Summary: It’s difficult to describe the magnitude of the monetary policy experiments now running around the world, most especially in China, USA, and Japan. At the end are links to a dozen posts attempting to do so with words and numbers. Today we do it with pictures.
The monetary stimulus programs running around the world are in effect leaps into the future, leaps of a scale never before attempted, leaps beyond theory. Should they work the world will changed, for these tools — massive quantitative easing and extended periods of zero interest rates (ZIRP) — will be used again. And again.
How can I show you the fantastic nature of these experiments? How they move far beyond what’s been considered possible — even prudent — in the past. How their success would create a new world? And, most difficult, how the programs of each nation differ in scope and daring?
Let’s use picture to show this, as metaphors.
First, the below picture shows America’s monetary policy: five years of ZIRP and three rounds of quantitative easing — designed by the four hundred economists of the Federal Reserve System, using unconventional means to press conventional theory beyond its limits — to rekindle the power of the American economy.
Second, we see Japan. They’ve had zero or near-zero interest rates since February 1999 (with intermissions), and several rounds of quantitative easing since March 2001 — attempts to re-ignite their economy since it flamed out in 1998. The latest is the three arrows of Abenomics (often described in different ways), announced by Prime Minister Shinzo Abe in December 2012.
- More fiscal stimulus, increasing the government’s deficit by 2% of GDP (to 13%).
- More monetary stimulus: doubling the money supply in 2 years to create 2% inflation.
- Structural reform — broad, deep, powerful (so far missing in action).
Abenomics is the desperate action of leaders who have tried everything in the playbook, and now tap unimaginable energies to unleash arcane regenerative forces that can revitalize Japan’s economy. They go beyond theory, a leap combining faith and science.