurs use to determine when to produce goods, and how long a production process should be employed. The negative effects of distorting the interest will only be revealed much later.
Upsetting the natural rate of interest through an inflationary monetary policy unbalances both consumption and production plans. The economy eventually succumbs to an Austrian business cycle as it tries to regain footing, and move to a more sustainable pattern.
The more things change, the more they stay the same. Ludwig von Mises was able to correctly identify the pitfalls of expansionary monetary policies over 100 years ago. Policy makers have yet to learn these important lessons, and consequently continue to plague their countries with the results of these failed measures.
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With everyone printing $, it is no wonder people the world over are buying gold for protection,
with the exception of Americans who are brain-dead.
"Depreciating your currency does make your export goods cheaper for foreigners to buy."
Should work fine as long as long as they keep printing more domestic sources of energy and raw materials.
I agree. I think it would make more sense to look at the major export items (cars and electronics) and tell the major export markets that if you buy an item, you get an instant cash rebate, discount, etc. Japan needs to put money in the hands of their potential buyers, that might have a side effect of lowering the Yen since for American consumers they will need to "buy" U.S. Dollars to hand to U.S. consumers.
Same with the U.S. give $ out at the bottom level to buy goods and watch prices skyrocket. Look at the rise of college tuition, they give $ out to poor kids like candy.
Who pays for the "huge rebate", or does the central bank just print it up?
Print.
That is not an either/or question. The central bank prints. All non inflation-indexed creditors pay.....
Message to BOJ CB.
ONLY EASE ON TUESDAYS you idiots.
Gold and Silver may have put in a bottom today. Still to soon to say.
What easy money gains? From this angle, the jap market appears to be crashing more everyday
It isn't helping Agency MBS investors like pension funds ... and The Fed. Ha-Ha!
http://confoundedinterest.wordpress.com/2013/06/03/grumpy-ben-increasing-risk-for-ginnie-mae-investors-fed-rising-rates-spreads-and-duration/
Yep. Vanguard's GNMA fund generated a total return of -2.29% in May. Not what investors were expecting from a "safe" (duration = 2.5 years) bond fund.
Got Liquidity Trap?
Inject money.
No response?
Inject way the fuck too much money?
Oh, there's a response?!?!
Stocks rally!
Check!
Internet Rates skyrocket!
WTF?
Whaddya mean interest rates skyrocket?
Inflation premiums expand
Oh....
Yeah, Oh as in Oh shit, right?
Oh no, we just gotta do more.
Things start falling apart.
Oh
Yeah, oh
Oh what?
Oh shit.
Say it after me.
Say what?
Say Oh Shit.
Oh shit.
Feel better?
No
No what?
No shit.
See I knew you'd get it.
Get what?
No shit.
We're fucked
We know that, whadda we do?
Undo it. Reverse everything
We can't do that!
Why
Because everything'd fall apart
No shit!
Too much debt leads to lower interest rates until it is repaid or defaulted, Japan is a perfect example. When everyone in the world tries to devalue at once, it really does not work, growth stagnates and shit gets cheaper until the bottom discovery process is complete. Once defaults occur, you can waive the inflation flag
No. Too much debt leads to higher interest rates and defaults. Japan's problem is plain old stupidity. Japan is a perfect example of stupid people thinking buying a government bond is an investment, or worse, a risk-free investment. It is neither, unless the bond belongs to an expansionist empire who can actually grow as a business by conquering more land/people. In effect, japanese "savers" are paying a voluntary tax which is preventing inflation; or more accurately, there is inflation but it's in the price of government bonds instead of consumer goods. The ONLY way to generate consumer price inflation is to burst the bond bubble, even if in a controlled manner. If the government would reverse course and start actually paying back the debt, excess savings would be forced into actual businesses leading to actual economic growth. Which if I recall, is how they became one of the world's richest countries. Japan's only other option is to flood the country with chinese immigrants.
To these Keynesian idiots, old people trying to save cash to support themselves through old age = "liquidity trap."
Mises was brilliant in many ways. Too bad he wanted to put the oligarchs in charge, which is where I have my big disagreement with him. This article is dead on.
He and all Austrians want the individual in charge of himself. Going back to etymology, economy was oikonomia which meant 'management of one's own household.' AKA, I run my own economy and am my own agent and make my own subjective valuations and decisions.
If people have an ethic of liberty they will guard against those who would seek to rob them of their freedoms.
That would be great if human beings did not always allow sociopaths to control them. You may be perfectly capable and willing to fend for yourself, but most people will allow a Hitler or a W or an Obama to rule them and by default, you too. Before we had a representative government with at least some potential for freedom and liberty and wealth for the average guy, we had Kings who ruled by force and mass poverty. No one elected them and most people would have loved a free market with justice for all but the Kings made sure they had the bigger armies. To ignore that fact is to be a true Mises believer.
