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Here’s Milton Friedman during the early stages of Japan’s Great Deflation:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy. . . . After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Friedman never would have dreamed that Japan’s nominal GDP in 2013 would be far below 1993 levels. Nothing like that has ever happened in a country with a fiat money central bank. Ever.

But Friedman would be even more shocked by the reaction of the rest of the world to Japan’s insane descent into deflation and falling NGDP. Japan is being attacked for running excessively expansionary monetary policies by the Very Serious People:

Referring to the Bank of Japan’s move to ultra-loose monetary policy and similar action by other central banks, Axel Weber, former Bundesbank president and now chairman of UBS, warned that the spread of the approach was “heading into dangerous territory”. Mr Weber, speaking at the World Economic Forum in Davos, said that the current generation was “living at the expense of future generations” because monetary policy was encouraging people to pull out all the stops to continue consuming heavily. “We are trying to keep a speed limit for our economies that is simply unsustainable,” he said. The debate on whether monetary policy could do more to boost growth or whether further action would have negative side effects came as International Monetary Fund forecasts again suggested the world recovery would be slower than previously hoped. Mr Weber’s comments echoed concerns in China and at the central banks of Germany and the UK that Japan’s move to an ultra-loose policy was a bid to drive down the value of the yen that could lead to retaliation from other countries also seeking to boost the pace of recovery through stronger exports. China’s official Xinhua news agency said on Tuesday that Japan’s “decision to crank up money printing presses is dangerous” and might lead to “currency wars“. Sir Mervyn King, Bank of England governor, said on Tuesday that if a number of countries sought to lower their currencies it would be “hard to be optimistic about how easy it will be to manage the resulting tensions”. Jens Weidmann, the Bundesbank president, meanwhile, had described Japan’s new government’s pressure to make the BoJ more proactive as an “alarming infringement” of central bank independence that could lead to “politicisation of the exchange rate”. . . . Mr Weber’s concerns over monetary policy were supported by Nouriel Roubini of the Stern School at New York University, who had backed the initial moves towards unorthodox policies such as quantitative easing in the financial crisis. “We must care about it,” Prof Roubini told delegates in Davos.

I don’t really have anything to say, other than that the world economy is in the hands of a bunch of people who are stark raving mad.

PS. This post is not about the merits of a higher inflation target in Japan, nor how Japan is actually doing in RGDP terms. Comments on those subjects will be ignored.

PPS. There are recent indications that Japan is already backing away from a 2% inflation target. Which makes the complaints all the more absurd, if that were possible.

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This entry was posted on January 24th, 2013 and is filed under Monetary Theory. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



