It was an interesting past few weeks wherein Koichi Hamada, a special economic advisor to Japanese prime minister Shinzo Abe has stepped up the plate to defend the countries and currency blocks which have entered into a program of Quantitative Easing to give their respective economies more fuel.
In a written statement, Hamada is actually defending the creation of money out of thin air to keep the economy going, stating that even in a low interest rate environment the creation of money could be an important step for ailing economies. Referring to Japan’s own situation both in 2001 and in 2007, Hamada says his country should have printed more money to save itself from a contracting economy.
The most remarkable thing however, is that Hamada is effectively supporting and promoting quantitative easing and thus indirectly the currency wars it induces. He says that due to the fact Japan didn’t expand its monetary basis back in 2008 when the global financial crisis has hit the markets, its economy lost a lot of power and just one year later, the Japanese economy was performing approximately 8% below its potential. This is a clear statement countries should consider to apply quantitative easing to bump its own GDP numbers.
Theoretically, this all sounds great! A country could continue to grow by creating more money through quantitative easing (even though the GDP would only increase in terms of the domestic currency) but there’s one thing Hamada is ignoring here. This could work if only one country would allow its currency to depreciate, but that’s not the case in a globalized world. If one country would start to print money in order to boost its economy, a retaliation from another country cannot be excluded.
But let’s look at some charts (courtesy of tradingeconomics.com) of the money supply in Japan throughout the years as well as the USA and the effect it had on the GDP.
So there is some truth in Japan’s statements and the country’s newest round of quantitative easing should help the country to increase the GDP again. The ECB’s view might be strengthened by the fact the inflation rate in the USA hasn’t (at least not according to the official numbers) increased tremendously as it continues to be around the 2% mark which is exactly the sweet spot the ECB has been aiming for.
The currency war is continuing in full force and the strong US Dollar might prevent the Federal Reserve from increasing its benchmark interest rate in June as it would undermine the country’s export position on the world market.
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