" Before we had a representative government with at least some potential for freedom and liberty and wealth for the average guy, we had Kings who ruled by force and mass poverty."
So where do we go from here? It seems like the one thing we have not actually tried in a long time is actually fending for ourselves.
The point I keep trying to make and that no one has argued against, is that most of humanity will never allow that to happen and if wishes were horses.... The Constitution is a brilliant concept that imperfectly but effectively (when not usurped by monied interests) balanced individual freedom with the reality that Kings and oligarchs will take over by force if you don't allow the people to act collectively to stop them.
I'm with you man and you know i ain't your junker. I guess what I am saying is " if wishes were horses"...
Where are we going from here? We can debate what should be in the abstract all day, every day....but I am afriad we will be debating it in either a fema camp or an insane asylum soon enough.
I really need to start up arrowing myself like Freemarket guy. And I'm with you -- I would love to believe that we could all be truly free and that some asshole or group of assholes wouldn't always fuck it up. I understand why the Mises camp wants to believe it, but I don't understand how they ignore the facts and make an entire philosophy around a fantasy. Oh well, like you say we can all pick up this debate in a few years in camp. Maybe we could decide who gets to eat by who gets the most downvotes!
LOL nothing cracks me up like a post with an immediate upvote. I understand the momentum trade and all...
What blows my mind is how we are all still on here (granted we have lost a shitload of people lately) having the same conversations....we may just actually be in a virtual fema camp at this point and not even realize it.
My argument was never contingent on historical precedent.
Yes, 19th century America was as close as it's ever gotten to anarcho capitalism, and there was prosperity and rising living standards. That was by no accident.
All I can do is mind my own business and voluntarily persuade others to have an ethic of liberty, which is a crucial common ground. Adding a system of organized theft (government) always makes things worse.
Indeed, people do need to be aware of the incalculable value of liberty, such that they value it and will defend it. This is what I meant by 'ethic of liberty.' Sadly many just morally relativize and justify different ways to rob Peter to pay Paul.
People CAN voluntarily join together and form groups, you know. Mutual aid societies were prevalent from Victorian Britain into the 1930s.
"... great if human beings did not always allow sociopaths to control them."
I would not call President Andrew Jackson a sociopath.
He eliminated in 1836 the Second Bank of the United States, the equivalent of today's Federal Reserve.
Andrew Jackson, you will remember, was the chief architect of the Trail Of Tears, a man who claimed that he "never met an Indian I didn't kill and never killed an Indian I didn't scalp."
Japan has no natural resources and has to import everything particularly oil. Depreciating the Yen is like shooting yourself in the foot. God help consumers in Japan, they are facing massive inflation.
The nikkei is nice and calm. Central planners are smoothig it all out. Everyone go back to sleep.
We have a real horse race here. Will their stock market go to infinity before the yen is worthless. Oh right same outcome either way.
"Higher monetary inflation will reduce interest rates." You lost me there. When does high inflation reduce interest rates? It has the exact opposite reaction
maybe he means in the short term, because CBs print the fiat to buy bonds to suppress borrowing rates. Obviously the market overwhelms this eventually, though, as is being seen in Japan as people aren't going to put up with the low yields given the inflationary yen policy
Tyler posted an artical a few days back showing that in the us the fed is the market - owns a large percent of federal "debt". The error in Tylers calculation was that he did not anticipate just how bat shit crazy these people are. There is no limit to what these people can and will do - up to and including punishing holders of cash and gold and confiscation of same. It does no good to bury your gold in the back yard with the ex if you cant trade with it.
Mises is using the term inflation in its original meaning of "an increase in the supply of money" not the modern perversion of the term to mean "an increase in general prices". As the central banks create more money, the price of funds on the loan market is driven down, so that it deviates from the natural rate of interest determined by people's time preference. So in this sense it seems obvious that inflation (an increase in the money supply) leads to lower interest rates. This exact process is what central banks count on when they use "open market operations" to influence interest rates.
@ Vidar....the current use of the term inflation is not a 'perversion'....language evolves naturally and according to the needs of its users...modifying the meaning of inflation is just part of that process....the word 'meat' used to mean all food - is its current use a perversion? As you seem to be an expert on the De Mises theorem, could you explain how interest rates are used by entrepreneurs to plan investments? I don't quite understand this point.
"the current use of the term inflation is not a 'perversion'"
Yes it is.
Because inflation was defined years ago as 'an increase in the money supply'.
Price inflation is a result of inflation.
I suggest that you invent a new word for "price inflation".
May I suggest "Benflation", "Keynesflation" or "idiotflation".
