It’s a mad mad mad mad world

By Detlev Schlichter 

Shinzo Abe, Japan’s new prime minister, has some exciting new ideas about how to make Japan’s economy grow. How about the government borrows a lot of money and spends it on building bridges and roads all over the country?

If that doesn’t sound so new, it is because it isn’t. It is what Japan has been doing for 20 years, and it is the main reason why Japan is now the most heavily indebted nation on the planet – and still not growing a lot. Its debt-to-GDP ratio stands at an eye-watering, world-record 230 percent, which already guarantees that the country’s pensioners-to-be (and Japan has a lot of those) will never be repaid with anything of true value for the government bonds they kept patiently accumulating in their pension funds, and that they optimistically keep calling ‘assets’.

But never mind. The Keynesians agree that this policy was a roaring success, and that this is why the country needs more of it, as, strangely, Japan has still not regained self-sufficient growth after 2 decades of such a policy. Hmmm. Well, in any case, surely the next set of roads and bridges are going to make all the difference. I suggest that this should be called the ‘Krugman-doctrine’, after the outstanding Keynesian thinker, Paul Krugman: even if a few trillion of new government debt and a few trillion of newly-printed paper-money have not revitalized your economy, the next trillion in government deficit-spending and the next trillion in new central-bank money will finally get the economy going. “Just keep the foot on the gas pedal until the economy grows, damn it!”

Mr. Abe also plans to force the Bank of Japan into printing more money, and this is surely going to be a great success, too. Most economists of the Keynesian and monetarist persuasion, i.e. most economists, agree that the Bank of Japan has not really been pulling its weight. Unlike, for example, the Bank of England. The Bank of England more than quadrupled its balance sheet since the start of the crisis to a size that is now almost a third of UK GDP. In the process, the Bank of England also monetized a third of the nation’s public debt. The Bank of England truly deserves to be called the queen of ‘quantitative easing’!

Now, the Bank of Japan’s balance sheet is even larger than a third of the country’s GDP but most of that is a legacy of its earlier programs of ‘quantitative easing’, which have – come to think of it – also not led to self-sufficient growth but let’s not get distracted. In any case, since 2008, its balance sheet has only expanded by a meager 40%. Pathetic.

Such differences in monetary activism are not without effect: At the beginning of 2012 and measured in ‘real terms’, the Japanese economy was about 3 percent smaller than at the start of 2008, while the UK economy was — well, also about 3 percent smaller in ‘real’ terms than at the start of 2008.  And if you think that 2012 made any difference, it didn’t: Both countries re-entered mild technical recessions in the course of 2012.

But in any case, the generally accepted verdict of the international commentariat and of the economics profession, which is predominantly Keynesian and pro-state-intervention, is that the Bank of England did a better job than the Bank of Japan. Why? Japan suffers from ‘crippling deflation’, and the United Kingdom, thanks to the Bank of England’s excellent monetary policy, doesn’t. The benefits are self-evident:

When Mr and Mrs Watanabe did their grocery shopping in 2012 in their three-percent-smaller economy they paid about two percent less on average than they did in early 2008 for the same goods. In the UK, however, when Mr and Mrs Smith did their grocery shopping in 2012 in their equally three-percent smaller economy, they paid 15 percent more for the same goods than in early 2008.

How that is a benefit to Mr and Mrs Smith is beyond me but I guess these journalists and economic commentators must know something that we don’t, as they all agree that all this ‘crippling deflation’ – of not even 1 percent per annum! – is really what is holding Japan back. Well, why does all the inflation in the UK than not propel that economy forward?

The central planners are now looking for an even better plan: have the central bank print even more money! Evidently, the problem with the previous plan was simply this: it was not ambitious enough. Mr. Abe will give the Bank of Japan a new goal of 2 percent inflation. The previous target was 1 percent inflation, which the Bank of Japan did not achieve. But Mr. Abe will help the Bank of Japan achieve their new goal by encouraging them to print money without limit, a policy that is currently the latest vogue among monetary central planners the world over, and will surely be a great success and lead to lots of new, lasting and well-paying jobs and great growth and wonderful innovations. The world’s finest central bank bureaucrats have already endorsed it: Bernanke calls it ‘open-ended quantitative easing’, Mr. Draghi ‘unlimited bond buying’. Such policy instils a lot of confidence. This is yet more proof of what a creative politician Mr. Abe is.

