What’s good for the Europeans, what is good for America...is good for Japan. It seems they are turning on the spigot all over the world and trying to flush away our fiscal troubles with a flood of fiat money. It is getting to be a trend. Japan’s central bank is the latest to decide to flood the market with money in the hopes that the market would float upward – and perhaps its wounded exports would as well.
The excuses for such actions vary. The end result is the same. According to the New York Times’ Hiroko Tabuchi: “The Japanese central bank moved to ease monetary policy Wednesday, saying it would buy larger quantities of government bonds and other assets, following the U.S. Federal Reserve in a show of resolve to shore up a shaky economic recovery.
The central bank, the Bank of Japan, will expand its asset purchase and loan program by ¥10 trillion, or $126 billion, to ¥80 trillion, the bank announced after a two-day board meeting that ended Wednesday. The purchase program was also extended six months, to the end of 2013.
The program aims to stimulate stronger economic growth by adding to bank reserves and driving down the cost of lending, prompting more money to flow through the economy.
The Bank of Japan downgraded its assessment of the country’s export-driven economy, blaming a slowdown in global demand and fresh uncertainties emerging from the anti-Japan protests this week in China, a major trading partner.
The question is will these actions help Japan. As Wall Street Journal economics editor David Wessel wrote this summer: “Even some QE defenders see a problem. ‘The channels through which monetary policy stimulates the economy are weaker than normal right now,’ New York Fed President William Dudley has said. That’s why unemployment remains high. Mortgage rates are way down, for would-be home buyers or refinancers to get loans that the economic oomph is diluted. Interest rates are lower, but small-business owners find borrowing against home equity or credit cards tough. Similar issues plague the Bank of England.”
More cheap money isn’t the solution to the problem; it is the cause of the problem. “Experts generally agree that the ‘neutral’ rate of interest for the key Fed funds rate – that is, the rate that neither stimulates the economy not restrains it – is about 4-5 percent,” wrote Australian journalist Peter Hartcher in The American Interest. “Can you guess how much time the rate has spent above the 5 percent level in the past ten years? The answer is all of 15 months, between June 29,2006 and September 18, 2007, peaking at 5.25 percent. For a decade, in other words, the Fed has been pricing money at either neutral or cheap rates. If the Fed’s job is to ‘take away the punch bowl just when the party gets going’, as former Fed Chairman William McChesney Martin memorably remarked, then the Greenspan-Bernanke. Fed has kept the punch bowl out on the table, amply filled, for so long that the American economy has been perpetually intoxicated. As 2012 begins, that economy is an alcoholic wreck.”
Speaking at the 29th Annual Cato Monetary Conference back in November, 2011, economist Allan H. Meltzer of Carnegie Mellon University observed: “Recent Fed actions have much in common. They reward the day traders in the bond market and have little if any effect on employment and output. Also, they show the very short-term focus that dominates Federal Reserve activity.” The yen for such activities continues.
The problem, of course, is that the monetary party gets going for those with access to cheap money – but the party never begins for those with no access to the cheap money but whose own savings are cheapened by the policies of the central banks. As the Howard Beale character says on Network: “We know things are bad – worse than bad. They're crazy.”