In continuing yesterday’s pointed critique of the current state of monetarism, there is another element to consider here. To reiterate, last year the yen devaluation was unquestionably seen as a catalyst toward rebirth of Japan Inc, and thus Japan economically (and maybe even demographically). This sentiment was as ubiquitous as it was accepted on faith:
“Japan’s economy is going to improve in the coming months due to a weak yen and a pickup in exports,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, a top-three forecaster of the economy last quarter in Bloomberg News surveys. “The Bank of Japan will do its best to live up to market expectations by boosting monetary stimulus and that will support corporate and household sentiment.”
That was from last March, just before the Bank of Japan engaged in unconventional monetary “easing.” Given that this was the tenth (perhaps only ninth) bite at the QE apple, the qualification “unconventional” seems more than a little out of place. In Japan, QE has been very much convention for thirteen years or so.
At any rate, the current verdict has moved to the inverse. Even the Financial Times, a media outlet far more comfortable with orthodoxy than not, admitted more than two months ago:
Gross domestic product expanded at an annualised rate of 1 per cent in the quarter, the Cabinet Office said in a preliminary estimate on Monday. External trade was the weak point: a softer yen has done little to spur more exports even as it has sharply increased the cost of imported energy, helping turn Japan’s once vaunted trade surpluses into large and growing deficits.
With trade no longer the engine of growth it was, the domestic spending that is supporting the economy will soon face a headwind of its own, with an increase in Japan’s national sales tax in April likely to hurt consumption.
That was the set up for the monetary problem I examined yesterday with the release of March trade estimates. There is a fundamental problem at the heart of all of these QE assumptions embedded by conventional economics. There is also a corollary to that striking point, namely as it relates to the practice of conventional economics in monetarism.
This related concern was raised by Paul Krugman, of all people, in October 2010, though his point came from the opposite view.
What I have always suspected is that the real risk the Fed fears is that it will do unconventional stuff but fail to move the economy, and hence lose face — which was the primary reason the Bank of Japan was so unwilling to act back when Professor Bernanke used to criticize it. So it’s important to understand two things: first, this should not be a consideration — the Fed’s job is to save the economy, not its own reputation. Second, half-hearted measures are a good way of guaranteeing that unconventional policy fails.
These central banks can only lose face with those that actually believe they have some real power and input. Perhaps Dr. Krugman and others fit with that accord, though I don’t really know for sure not having much exposure to his views, but monetarism in the age of rational expectations theory has been far more constrained to psychology than actual money. I have said for many years that there is no money in monetary policy, unconventional or otherwise.
This very much reminds me of the well-worn quote attributed to many people, but with its actual origin in the Bible:
Even a fool, when he holdeth his peace, is counted wise: and he that shutteth his lips is esteemed a man of understanding
Most people know it today as, “better to remain silent and be thought a fool than to speak and remove all doubt.”
The transverse into central banking and monetarism is essentially the same idea, as committing to unconventional programs in such size and depth of intrusion risks exposing that main illusion – that monetarism is nothing more than a certain and devious strain of psychology. It only works if a large proportion of agents (in whatever sphere; markets, the economy, etc.) believe in it. QE is the Easter Bunny.
What we have in Japan and the US, particularly real estate, labor and income right now, is the removal of all doubt. The premises and promises of monetarisms do not align with the results, at all. Unconventional or not, the empirical determination is that there is no real power held by central banks other than trying to convince you to do what is likely not in your best interest. At its root, the whole idea of psychological monetarism is heavily misanthropic, but that is another story.
We are left with all these distortions anyway. Japan sinks into desolation, as a once mighty export surplus has been turned into national dependence. The US suffered decades under debt saturation and wage diminishment at the behest of share repurchases and interest rate “control.” Now China has succumbed to the allure of PhD’s that claim they can model and predict and control.
It is not as Krugman proclaimed; instead we live in age of such certainty and overconfidence, and all of it unearned. The silver lining, such that might come after these huge artificial distortions and more impoverishment, is that in the wake of failure there might end this vexingly persistent belief in monetary illusion – the clear impotency of manipulation finally and fully exposed. The next time when these charlatans try to claim the mantle of, “we didn’t fail, it just wasn’t big enough” we might hope there is no one left to listen.
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