A friend sent me the following chart that looks at the Japanese stock market and the S&P. Two important adjustments have been made to the data. (1) There is an eleven-year lag on the Japanese Nikkei. (2) The data is currency adjusted. I think this is a pretty scary stuff:
These lines do not match up perfectly over the measured period. But what is striking is the correlation of the “Turning Points” in the markets. Look at how it lines up in the most recent period. The S&P appears to be rolling over the past six weeks. Exactly as the Nikki did eleven years ago. But look at the results. In the eleven years that followed, Japanese stocks fell from the index level of 200 to the current value of 76. That is a 60+% drop!
There are differences between the US and Japan. So this chart may not be our future. But if it is even remotely close then the US will not make it another eleven years. Something will blowup in a spectacular way.
I found this chart fascinating, so I looked a bit deeper to see what Japan has done and why. Guess who played a big hand in determining the monetary policy of Japan? I’m sure you guessed this one right. It was none other than Ben Bernanke. He gave a major speech way back in 2003 on what Japan should do. If you’re a Fed watcher read the whole thing. My take on it was that Ben was lecturing to the Japanese Central Bank. If you found the above chart a sign of what is in our future Ben’s words eight years ago will give you the Willies.
The Intro:
My remarks today will be focused on opportunities for monetary policy innovation in Japan, including specifically the possibility of more-active monetary-fiscal cooperation to end deflation.
BK: If you took out "Japan" and inserted "America" this would be the same speech that Bernanke would use today. He has taken the same attitude in all of his speeches since 2008.
The “Ben” plan
I will discuss the option of asking the Bank of Japan to announce a quantitative objective for prices, as well as how such an objective might best be structured.
I would like to consider an important institutional issue, which is the relationship between the condition of the Bank of Japan's balance sheet and its ability to undertake more aggressive monetary policies.
BK: Bernanke has pushed for a Fed policy that targets inflation. He has brought us QE that has added to the Fed balance sheet. Ben’s plan for Japan is what we have in the USA today.
Ben’s philosophy
In principle, balance-sheet considerations should not seriously constrain central bank policies.
BK: They shouldn’t be “seriously” considered?? OMG!
The Bank of Japan should consider increasing still further its purchases of government debt, preferably in explicit conjunction with a program of tax cuts or other fiscal stimulus.
BK: That is exactly what happened in 2009. We got ZIRP, QE1 and HERA (tax cuts and stimulus).These things have had no lasting impact.
From the point of view of conventional private-sector accounting--which, as I will discuss, is not necessarily the correct standard in this case.
BK: Ben thinks Central Banks are above the “rules”. We certainly have that status today.
On the issue of Monetiziation
A tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt--so that the tax cut is in effect financed by money creation.
BK: Note the “financed by money creation” part of this. Ben swears he is not creating money today. But that is exactly what he proposed for Japan AND that is exactly what he is doing in the US today.
On the "Goodness" of more debt
Ben asks:
Isn't it irresponsible to recommend a tax cut, given the poor state of Japanese public finances?
And answers:
To the contrary, from a fiscal perspective, the policy would almost certainly be stabilizing.
BK: NO! The consequence is destabilizing. The real consequence is that people (markets) lose confidence when money is cheap and governments are running printing presses.
Ben admits to a downside
Of course, one can never get something for nothing; from a public finance perspective, increased monetization of government debt simply amounts to replacing other forms of taxes with an inflation tax.
BK: This drives me nuts. Bernanke has been pounding the table that his monetary policy does not cause inflation in the US and the rest of the world. But Eight years ago he saw the connection perfectly. Today he is in denial. Either Ben’s lying to us, or he has his head in the sand.
H/T:JH
Posts
I don't like the looks of this at all. Thanks for posting.
ReplyDeleteYou certainly found all the money quotes in that speech! A great analysis, Bruce, and a thorough elucidation of how Bernancke double-speaks.
ReplyDeleteWhat is being said here “makes” for a depression, not dispersing one. In the 1930’s, if there had been a bromide and a sickening by government in the money supply, tax rates, interest rates, or of President Hoover telling business how to hire and lying about prosperity is just around the corner, the government’s mandatory bitter brew ended in discouraging business. Today, to print money recklessly and call it progress, to not solve the banks’ too-big-to-fail problem, to lie about inflation, to crash the dollar, all is adding to this lack of trust of what business sees the government to be dishing up. Like the 1930’s, we are frozen in molasses. Businesses then do not hire. The unemployment gets worse and the Great Depression is repeated. If Bernanke is a student of the Great Depression, he is playing dingdong.
ReplyDeleteThough I agree that Bernanke is following the same reckless playbook as Japan, the problem is where are the signs of consequences? The Yen is near all-time highs and their 10-year yields near 1%, certaintly not what you would expect from reckless money printing and quantive easing. Even here in the US after $4.5 trillion in new debt and $2.2 trillion in QE, the dollar is stronger than before the crisis began and yields are lower. None of this makes sense.
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ReplyDeleteToday, to publish cash recklessly and call it advancement, to not explain the banks’ too-big-to-fail difficulty, to lie about inflation, to smash into the dollar, all is supplementing to this need of believe of what enterprise sees the government to be dishing up
ReplyDeleteIMO calling money into existence to prevent deflation is well worth the costs to holders of dollars and dollar denominated. I do NOT feel that it is being handled very well in either the US or Japan. They could would stop lying about the CPI and target like 5 or 10% inflation, and just give the money they print to people as a national dividend instead of introducing it into the economy by lending it to failed banks at negative real interest rates. Then replace payroll taxes with a carbon tax, fix health care and call it a day. What they are doing now is kicking the can down the road. That's better than eating the can and choking on it, but we need to use the time we are buying to fix the problems facing the US economy, not use it to pretend they don't exist.
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Mr. Krasting,
ReplyDeleteHaving read back through a number of your posts, it is clear that you are adamantly opposed to the vast majority of Mr. Bernanke's policies. I agree that some of his policies do not hold up well under intense scrutiny, but I would recommend that you do not employ the sort of sophistry displayed in this post to criticize him out of hand - it only detracts from other, much more legitimate critiques.
To say Bernanke was majorly involved in Japanese monetary policy on the basis of a speech he made in 2003 is absurd. Besides, your chart ends about 6 months after his speech, so assuming some lead time for Japanese central bankers to bow to the all-mighty Princeton professor's will, you should be displaying data past the end of '03. What will this data show? A 75% appreciation in the Nikkei in the subsequent three years. Not that I think this had anything at all to do with Bernanke's speech (to the best of my knowledge, none of the policy prescriptions recommended therein were ever employed in Japan). The analysis as it stands is in no way productive. At least start with inflation-adjusted figures.
Regards,
WellRed