The intellectual groundwork is being laid for the next stage of the Money Bubble, and it’s going to be epic. Here are excerpts from two articles that appeared over the weekend (and which should be read in their entirety). Both deal with Japan, which went all-in on debt monetization, lost badly, and now needs a new plan.
The first is from a University of Michigan economics professor:
Japan should be trying out a next-generation monetary policy
Japan is wasting its time trying to raise inflation.
Japan may succeed at bringing annual inflation up to 2%; indeed, it has made some real progress toward that goal. But suppose Japan succeeds in getting inflation up to 2%; would that be enough? The US economy has struggled mightily despite the fact that it went into the Great Recession with a 2% annual rate of core inflation. Japan could try to target an even higher rate of inflation, as Blanchard, Ball and Krugman recommend, or Japan could leave behind quantitative easing and higher inflation targets to make the leap to next-generation monetary policy.
The key to next-generation monetary policy is to cut interest rates directly instead of trying to supercharge a zero interest rate by raising inflation. Of course, cutting interest rates below zero pushes them into negative territory. But Switzerland, Denmark, Sweden and the euro zone have already shown that can be done. There is a widespread myth that cutting interest rates much deeper than -0.75% would inevitably cause people and firms to do an end run around those negative interest rates by taking their money out of the banking system as paper currency. Not so!
It is easy to neuter cash taken out of the bank as a way to defeat negative interest rates simply by removing the guarantee that the Bank of Japan will take that cash back at face value. This is an idea I have taken on the road that has withstood close examination and grilling by central bankers and economists all over the world. A common reaction is surprise at how easy the practical details are relative to the many much more difficult things central banks already do.
This next one is from Paul Krugman, who’s definitely feeling the momentum shift his way:
Japan’s Economy, Crippled by Caution
…Japan is still caught in an economic trap. Persistent deflation has created a society in which people hoard cash, making it hard for policy to respond when bad things happen, which is why the businesspeople I’ve been talking to here are terrified about the possible spillover from China’s troubles.So Japan needs to make a decisive break with its deflationary past. You might think this would be easy. But it isn’t: Shinzo Abe, the prime minister, has been making a real effort, but he has yet to achieve decisive success. And the main reason, I’d argue, is the great difficulty policy makers have in breaking with conventional notions of respectibility.
Respectability, it turns out, can be an economy-killer, and Japan isn’t the only place where this happens.
…What’s remarkable about this record of dubious achievement is that there actually is a surefire way to fight deflation: When you print money, don’t use it to buy assets; use it to buy stuff. That is, run budget deficits paid for with the printing press.
Deficit finance can be laundered, if you like, by issuing new debt while the central bank buys up old debt; in economic terms it makes no difference.
Printing money to pay for stuff sounds irresponsible, because in normal times it is. And no matter how many times some of us try to explain that these are not normal times, that in a depressed, deflationary economy conventional fiscal prudence is dangerous folly, very few policy makers are willing to stick their necks out and break with convention.
The result is that seven years after the financial crisis, policy is still crippled by caution. Respectability is killing the world economy.
Both authors make it sound so easy.
What they don’t say is that we’ve arrived at this extraordinary point in history — when helicopter money, negative interest rates and the elimination of physical cash are suddenly mainstream ideas — by following the advice of these guys’ intellectual predecessors.
Their argument, as far back as the 1990s if not the 1970s, has been that it makes no sense for government to allow markets to clear the detritus of bad decisions. Instead, we should just borrow what it takes to satisfy all “needs” and print what it takes to pay the resulting interest. People will buy lots of stuff, “growth” will eliminate all imbalances, both moral and financial, and the system will chug along in equilibrium.
Liking the way that sounded, the developed world broke the link with gold in 1971, started borrowing heavily in the 1980s and bailed out everyone in sight in the 90s and 00s. And here we are, with debts so massive that growth under traditional policy options is impossible.
And right on cue, here comes a new batch of monetary theorists explaining to the ignorant masses that governments just aren’t being bold enough in their borrowing and money printing — and that with just a few little tweaks to our notions of personal freedom (the war on cash) and common sense (greatly expanded government borrowing on top of record debt loads), our problems will vanish.
If this sounds vaguely familiar, it’s because it’s been around in various forms for thousands of years, bubbling up whenever governments borrow and spend themselves into impossible situations. See Rome’s hyperinflation and price controls and John Law’s excellent French adventure.
Another thing the authors omit is the “in a perfect world” disclaimer that should accompany blunt-instrument proposals like sharply-negative interest rates and massive new deficit spending. Here in the real world, where highly-emotional people don’t automatically obey unfamiliar and aggressive government edicts, things tend to spin out of control when markets are hijacked by lawyers and economists.
Anyhow, it’s a virtual lock that some variation of the above will be tried next year in most major countries because it’s the only course of action that doesn’t involve an immediate slide into a deflationary abyss. That it probably leads to something much, much worse will be viewed as a problem for another day.
