Japan Watch: Governor King Reads Governor Shirikawa’s Lines
Oh god. This was Governor Shirikawa of the Bank of Japan back in March 2012:
The first is the burden of balance-sheet repair. Even with monetary easing, economic entities with excess debt neither increase expenditures nor embrace more risk taking until their debts are reduced to an appropriate level. Monetary easing only mitigates pains associated with balance-sheet repair. Moreover, employing this mitigator for a prolonged time comes with costs, as it reduces incentives to lessen excess debt and causes delays in balance-sheet repair, which ultimately is necessary for economic recovery. Needless to say, the effect of low interest rates is extended to those economic entities that have not suffered any damage to their balance sheets. If they bring forward future demand to the present by taking advantage of a low interest rate environment, this leads to an increase in aggregate demand. As balance-sheet adjustment continues for a long period of time, however, the amount of future demand that could be brought forward gradually diminishes even in a low interest rate environment. The above-mentioned cost of reducing incentives to lessen excess debt is not only an issue for private economic entities but also for the government. Once the increased level of government debt is perceived to be unsustainable, this threatens both price stability and financial system stability, as in the case of the European debt problem.
My emphasis. This is Governor Shirikawa’s good friend Governor Mervyn King in October 2012:
First, monetary policy supports demand and output by encouraging households and businesses to switch demand from tomorrow to today. But when tomorrow becomes today, an even larger stimulus is required to bring forward more spending from the future. Since the paradox of policy has been evident for almost four years, tomorrow has become not just today but yesterday. When the factors leading to a downturn are long-lasting, only continual injections of stimulus will suffice to sustain the level of real activity. Obviously, this cannot continue indefinitely. Policy can only smooth, not prevent, the ultimate adjustment. At some point the paradox of policy must be resolved.
My emphasis again. It’s almost the same wording. Oh god. How did this happen? How are the lessons of Ben Bernanke and Lars Svensson forgotten so easily?
I am short on time so cannot post more than an idle rant, but, oh god. Please, Mr Osborne, replace this Governor now. Get Svensson in to blow you away with New Keynesian macro done properly. Get Scott Sumner in, or any damn fool who can print money and buy stuff; throw the Keynesians out with the bath water; target the level of nominal GDP. Get Gideon Gono in to show you how far you can debase the currency if you are serious about firing up the printing press. Actually, scratch that one. But please, no more of this. Oh god.