For some reason, liberal technocrats seem to think that printing gobs of money when money can’t flow into the real economy has some sort of impact for wage earners. In the United States, it’s called quantitative easing and we’re doing it to the tune of trillions. The signature example for this isn’t the U.S., it’s Japan, where the printing presses are really going hot.
Is it working?
Well, Paul Krugman wrote this about Japan in January, 2013.
Enter Mr. Abe, who has been pressuring the Bank of Japan into seeking higher inflation — in effect, helping to inflate away part of the government’s debt — and has also just announced a large new program of fiscal stimulus. How have the market gods responded?
The answer is, it’s all good. Market measures of expected inflation, which were negative not long ago — the market was expecting deflation to continue — have now moved well into positive territory. But government borrowing costs have hardly changed at all; given the prospect of moderate inflation, this means that Japan’s fiscal outlook has actually improved sharply. True, the foreign-exchange value of the yen has fallen considerably — but that’s actually very good news, and Japanese exporters are cheering.
In short, Mr. Abe has thumbed his nose at orthodoxy, with excellent results.
How’s the experiment going?
In short, not good. This is a headline picked out at random, but they all say the same thing: Japan’s economy makes surprise fall into recession
There’s a lot to say about this policy. Printing money isn’t a bad thing, per se. It is what governments need to do. It’s probably true that QE is juicing some lending in some areas of the economy. The problem is that the financial system is at this point only very marginally connected to the real economy, so when you print more money, it goes into corporate treasuries and from there into speculation. Japanese exporters, for instance, are just keeping the extra money they are making from a lower yen rather than investing it into factories.
This money piles up, and since corporations can’t put it into regular deposits, they stick it into the shadow banking system via money market funds, fancy things called ‘repos’ (which are basically just uninsured deposits), the central bank and some government and corporate debt. From there, the money is lent to hedge funds, pension funds, or other funds who buy financial assets. The stock and credit markets go up.
At no point does this money touch the real economy or the hands of consumers, it just inflates financial markets.
The main function of a credit system should be to put funds to work in useful endeavors. That’s not happening, for a lot of reasons, but on a fundamental level because Japanese corporations are too powerful and stagnant, and no one else can get access to money. That is why Japan is in recession. We face the same problem.