Following my piece about Japan's latest money-printing policy a friend of
mine posted it to Steady-Staters Google Group and an anonymous member
replied to me through my friend. This may be of interest to some FWers.
Keith
(ANON)
Jack,
I'd like to ask a few questions and offer some remarks in response to
Mr. Hudson's recent piece which you posted about Japan's Great
Experiment in monetary policy:
a. How will the newly printed money get into the hands of the
consumer? Do you think Japanese consumers are willing to borrow in order
to spend? Will Japan issue credit cards with 0% interest for 10 years?
(KH) Reducing taxation would be the quickest and surist way. Credit cards
hardly existed in the 1920s and 30s when Keynes was formulating his General
Theory. .Monetary policy was still in its early years of being used and the
Chairmen of central banks tended to be frightened of changing interest
rates. They knew that the effects of these are medium to long term and in
some cases the changes are counterintuitive.they can never be certain in
their effects. Except when putting them up steeply as an extraordinarily
courageous Volcker did in the 70s.
.
(ANON) b. If Japan's central bank prints new money, doesn't that devalue
what already exists to the degree of printing? How does that provide
more spending power? Japan imports a lot of materials and food
(KH) Yes, of course it will devalue the currency. It will affect the price
of the currency vis-a-vis other currencies on the foreign exchange because
speculators will be adjusting their ratios within minutes of any announced
devaluation as to how they think the new currency price will affect the
prices of many different traded goods at different futures. The price of
food, for example, will be affected very quickly indeeed because there's
only about 10 day's world supply of carbohydrate food (most food) on any
one day. Wages in export industries will rise the quickest. As well as
their savings being steadily wiped out, the salaries of the profesional
classes will be among the slowest to adjust as will be those in
sub-professional service occupations. Government workers will be the
slowest of all because governments will also want to wring as much
inflation as they can in order to help pay-of f the national debt with
money that's a great cheaper than the money of the original debt.
(ANON) I believe that Mr. Hudson's discrediting of Keynes is flawed. Keynes
advocated fiscal stimulus, not monetary stimulus, right?
(KH) In the 1920s and '30s the idea of a monetary stimulus was pretty low
(even in Keynes' spacious mind) because the relevant central bankers of
those years (US, UK, France, Germany) were still old-fashioned enough to
regard their own interests lifetime careers to be just as important as
their government's. They saw their job as (a) the maintenance of value for
their country's currency; (b) making sure that their own country's banking
system -- and its individual banks-- had sufficient reserves to withstand
the fiercest economic blow or the most exuberant antics on h stock
exchanges. The Bank of International Settlemens was bankers' brainchild,
not governments'.
(ANON) Keynes advocated spending by government to provide demand when the
private
sector wouldn't or couldn't. He didn't specify if the spending was to be
financed with debt or currency-destruction, or by confiscating the
savings or gold holdings of each citizen, or by raising taxes. Keynes
didn't say how the fiscal stimulus was to be financed, he just said that
when private sector demand plummets, it's time "for the gov't to find
something useful to buy, and buy it".
Mr. Hudson says that shortly after World War II, Keynes said he didn't
believe his fiscal stimulus ideas could help England revive its economy.
Mr. Hudson seems to infer that because Keynes didn't think his policies
could help England at that moment, they were therefore not helpful at
any time or place. Let's take a moment to review England's situation
post-war.
England after the war was broke. It had just waged its second major war
in 30 years. It had no credit, no productive capacity; . . .
(KH) Correct, but it still had plenty of industrial infrastructure if only
the top half-dozen High Street banks of England had sufficient money to
invest seriously. Furthermore, the private banks of the City of London plus
other large finance houses were disinclined to invest in UK industrial
projects. They were hankering after investing in the borrowings of foreign
governments which had given them immense profits pre- and post-WWI and WWII.
(ANON) . . ., most able-bodied
folk were dead or wounded, the nation was stripped of natural resource
holdings abroad, and of markets for finished good abroad. It's
industrial capacity was smashed. In short, England was holding a really
bad hand of economic cards. While England had all manner of useful
projects to spend money upon, they had no way to pay for major fiscal
stimulus. All resources were allocated to caring for the near-dead and
sifting through the rubble to find what's left of value.
Meantime, U.S. manufacturing plants, which were never bombed, were
roaring away at full capacity, and were vigorously exporting in order to
get share in markets once dominated by the Brits (and Germany and France
and Italy, too).
Keynes had some good ideas, but he was not Rumplestiltskin. He couldn't
spin straw into gold.
In another interesting passage, Mr. Hudson asserts that Japan is simply
embarked upon the road to steadiness. They aren't interested in buying,
because they're "sated". I think there may be some truth to that, and
maybe that factor is operative here in the U.S. to some very small
degree; after all, for a few decades now, we've got all the junk we need.
