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.
We can see the process of creation (from the 1931 version):
In fiction the experiments always end successfully, although sometimes with ugly after-effects (e.g., a mad, homicidal monster). In reality sometimes the experiment fails. Sometimes quietly. Sometimes with ugly after-effects.
For More Information
(a) Posts about monetary stimulus:
- A solution to our financial crisis, 25 September 2008 — Among other things, large monetary action
- The lost history of money, an antidote to the myths, 1 December 2012
- Government economic stimulus is powerful medicine. Just as heroin was once used as a powerful medicine., 19 September 2013
(b) Posts about our great monetary experiment:
- Important things to know about QE2 (forewarned is forearmed), 21 October 2010
- Bernanke leads us down the hole to wonderland! (more about QE2), 5 November 2010
- The World of Wonders: Monetary Magic applied to cure America’s economic ills, 20 February 2013
- The World of Wonders: Everybody Goes Nuts Together, 21 February 2013
- The greatest monetary experiment, ever, 20 June 2013
- Different answers to your questions about the momentous Fed decision to delay tapering, 20 September 2013
- Do you look at our economy and see a world of wonders? If not, look here for a clearer picture…, 21 September 2013
- Two warnings about quantitative easing, the taper, and what comes next, 27 September 2013
- A Fed Governor speaks honestly to us about the costs and risks of our monetary policy, 18 January 2014
- Wagering America on an untested monetary theory, 22 January 2014