Monday, November 22, 2010

The Japanese don’t understand why they lost a decade, nor does Krugman.

Krugman’s book, “The Return of Depression Economics” devotes a chapter to Japan’s lost decade. But no solution to the lost decade appears in this chapter. However and strangely enough, a solution is set out in an earlier chapter.

The latter “earlier” solution involves a real “mini-economy” in the 1970s: the Washington DC baby sitting economy. Discovering this econonomy, according to Krugman, “changed my life”. Briefly, this economy consisted of a club which couples with young children could join. The objective was to enable couples with nothing to do on particular evenings to baby sit for couples wanting to go out for the evening and in need of baby sitting services. A those doing baby sitting for an evening earned a token or coupon. For a fuller description of this economy, see here.

But this economy ran into a problem: it suffered a depression or recession. That is the number of couples wanting to baby sit exceeded the number willing to hire baby sitters. As Krugman put it, “Couples who felt their reserves of coupons to be insufficient were anxious to baby-sit and reluctant to go out.. But one couple’s decision to go out was another’s opportunity to baby-sit; so opportunities to baby-sit became hard to find….”

The solution to this recession was simple: distribute more coupons to everyone. It worked.

Now for Krugman’s chapter on Japan. He considers the possibility that money (i.e. “coupons”) can be borrowed and lent (not a feature of the baby-sitting economy). Certainly borrowing and lending will facilitate higher aggregate demand for a given total stock of money/coupons. And reduced interest rates will encourage more borrowing and ought to raise GDP a bit (assuming the relevant economy has some slack, i.e. that additional demand does not result in inflation).

But Japan dropped interest rates to near zero and nothing much happened.

He then notes that Japan tried expanding public works (bridges to nowhere in many cases). But this was financed by BORROWING not by PRINTING and distributing more money (coupons). By now Krugman has forgotten all about the obvious and simple solution: increasing the volume of coupons! He offers no solution to the lost decade.

Doubtless some economists think that lending money at a zero rate of interest rate is the same thing as printing and distributing money. Well assuming the loan and zero rate of interest is guaranteed to last for ever, the the two come to the same thing. But of course in the real world, neither are guaranteed to last for ever: a point which ordinary would be borrowers (households) have spotted, but which allegedly sophisticated economists, bankers and politicians have perhaps not.

Krugman then considers deliberately stoking inflation so as to get those in possession of “coupons/money” to spend the stuff! Well that is just desperation.

The chapter ends by noting that Japan’s problems have been temporarily alleviated by increased exports, but that the supposedly insoluable problem, the dreaded liquidity trap, will re-surface!

Why not just s*dding print and distribute more coupons/money????

Or to quote Mosler’s law: “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.”

And if anyone tries to tell me that quantitative easing equals printing money, I’ll scream. QE simply involves swapping one asset for another. It does not result in a net increase in private sector net financial assets. And in the case of quantitatively easing short term government bonds (which are little different to cash), you might as well swap $10 bills for $20 bills.

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