What is puzzling is that with all the increase in the supply of money there is no price driven inflation, like in the 70's because of deflationary pressures and a sea of debt.
Martin Armstrong recently pointed out that price driven inflation is a completly different animal than hyperinflation. The latter is a wholesale lack of faith in the financial system itself. not inflation as measured by the CPI. It's hyperinflation that lies at the end of this road.
That anomaly that you just observed is quite poignant. GOOD JOB IN OBSERVING IT. Most inflation that we see here in the USA is innocuous. SMALL. prices stay the same but portions are SLIGHTLY smaller. Costs have gone up, but gradually. Cheaper to buy junk food, eating wholesome natural foods is expensive, hence small areas in supermarkets designed for organic food stuffs.
However.....
Inflation is being exported to the rest of the world, even as we speak. 9 dollars for a Big Mac with cheese in Dubai. 4 dollars for a LITER of petrol in EU, 15 dollars for a gallon of cooking oil in Pakistan (tripled in price!!!)
Will the USA experience inflation, hyper-inflation, rioting, revolution, civil war? Who can say. But the one anomaly that keeps the wolves from the door is our ability to print money out of thin air to pay for our debts. Eventually this will become a SERIOUS PROBLEM. But not today!
in a true free market interest rates can only be low if savings are abundant. That would imply that people have actually foregone consumption and put it aside as capital. The problem is that right now rates should not even be near this low; it is totally unwarranted because most people are quite leveraged and spend everything they make and then some. Savings are not high. The Fed doesn't want to allow people to organically repair their balance sheets/go through scrimp and save, and so it prints fiat to replace the savings, but it is phony and not real capital. Businessmen see the low rates and are spurred to start projects and they are unwarranted, because consumers have to supply something, too, and if all they can supply are an ever increasing # of Federal Reserve Notes, then it's going to take a lot of those to buy anything tangible of value.
This is Say's Law; I pay for goods with goods. Money is simply a claim on wealth. Going back to the bubble, though, homebuilders and entrepreneurs realize that supply/purchasing power is not sufficient to warrant all this expansion, and so they quickly stop their projects and rush to liquidate into dry powder. This is the bursting of the bubble. The problem was never lack of demand; demand is practically infinite. The problem is that supply is not sufficient to warrant all these projects, literally there is not enough. Consumers cannot supply anything but fiat which is not scarce and therefore it takes a ton of it just to lay claim to any real wealth.
no shit.
http://youtu.be/1z-AxgueBRk
Roubini Sees Gold Falling to $1,000 by 2015 on Global Recovery
Bad prediction? No uinderstanding of the English language?
Paid shill? In the chair satan's pocket?
You decide!
Roubini is a fool they like to trot out as an "expert" yet all of his predictions have been wrong. He will be wrong again.
OMG...answer: All of the above.
Roubini.....arrogant.....never liked him.....and just where do have your money Mr Roubini Know it ALL?
Uh,Do an Iceland?
I'm making a prediction. Do they still have that show "Gold Rush" on whatever channel? If so they will announce at the beginning of this season that the miners have decided to cancel any more mining due to the pickup in the economy, strong dollar, and drop in gold prices.
I think this post is a little disengenuine.
Japan is trying to bring the yen back to a more typical level - an attempt to overcome the market forces that had recently caused the yen to become unusually strong in comparison to the rest of the ponzi world. Thet are targeting 2% inflation - which is the usual nominal target of most of the rest of the ponzis.
This is not to say thier scheme will work - they've made some progress but there is no stability in bens clockwork orange world.
Still give it a rest with the dire predictions of hyper-inflation. In order for hyperinflation to take hold people would have to be paid more. Still I suspect the bankers are suufering a bit with the cost of exotic cars and shower curtains and such.
I agree M. I think the BOJ is atttempting to fine tune its approach....- it wants to get the Yen up but not too much (can't piss off the Koreans, etc. too much) and probably let the Nikkei drop for a while in order to show that it is not a one way street and to discourage overenthusiasm .......their grand experiment will have to go on for a while yet before it either crashes and burns (most likely imo) or actually works (bees fly).
Japan is ground zero for every failed Western interference with Eastern culture, using it to test modern financialization, and nuclear power. Both failed.
A demographic time bomb goes off in Japan; Fukishima goes off. Not much on those stories in the West which uses Japan.
The media caravan moves on, caring nothing for Japan: our future if we persist with this nonsense of financialization, the ways of the rootless cosmopolitans of the globalist agenda Trilateral Commission founded in old dying Europe; it's monarchy, Vatican and central bank Rothschild Zionism which cares nothing for any nation, least of of all the U.S.A., and Japan.
China and Russia: you next. Beware.
This is a comment for traders, not compromised venal politicians.
All to prop up the US dollar.