14 August 2011

Krugman's advice to Japan: 1997

It is interesting to read Krugman's remedy for Japan's recession, advanced in 1997. The Fed has followed it to the hilt so far in the US and has nothing to show for its pains.

"The simple fact is that there is no limit on how much a central bank can increase the supply of money. [sic] Could the Bank of Japan, for example, double the amount of monetary base - that is, bank reserves plus cash in circulation - over the next year? Sure: just buy that amount of Japanese government debt. True, even such a large increase in the money supply might not drive down interest rates very much, since they are already so low. But an increase in Japan's money supply could ease the economic problem in ways other than lower interest rates. It is possible that putting more cash in circulation will stimulate spending directly -- that the extra money will simply "burn holes in peoples' pockets". Or banks, awash in reserves, might become more willing to lend; or individuals, with all that cash on hand, will bypass the banks and find other ways of investing. And even if none of these things happens, when the Bank of Japan increases the monetary base it does so by buying off government debt -- and therefore makes room for spending increases or tax cuts.

"So never mind those long lists of reasons for Japan's slump. The answer to the country's immediate problems is simple: PRINT LOTS OF MONEY. But won't that be inflationary? Well, remember that the Bank of Japan is supposed to be impotent: if it prints more money, people will simply hoard it rather than save it. But printing money is only inflationary if people spend it, and if that spending exceeds the economy's capacity to produce. You cannot first argue that monetary policy is ineffective as a way to increase demand, then reject a proposal to print more money on the grounds that it will cause inflation."

The full article can be seen at What is wrong with Japan?.

Readers might wonder why a Keynesian was advocating such notably monetarist remedies instead of recommending public spending. The reason was that the Japanese government had tried it and failed.

Category: Economics

08 August 2011

One massive crash coming up

The graph of Corrected Money Supply below shows a massive increase upto June 2011.

It has gone way above its previous peak at the end of 2005. But the situation is still (I am speaking of June, remember) a little less dangerous than it was then, as the graph of Velocity of Money below shows. Since then, of course, it has probably got a lot worse.

I wonder whether the real crash is going to occur in the treasuries market. Perhaps all those who bought treasuries at rock bottom yields are going to get a rude shock if interest rates go up. Buyers of short-term treasuries can of course hold them to maturity but those with longer-term treasuries may suffer a sharp erosion in capital.

If you haven't been keeping up with this blog you might want to read The riddle of money, finally solved which explains Corrected Money Supply.

Category: Economics

08 August 2011

Corrected Money Supply and the S&P 500

Here's an interesting graph showing Corrected Money Supply from January 2001 to June 2011 against the S&P 500 Index at close.

Those who haven't been following this blog might want to read The riddle of money, finally solved which explains what Corrected Money Supply is.

Category: Economics

03 August 2011

Isaac Newton on declining to join Facebook

Q. What did Isaac Newton say when he declined to join Facebook or any other social networking site?

A. I see not what there is desirable in publick esteeme, were I able to acquire and maintaine it. It would perhaps increase my acquaintance, ye thing which I chiefly study to decline.

Category: Miscellaneous

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