But even the Bank of England can certainly do better. In the UK the discussion centres on the question if the Bank of England should adopt ‘nominal GDP targeting’. The notion behind these considerations is that the central bank’s current target of holding inflation steady at around 2 percent might have still unduly restrained it in its money-printing efforts. How so? – Well, whenever inflation was above 3 percent, i.e. 1 percent above the target, for more than 3 months – and despite economic stagnation, inflation was that high for long stretches of time over the past four years – the governor of the Bank, Mervin King, had to write explanatory and apologetic letters to the Chancellor of the Exchequer, George Osborne. Now, writing grovelling letters that are read out in public and reprinted across the country might be rather embarrassing even for you and me, but Mervin King is a highly decorated civil servant and a Knight Grand Cross of the Most Excellent Order of the British Empire. For somebody like him, writing those letters must have been truly embarrassing and hurtful, and such embarrassment might have made him a bit more cautious when printing yet more money and buying more government bonds. Who knows, without such strictures on inflation – which were violated anyway – the Bank of England might have expanded its balance sheet not 4.5 times but 6 or 7 times, to the great benefit of Mr and Mr Smith.

So here is how nominal GDP targeting would work instead. Let’s say the target is a nominal GDP of 5 percent, meaning the combination of real growth and inflation should be 5 percent every year. Why 5 percent? – Well, why not? Surely, some econometrician can explain why 5 percent is a good number for the UK. Think about it. More than half of UK GDP is now accounted for by the public sector, not by private citizens and companies. The UK is already closer to Soviet Russia than to unconstrained capitalism anyway, so it is about time these things are properly planned centrally. The central plan of the UK government will stipulate that the comrades over at the central bank should deliver 5 percent nominal growth. So if the official inflation rate is 3.5 percent and the official real growth rate is 0, and nominal GDP is thus 3.5, as has happened frequently in recent years, or if the inflation rate is 4.4 percent and the growth rate -0.5, and nominal GDP thus 3.9, no apologetic letters have to be written about creating ‘too much inflation’. Instead, it has to simply be acknowledged that the central committee’s growth plan of 5 percent nominal has not yet been reached, but that the central bank bureaucracy will speedily correct this – by printing more money. Thus, silly concerns about inflation will no longer constrain the Bank of England’s enthusiasm for ‘quantitative easing’ and other unconventional methods. There will be fewer limits to unlimited money printing.

Of course, the Bank of England would meet its 5 percent nominal GDP target if it created 5 percent inflation and no real growth, and as we all know, this is precisely what it has achieved before. But not too worry. Remember the Krugman doctrine: the next round of QE and of deficit spending will finally do the trick and stimulate the economy for good. Really. It will be different next time!

Well, how would that work, you may ask? How could more aggressive money-printing lead to ‘real’ growth? Clearly, through more borrowing. If credit is very cheap more people and more companies – and the state! – take out more loans and accumulate more debt. Voila! — Sure, this is the type of policy that has lead to the housing boom and subsequent crash, and to the 2008 banking disaster, but in any case, the civil servants, the bureaucrats and their Keynesian and monetarist advisors just know that this is the policy we need today – just more of it because of the crisis. The UK is – next to Japan, ironically – the most highly indebted society on the planet. Surely, it needs more cheap credit, more borrowing and more debt!

As I already indicated above, I am convinced that 23 years after the fall of the Berlin Wall, socialism has finally won, certainly in the sphere of money where the monetary central planners, i.e. the central bankers, play an ever bigger role and enjoy ever more power and public adoration. In the UK, the debate about the country’s next central bank governor, the Canadian ex-Goldman banker Mark Carney, is filled with hope, anticipation and excitement, and with the importance it bestows on the role of the ‘star bureaucrat’ it is certainly worthy of a proper command economy. Mark Carney is a central planning superstar, so says Chancellor of the Exchequer George Osborne, who seems to have become an expert on the international ranking of central bankers, and who pronounced Mr Carney the ‘finest central banker of his generation’. Previously, the ‘finest central banker of his generation’ was the American Alan Greenspan whose reputation inflated with the bubbles he blew, and collapsed when the bubbles burst. On this account, Mr Carney is still early in his career, having inflated only a little housing bubble in his native Canada so far. The exact nature of his UK mission is clear: print more money faster than King did, and find new, clever and complicated sounding explanations for why this is a good policy and to the benefit of the public at large. Carney has already started the latter part of his mission by instigating the public debate over nominal GDP targeting.

None of us knows what 2013 may bring but I venture a prediction: much more state paper money will get printed or created electronically around the world. Much, much, much more. None of this will create real growth, real wealth, real prosperity, real, lasting jobs, and real capital.

In the knowledge that we live in a truly mad, mad, mad, mad world, I wish you all the best for 2013!