(KH) I agree with all the above and am glad that you agree with my point
about satiation. Of course, it wasn't the only factor making for Japan/s
'lost decade' (1990-2000). Another going on is that the Japanese,
frightened of losing face more than any other culture, had not allowed the
worst perfoming Japanese banks to go bankrupt at around 1990 because they
had invested so much on the basis of unrealistic city land values lodged
with them as collateral. The Japanese government subsidized the banks for
them to get themsevles in order as land values steadily sank downwards
-- and thus the banks' accounts were realistic once more. This took all of
ten years! (It is what is happening in the UK right now. This is why Mervyn
King, our BoE Goverrnor and the UK Government keep on telling us pork pies
[London Cockney slang for lies] -- that is, a supposed lack of
entrepreneurs who are causing the delay in recovery. It isn't. It's to wait
for London commercial land values to regain sensible levels and for banks
to be able to adjust their accounts accordingly and thus, behind stage,
where their bankruptcy isn't visible, make themselves solvent again.
(ANON) In contrast, I think that's one reason that growth rates in Asia and
South America and the former USSR are going to be higher than ours for
some time to come. Those countries don't have all the junk they need yet.
(KH) And also why the US and the UK will record some low rate of economic
growth for some years while immigrants catch up with a full kit of Western
household goods (white goods plus status goods like cars and living room
furniture).
(ANON) But I think that the real reason for depressed demand in both Japan
and
the U.S. is something else altogether. I wonder what Mr Hudson might say
about the reduction in the average laborer's earning power experienced
by western European, N. American, Japanese and to a lesser degree S.
Korean workers over the past 20 years as automation and tens of millions
of far-less-expensive workers displaced the manufactures coming from the
developed economies.
I believe that reduction in real earning power has more to do with
reduced demand than any "sated"-ness, especially in a society that is as
class- and status-aware as Japan is.
Note that Japan rode the mercantilist tiger first, got knocked off by S.
Korea, and then China jumped in and trounced them all. Japan's economy
was most vulnerable to newly-minted mercantilists, and took the hit
hardest and firstest. I wonder how Korea's doing these days. I'd say
they are vulnerable, t
(KH) Not the real reason in my view, but certainly among the main reasons
and probably Yes to Korea being the next.
(ANON) . China's in the auto and PC and TV and phone
business, is eying ship-building, will soon enter the heavy earth-moving
equipment sector, and will graduate up toward locomotives, heavy trucks,
and the like shortly both to meet internal demand and for export
revenue. China is really, really good at selecting target industries to
dominate (just like Japan and Korea did) only now, by virtue of the
internet, container-shipping, easy capital flows...It'll happen faster
than any other major industrialization in history.
(KH) Unfortunately for the Chinese Government, things aren't going
according to plan. All the 20 or so empty 'ghost' cities of the rural
interior which the central government allowed the provincial governments to
build are not being filled up by the rural peasants intended because there
aren't any jobs to go with the apartments and houses. Many of the more
labour intensive industries of the coastal provinces were intended to go
there. But they haven't. They've gone to countries like the Philippines,
Thailand, Laos and Vietnam. Some are actually returning to countries of
origin (particularly the US and UK).(When the Chinese adopted Adam Smith to
replace the disastrous policies of Mao Zedung they should have taken full
measure of the canny Scottish philosopher and reaiized that what was sauce
for the goose (the Chinese stealing our technologies) is also sauce for the
gander (the subsequent steaing of Chinese industries by Laos, Vietnam, etc).
(ANON) In terms of economic "growth" rates, I'd say that household earning
power at the consumer level explains a lot. So does having all the toys
you really need is also a contributing factor. The declining value of
labor in the developed economies is also a significant factor in
explaining the leveling off of demand, or to state it another way, the
reduction in growth rates. Finally, the concentration of wealth in the
hands of a relative few is the other major factor constraining
consumption in the developed world.
Now the question is "What to do about it?".
I'm pretty sure this why Biz keeps hammering away at the Harris model in
his posts. He seems to think that the answers to our economic maladies
lie more in human psychology and cultural values than they do in
monetary policy or industrial policy. What do people want, and why? What
happens when they get all the stuff they need? What do they do when
their labor isn't needed any more?
What do they do when the value of all labor, generally, is falling?
(KH) All businessmen assume, along with almost all economists, that
economic growth can go on forever (or at least for their own lifetime!).
They confuse economic growth with economic innovation as though they're
tied togather.That has been so during Capitalism which started only around
the 1820s. This was when ordinary people started to bank for the first
time. Their deposits were generally very small compared with business
accounts were usually on-demand, short term savings. They didn't object
(since they had no way of knowing) when banks started to aggregate the
savings of thousands of these into sizeable tranches for long term credit
granted to entrepreneurs for major investments. The big blackholes that are
now appearing in almost all pensions funds, governmental or private, means
that the type of Capitalism of the 1820s-2007 will now be over. Already big
industry is increasingly funded by raising bonds, not bank funding. Perhaps
the same, or something similar, will apply for small and medium business
requirements from several other new bodies than just the banks.
I see now that I have the last word -- so over to you!
Keith
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