Insufficient Monetary Easing

Modern economics’s ongoing failure in Japan is an especially intriguing spectacle to behold.  The country has an enormous debt – more than it could ever hope to pay off, and all efforts to revive the Japanese economy by the intellectual class have failed to do anything besides creating more debt.

You might expect that after this decades-long failure, that voices in Japan would rise up in protest of discredited economics and reject the absurd policies of the past.  Sadly, the newest voices in Japan are stating just the opposite:

“Insufficient monetary easing has been the reason why Japan hasn’t been successful in getting rid of its deflationary gap, and there is nothing more to say than that,” Mr. Watanabe told Dow Jones…

MarketWatch

And yet by monetary easing we  know that Mr. Watanabe doesn’t think that the Bank of Japan should lower interest rates – they are already at 0.1% and cannot realistically go any lower.  Monetary easing in this sense can only refer to the outright printing of money or a more underhanded version of the same thing.

In a sense, of course, Mr. Watanabe is right.  If the Bank of Japan printed enough money, the currency would cease to exist and deflation would not be Japan’s problem.  However, the ingrained belief that inflation will stimulate an economy seems as outmoded as a Made in the USA sticker.  He’s hoping for a “2% inflation target” to be set – but once inflation is loose, it ceaselessly erodes the value of currency through its stealthy exponential nature.

Although we’ve become accustomed to thinking about 2% inflation as “low”, this is far from reality.  In 20 years, a currency with 2% annual inflation will have lost a full one third of its value – that such currency destruction can be openly advocated by essentially all of the world’s countries seems strange, but then – what doesn’t seem strange lately?

Countries around the world openly complain that their currencies aren’t losing value quickly enough, and blame their neighbors for “cheating” by sending too many goods in return for their currency.  How US politicians can repeatedly complain that US dollars buy too much cheap junk from China coupled with China’s verifiable “cheating” shows that both countries are run by completely incompetent individuals.

Yes, the Chinese are run by morons too – it’s just not nearly as obvious yet.  As the countries around the world continue this so-called “competitive devaluation” (all countries trying to make their currency the least valuable in the belief that they must increase exports), we will certainly see things we have never seen before.  Although its hard to predict what will happen, it certainly won’t be good for bondholders.

In the 97 years since the creation of the Federal Reserve, the US dollar has lost just about 97% of its value, while it retained essentially all of its value from the founding of the country up until the creation of the fed in 1913.  I don’t think I’m the only one worried about the last 3 percent in the next 3 years.