34 thoughts on "This Is Actually Going To Happen Next Year"
“It is easy to neuter cash taken out of the bank as a way to defeat negative interest rates simply by removing the guarantee that the Bank of Japan will take that cash back at face value.” There was actually a proposal by an official of the U.S. Treasury years ago that a chip be implanted in currency rendering it worthless if not spent within a specified period of time. However, inflamed workers told their labor has just become worthless may develop their own theories about neutering.
John Rubino focuses too much on central bank policy and Keynesian phony economic analysis by disinfo shills like Paul Krugman. Here’s the reality: ALL MONEY IN OUR SYSTEM IS CREATED OUT OF THIN AIR BY BANKS WHEN THEY ISSUE LOANS. WE PAY TRILLIONS ANNUALLY IN INTEREST FOR MONEY CREATED OUT OF THIN AIR BY LEGALIZED COUNTERFEITERS CALLED “BANKERS.” CENTRAL BANKS ARE OWNED BY THESE SAME BANKERS.
BANKS REPOSSESS HOMES, CAUSE WARS, AND RUIN COUNTLESS LIVES TO COLLECT INTEREST PAYMENTS FOR MONEY THEY NEVER HAD. OUR POLITICIANS, COURTS, LAWYERS, POLICE, MILITARY AND ACADEMICS ARE BRAINWASHED OR PAID-OFF TO NEVER CHALLENGE THE SYSTEM.
YOU ARE A DEBT SLAVE.
Buying gold coin and bullion. The world is doing it.. NOT the folks.. YET!
what kind of stuff? the feds charter permits them to buy any kind of asset (when the fed buys an asset i assume it becomes “stuff”, just as liabilities become deferred assets) they also have the discretion to pay in kind to bondholders. if the bond is MBS they might give you property in Detroit, which automatically confers a tax burden. that kid with the hedge fund who is buying US Tbonds in Belgium might be the smartest kid in the room.
The central bankers have been creating financial inflation while doing their best to contain it there and avoid price inflation (when the clubs and pitchforks come out). They yammer on about wanting the price inflation and how they are going to get there with their policies which are actually directed at financial inflation. They know as well as any that when price inflation actually comes it will be leading the civil unrest (riots) so they do what is required of them and lie. It is these lies that seem to cause such dissonance with thinking observers. They do not want price inflation in the consumer markets but that lies at the end of all of their policies and will come when their balancing act in financials is fully ripe. What assets will then rule the day? Talk like these “economists” is just peering into the future and stating that the dance of the dead that they see can be good.
Our economists and politicians want the problems to simply vanish over time. The US has over 200 trillion in derivatives which on their best day are worth about a tenth of that and they will not go away. We cannot borrow, grow, pretend it will go away.
There was a recent estimate on the number of trees in the world. If we nailed a ten and a one dollar bill on every tree in the world we would have an example of just how big our problem is.
The world’s derivative deficit is close to a quadrillion dollars. Their value is also about 10% of the balance. The reckoning is coming and all they can do is make it worse the longer they try to delay it.
IMO, Mr. John Law did not leave France and King Louie and his wife with a party at the palace and a medal pinned on his otter coat lapel. He had to run for his life to get on a ship and leave hoping no one would come on board before, the ship set sail.
“simply by removing the guarantee that the Bank of Japan will take that cash back at face value.”
This idiot professor does not know what cash is. “will take that cash back at face value”. what lousy writing. That professor should be fired ASAP. Or have his pay withheld indefinitely, whichever is easier to do.
What this Michigan econ professor really wants to say is that promises to pay cash will not be honored.
When will people open their eyes to the scam of shit-stained pieces of paper standing in for good money?
Da-da-ism-economics! at best its sort of absurdist, but can be sinisterly seen as an
Orwellian fascist-logic.
“Debts are now interest earning assets”……”big numbers equal wealth”……”a zero, which costs us nothing, can be added to your bank account, giving you ten times the wealth!”
How does this not end in Zimbabweimar? Is the collective cargo cult public a willing subject in this financial mass hypnosis? because to disbelieve the suggestion means waking to a reality of less……..”let the dream continue, please, please, more soma”
what can’t go on, won’t…..but the wait for thecrash can seem interminable
So many GDP-centric economists. If total debt dropped 70% and GDP dropped 40% we would all be better off. Do the math. It is simple mathematics.
In my opinion, we have just entered the “you can’t make this stuff up” level of absurdities coming out of academia. I have to admit I’m a little jealous because there are many readers of blogs like this that have been advocating “helicopter money” (instantaneous increases in citizens digital bank accounts by a factor of 10 or 100), “debt jubilees” (shredding bonds owned by the CBs so the borrowers/bond-sellers can double down), elimination of cash, and the purchasing of physical “stuff” with un-backed FRNs for years. Nobody would listen to us because it all sounded so stupid and nihilistic and mocking, until now that “intelligentia” have caught up.
