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We all know that little kids will often blurt out an uncomfortable truth, which is not supposed to be spoken in polite society. Stock markets also tend to mention the unmentionable:

Governor Masaaki Shirakawa expanded the Bank of Japan‘s assets by 50 percent, introduced an inflation target and safeguarded his nation’s banking system from shocks. Yet when he announced he was leaving three weeks early, stocks soared to a four-year high.

I suppose that’s not a very polite way to send him off, but markets can’t help telling the truth. This discouraged me:

Shirakawa, a career BOJ bureaucrat who trained in economics at the University of Chicago, wasn’t supposed to become governor. Originally picked for deputy, he was a compromise after two candidates failed to get parliamentary approval. At a press conference on April 9, 2008, his first day on the job, Shirakawa warned that too much short-term stimulus could hurt long-term growth. At a press conference yesterday, he said the government and BOJ need to have discipline. . . . Not Shoboi Shirakawa bristled at unfavorable comparisons with the Fed, chiding a reporter in 2011 for characterizing the BOJ’s efforts as “shoboi,” meaning lame or shabby. “I want to strongly say that none of the policy board members, including me, think it’s shoboi,” Shirakawa said at a press conference in March of that year. He also repeatedly stressed that the BOJ’s balance sheet, currently at 163.5 trillion yen, is larger than the Fed’s as a share of the economy.

I also went to the University of Chicago. We were taught that when money is very tight, as in the 1930s, the Fed’s balance sheet will be very large as a share of GDP. And when money is very easy, as during the German hyperinflation, the balance sheet will be small as a share of GDP. Indeed I seem to recall that the German Reichbank’s balance sheet fell to less than 1% of GDP in late 1923.

I know I’m just repeating myself over and over again, but the people running the world economy really do not know what they are doing. I don’t think they are making precisely the mistakes that Paul Krugman thinks they are making, but he’s right that they are in way over their heads. And that’s true even if my policy views are 100% wrong. Sure, a hawk my have a valid reason for disagreeing with me. But to claim policy was expansionary with a bogus argument about the size of the balance sheet as a share of GDP, reveals a lack of understanding of the basic principles of monetary economics.

PS. I recall a story, perhaps apocryphal, about a stock that soared in price each time the CEO was hospitalized with heart problems, and then plunged when he recovered. Was it St. Joe Paper? Perhaps someone else heard the story.

PPS. Tyler Cowen says (in the European context) that the problem is interest groups, not stupidity. I disagree. I’ve talked to lots of people at all levels. I’ve read all sorts of things written by economists, pundits, reporters, policymakers, etc. I see no evidence that people understand what’s going on. Some interest groups may believe they benefit from tight money, but they are almost certainly wrong. (They seem to think low interest rates imply easy money.) Indeed I often hear economists claim they would be hurt by monetary stimulus, and they are in the same interest group as I am! I’d benefit from easier money, just as I was hurt by the tight money of 2008-09. The key here is the non-zero sum nature of monetary stimulus during mass unemployment. The ECB could boost RGDP growth significantly while keeping inflation around 2% or 3%. That would help both the employed and the unemployed, workers and capitalists, rich and poor, governments and private sectors, as there’d be a bigger pie to share. Taxpayers would benefit big time. It would even help holders of government bonds on the periphery. Perhaps people who depend entirely on income from longer term German government bonds would be hurt. I’d guess that’s less than 1/2% of the eurozone population.

On the other hand I agree with Tyler’s more recent post claiming the US labor market has structural problems. Unlike Tyler, I think more AD could help fix those structural problems (by pushing Congress to lower maximum UI from 73 weeks to 26 weeks). Tyler’s right that the big problem is among the young. The fact that we are thinking of again boosting the minimum wage boggles the mind. The recent rise in youth unemployment can NOT be fully explained by the recession.

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This entry was posted on March 09th, 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.



