海角大神

Japan was the world鈥檚 most admired economy in the 鈥�80s. Then it was the world鈥檚 most despised economy in the 鈥�90s. By 1995, economists pointed their fingers and laughed 鈥� the world鈥檚 most admired businessman had lost his left shoe.

But now, much of the world is barefoot. The US inflation rate has been going down since the early 鈥�80s and was cut in half since last year. It now hovers barely above zero. Surely Japan 鈥� where prices have been falling for two decades 鈥� has something to tell us. As we pointed out last week, the Nipponese have been in decline for the last 20 years 鈥� with lower stock prices, falling real estate prices, and a falling GDP. Even the population has been sliding for the last five years

This week the Japanese decided to throw some more grit on the slope. Japan鈥檚 central bank governor, Masaaki Shirakawa, said he was boosting his 鈥渟pecial loan facility鈥� by 10 trillion yen, about $120 billion. And Mr. Naoto Kan, Japan鈥檚 Premier, said he would support the central bank, adding a 鈥渟econd pillar of stimulus鈥� of some 920 billion yen. The numbers always sound impressive in yen. But they are unlikely to give the economy much traction.

Professors Ken Rogoff and Carmen Reinhart studied 15 economic crises over the last 75 years. What they found was what you鈥檇 expect: real recoveries in the post-Keynes era are rare. Instead, in the 10 years following a crisis, economic growth rates are lower and unemployment is higher than in the years preceding the crisis. In two thirds of the episodes, jobless rates never recovered to pre-crisis levels, ever. And in 9 out of 10 of them, housing prices were still lower 10 years after the crisis ended.

鈥淥ur review of the historical record, therefore, strongly supports the view that large, destabilizing economic events produce big changes in the long-term indicators, well after the upheaval of the crisis. [Up to now,鈥� the authors warn, 鈥渨e have been traversing the tracks of prior crises. But if we continue as others have before, the need to de-leverage will dampen employment and growth for some time to come.鈥漖

It was perhaps this scholarly warning that roused Shirakawa to action, with Ben Bernanke right behind. Neither wants to be known as the central banker who followed in the footsteps of losers. Urged on by sages and simpletons, they will print money. 鈥淚t falls to the Fed to fuel recovery,鈥� writes Clive Crook, one or the other, in The Financial Times. 鈥淯nder the circumstances,鈥� he writes, 鈥渂etter to print money and be damned.鈥� At last week鈥檚 conference in Jackson Hole, Wyoming, the Americans promised to print more money, if needed. Shirakawa rushed home early so he could turn on the presses right away.

We would have more faith in central bankers if they had not been responsible for causing the crisis in the first place. Shirakawa joined the Bank of Japan more than 30 years ago. Ben Bernanke, an expert on the Great Depression, joined the Fed in 2002; he was standing at Alan Greenspan鈥檚 right side, with a pin in his hand, years before the bubble reached a crisis level.

鈥淚n a sense,鈥� said Professor John Taylor, also at Jackson Hole, 鈥渢he Fed caused the bubble.鈥� That is, in the only sense that matters 鈥� they kept the key lending rate too low for too long. Now they are about to make another monumental mistake. No, two of them.

The first is already in progress. By promising the world extremely low rates for an 鈥渆xtended period鈥� of time, they have created the exact conditions they wanted to avoid. President of the St. Louis branch of the Federal Reserve, James Bullard, explained that the Fed had unwittingly put the economy into an 鈥渦nintended steady state.鈥� The key rate cannot go any lower as prices sink; it is already at zero. It cannot go higher, either, not as long as inflation remains below the target. So, it does not move. The private sector has come to expect no policy response, Bullard concludes, 鈥渟o nothing changes with respect to nominal interest rates or inflation.鈥� As in Japan, the US economy remains in a coma.

The second major mistake is still ahead. Quantitative easing is a new weapon. It is not meant to kill dollar holders or bond buyers. It is intended merely to scare them with a little bit of inflation. But with the Fed鈥檚 QE shotgun staring him in the face, an investor may doubt the Fed鈥檚 promise to pull the trigger 鈥渏ust a little.鈥� He will drop the dollar and US bonds and run. Inflation will soar.

Here at The Daily Reckoning, we have argued that it is coming鈥�but not soon. Our opinion hasn鈥檛 changed. We鈥檙e just getting tired of waiting.

.

------------------------------

海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.