But, you know what? I don’t think it’s going to happen. Now that sanity and respectability is on the chopping block I don’t think their going to die. I know a lot of conventionally minded people who have given the benefit of the doubt to monetary policy with wait-and-see attitude, mainly because they didn’t understand enough to know any better. But these latest ideas are just too obviously bad even to the “smart money”.
helicopter money is only good if you get the helicopter visit first. I pledge to spend 100% of the H-money on silver and gold coin (and then some)
welcome to Zibabweimar, protect yourself
True, and that’s why the distribution of “money” is not as easy as it sounds. However, if the idea of maximum irresponsibility is the rage for 2016 then actually dropping paper FRNs out of actual helicopters over cities and neighborhoods isn’t a bad start. In our money grubbing culture what jury would convict a person for hacking someone’s hand off who’s got a fistful of dollars?
things tend to spin out of control when markets are hijacked by lawyers and economists. You forgot the banksters at the root of this problem and a government that can be bought.
There are two more solutions here and one is send a check out to every individual to spend as they please and stimulate the real economy every month. Number two, have a write down of all the outstanding derivative debts and put some people in jail or out of business and break up too big to fail. How come we never talk about that?
During times when people fear the worst, negative interest rates on savings would exacerbate the deflationary collapse. It increases the incentive to pay off debts. So would the elimination of cash.
I’m not sure yet, but I think this deflationary trend is reversing the flow of money back to the masses. It was the expansion of debt that enriched the oligarchs at the expense of the masses. The collapse of debt should do the opposite.
Beautifully said John, as always.
We don’t have enough inflation is the nobels conclusion? Inflation and debt is the problem which is why the global economy is tanking. Negative rates will just add fuel to to inflationary ifires and masses will spend and borrow even less. When masses spend and borrow less businesses fail.
Jerks like these arrogant Keynesian’s are the major reason for Donald Trumps political popularity!Anything along the lines that these over coddled University Dons are suggesting would further pauperize the working middle classes.As for Krugman,….he writes what he is told to write adhering closely to ‘The Narrative’ & making big bucks doing it!
Do these up jumped & arrogant fools really believe that most of the voting public are that stupid!Do they actually think that Americans can be fooled into voluntarily giving up all the material wealth & freedoms they have gained since the end of WW2?
John-Dalberg-Acton,..Lord Acton,was quoted as saying “The issue which has swept down the centuries & which will have to be fought sooner or later is the people versus the banks”.
Henry Ford,who I detest in most ways,happened to be correct when he said,”It is well enough that people of the nation do not understand our banking & monetary system.For if they did,I believe there would be a revolution before tomorrow morning”!
I’m pretty sure it will hit the people to late, but the answer is simple…hunt and hang those resposible from the nearest tree. Its a tried and true method that has worked for centuries…
Utter nonsense. Demographics don’t support the premise. Not enough new workers, too many people retiring. In other words not enough new consumers. Too many low level consumers now selling property and downsizing.
ohyan: That would be called a ponzi scheme, which is what we have now. Duh!
One of the keys to the problem is overpopulation!
These overstuffed fools from Keynes U. think that the world is run out of equity markets working with graphs & charts,…and maybe crystal balls!They need to change the name of their specialty from ‘economics’ to ‘astrology! something like a financial perpetual motion machine which goes on forever!
They don’t allow for political & socio/economic factors involved in the total picture!
At this point in history,2015,the world’s population is bursting out at the seams.There are 5X as many people on earth then there were in the year 1900!
backwards societies can’t function with these overloaded populations!
Mexico was set up over 400 years ago as a feudal system to serve the needs of the white Spanish Hidalgos who never made up more then 10% or 15% of the total population!In 1900 they could make it work with a population of 8 million people.In 2015 Mexican society is staggering under the weight of a population of 122 million inhabitants,85% of whom are illiterate Indians & Mestizos.
The same can be said of most of Latin America south of Mexico!
Egypt has similar problems with different historical factors involved.In 1900 Egypt had a population of about 11 million people,today that population is pushing 85 million,with a small upper class sitting on top of a semi literate mass of people who never left the ‘Dark Ages’.Through out the 3RD world this is the case.
All of the people from the Middle East who are storming into Europe are not Syrians,they are starving people coming in from all over the overpopulated Moslem world,desperate for food & shelter!
These hordes of 3RD world people,lf allowed in,will destroy the economies of the USA & Europe.At that point there won’t be a global economy for the Keynesian stargazers to pontificate about!
Complete nonsense. Overpopulation is a myth perpetrated by the ruling elite to eliminate the rest of us. Georgia Guidestone set up by the ruling elite https://www.youtube.com/watch?v=6lPotZobAm0
Lie of the lack of room for people. All the worlds population can easily fit on Duvall County FL. https://www.youtube.com/watch?v=QJuBkTNuHyw
The UN has a plan to de-populate the Earth https://www.youtube.com/watch?v=I_nROXRAxk8
It’s all part and parcel of the evolution myth. Easily debunked here: https://www.youtube.com/watch?v=BO0NPzNEmsg
Retired 22: Sounds like all those surplus people you want to eliminate are non-white.