Wikinvest Wire

Money supply in Japan and in the U.S.

Wednesday, March 25, 2009

Rich Toscano and John Simon of Pacific Capital Associates filed this report about changes in Japan's money supply during the 1990s and how the U.S. compares as we enter what some are also calling a lost decade.

Here's the chart that gets directly to the bottom line.
IMAGE We appear to be trying a lot harder than they ever did.

The entire piece is well worth a look. A few excerpts...

In our prior article on the government's willingess and ability to create inflation, we noted that Japan is often held up as an example of a country that was unable to inflate despite having a fully paper-based monetary system. But while the crash of Japan's credit-fueled stock and real estate bubbles resembles our own situation, the monetary policy responses in each case have been markedly different.

It's true that the Japanese authorities did not create any enduring price inflation after their credit crash. But a quick look at the data shows that this is because they opted not to do the one thing that can reliably create eventual inflation: rapidly grow the supply of money in circulation.
It is widely understood and agreed upon that substantially increasing the amount of money in the economy will eventually lead to inflation. Yet the Japanese authorities did not take this course. Did they not think to even try it? Did it just never come up at any Bank of Japan meeting for an entire decade?

We think a more plausible explanation stems from the fact that Japan was a nation of savers. Forcing up inflation via broad currency debasement would have harmed Japanese voters by undermining the purchasing power of their savings. As a result, accepting the mild (if lengthy) deflation was likely a more politically viable option than flooding the economy with money.

While bad for savers, inflation is good for debtors because it reduces the purchasing power-adjusted burden of debt. Here in the United States, the authorites face exactly the opposite constraints as those faced in Japan in the 1990s. Our nation is highly indebted and has a low savings rate. In this situation, deflation is a lot more painful than inflation. Politics demanded that Japan avoid inflation - and politics now demand that the United States embrace it.

Whatever the reason, it's very clear that the policy response being pursued by the US is vastly different from what took place after Japan's credit bust. Those predicting a repeat of the Japanese experience should take note.


Anonymous said...

"Our nation is highly indebted and has a low savings rate. In this situation, deflation is a lot more painful than inflation."

This is over-simplistic and leaves out a few dimensions of analysis. Deflation can be fine if all that is falling is asset prices - in that case, consumers actually benefit, even if loaded with debt. On the other hand, inflation is terrible for consumers if there is no corresponding wage increase. Due to the pressures of globalization - to wit, the hundreds of millions of Chinese who are willing to work for $300 per month and the unlawful immigrants permeating the US that are willing to work for less than minimum wage - the likelihood of wage inflation (at least, to keep pace with consumer price inflation) is extremely doubtful.

Anonymous said...

The central question is, "is there a net expansion or contraction of credit and/or money. They can throw trillions at this problem, as they are doing, but the world has lost $50 Trillion to date. When you get to $50 Trillion, then we can discuss how hard we are trying. Look at the M1 Money Multiplier for what is really happening with the velocity of money. OFF THE CLIFF!


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