Summary: A first step to understanding comes from appreciating the wonders before us. Recognition of extraordinary events that lie before us. Not unique events (those are seldom seen), but event of unusual magnitude. Old Faithful, not the usual steam kettle on the stove. Today we look at one such, one of the greatest experiments ever: sustain large-scale monetary stimulus.
In “Forbidden Planet” a great distant civilization — far away, long ago — built a planetary-scale machine to grant their every wish. It didn’t end well for them, but they deserve high marks for the boldness and scale of the project. Today economists are attempting something less ambitious, but still bold beyond any precedents.
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Size of central bank balance sheets for the major nations (2014 IMF estimate):
- China: $4.8 trillion, 49% of GDP
- Japan: $2.0 trillion, 39% of GDP
- UK: $0.7 trillion, 25% of GDP
- US: $4.2 trillion, 24% of GDP
- EU: $3.0 trillion, 23% of GDP
These are mind-blowing numbers, become familiar to us in the five years since the crash.
Combined with artificially low interest rates (near-zero in all of the above but China), the major nations have sought to restore growth using extreme and unconventional monetary policy measures. The first phase — first aid to stabilize their financial systems during the crash (2008-09) were a success. The results since then, using monetary policy for extended treatment, remain unknown until the experiment concludes and monetary policy returns to normal.
As with any bold experiment, economists will learn much from the results. If successful, it will be a new world. Economic policy of the 21st century will look nothing like that of the post-WW2 era, any more than the dark nighttime cities of Victorian London resemble its brightly lite 21st century version. Future downturns — and even more so with future crashes — will be met with tsunamis of newly printed cash. Perhaps we’ve built a monetary savior, like the discovery of antibiotics.
We’ll know when the experiment is concluded. So far the results are cloudy; we’ll have to ask again later.
Japan leads the way
Japan is the cutting edge of this experiment, going boldly to where no nation has gone before. While other nations look to slow the monetary engines, they’re revving them up even more.
Bank of Japan Governor Haruhiko Kuroda said there were “no limits” to what the central bank can do if it saw the need to adjust monetary policy in the future, signaling readiness to expand stimulus further if risks threatened its price target {2% inflation}. … He also said it was “not as if there weren’t any steps left” for the BOJ to take if it were to ease again, countering views held by some market participants that having delivered a massive stimulus last year, the BOJ had no tools left to deploy.
— Interview on 13 March with Japan’s Jiji news agency, as reported by Reuters
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The Bank of Japan can double its annual pace of bond accumulation to 100 trillion yen ($985 billion) to give fresh impetus to the economy after next month’s sales-tax increase, said an aide to Prime Minister Shinzo Abe.
“It’s not taboo for the BOJ to double the goal of bond holdings,” Koichi Hamada, 78, a retired Yale University professor who advises Abe on monetary policy, said in an interview yesterday in Tokyo. “The BOJ will be concerned about the real risk of being seen as financing debt, but drastic action is justified to pull Japan’s economy out of 15 years of stagnation.”
— Bloomberg, 14 March 2014 — about an interview on Bloomberg TV (see it here)
Japan is rapidly greying, buy they have the boldness of a youth. Perhaps that’s a winning combination in the 21st century.
What happens next?
“Unless you expect the unexpected you will never find truth, for it is hard to discover and hard to attain.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia
What comes next? The essence of experimentation is uncertainty about the outcome. That’s a constant in human affairs. Confidence by scientists about the outcome is another constant, but often wrong.
Let’s try another perspective. Almost every major economic development of the past 15 years has astonished us. Perhaps that’s the tell, hinting of deep unseen structural changes taking place right now. Crowds are often poor at recognizing such things, oblivious to the early stages — until the realization hits us all almost simultaneously.
Stay alert. Be skeptical of confident forecasts. Tune in here for further developments.
For More Information
(a) Posts about monetary stimulus:
- The lost history of money, an antidote to the myths
- A solution to our financial crisis — Among other things, large monetary action
- The lost history of money, an antidote to the myths
- Recommended: Government economic stimulus is powerful medicine. Just as heroin was once used as a powerful medicine.
- The easy way to understand unconventional monetary policy
(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
- What happens if the economy hits some rocks? Will the Fed stop the taper?, 9 February 2014
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