Just as the US Fed announced the end of its quantitative easing program, the Bank of Japan announced that it would be escalating its own program of mass monetary expansion.
Some economists are calling it the mass nationalisation of the bond market. And they’re saying that governor Kuroda is turning the Bank of Japan into “the world’s largest asset management company“.
It’s all very juicy.
Last year, I wrote a series of posts on Abenomics, and Shinzo’s big plan to get Japan out of the deflationary doldrums. You can read them here:
- Abenomics 101 – Let’s Talk About Japan: where Japan gets plenty of credit, has an asset bubble, and then collapses.
- Abenomics 102 – Japan’s Liquidity Trap: where I get to describe a liquidity trap(ped) economy in terms of food (still proud of this one).
- Abenomics 103 – Japan’s Lost Decades: where Japan loses two decades, and what the Japanese authorities did to get out of them, and why it still hasn’t worked.
- Abenomics 104 – Abenomics, finally: where Japan plans aggressive monetary stuff, aggressive fiscal stuff, aggressive reforms, and adds in a sales tax hike.
First off, a disclaimer: those posts were written over a year ago. I’ve changed my mind a bit about QE and inflation since (see here).
So here is my main observation around QE:
- Monetary stimulus is only effective if it pushes liquidity into the hands of consumers. You need those kids to spend.
- But where the main asset class investors are the wealthy and the pension funds, then monetary stimulus just inflates financial assets, because the wealthy don’t really change their consumption habits when they’re very wealthy. They just move their investments around.
- In fact, monetary stimulus in those situations could do something worse: it could dis-incentivise banks from giving credit where it’s needed.
- After all, if you’re a bank, and you’re in a low interest rate environment, why would you lend money to small businesses and entrepreneurs? Those clients are in extremely risky positions – deflation due to low spending is not a recipe for success.
- The bank would rather not lend the money than put the money at risk for almost no return.
Mainly, I’m just not convinced that we fully understand, or appreciate, the link between spending and inflation. It’s not as direct or as causative as we’d like. Does higher inflation mean higher spending?
I think that link is strongest in situations where the haves freely flip between “investing their money” and “preserving their purchasing power by spending it now”. That type of either-or scenario seems to be typical of developing countries with lower levels of overall wealth relative to the cost of goods and services – which is probably why those countries have a greater propensity toward inflationary episodes.
But when the wealth levels become extraordinary, that relationship breaks down. No plutocrat is going to try and preserve his wealth by buying a fleet of maseratis while they’re still $100,000 a pop. At those plutocratic levels, your spending levels have levelled out.
So the Bank of Japan’s move…could benefit from a littler redirection.
I went searching for some alternatives and workarounds to QE, and here are some suggestions:
1. Nationalise Credit
If you’re going to go through the process of nationalising anything – don’t nationalise bonds. I mean – if you’re already doing the dirty work, you might as well get stuck in all the way.
So instead, why not lend directly to small businesses and entrepreneurs? Don’t incentise and persuade – just do it directly. Buy up a zombie bank, loosen up the lending practices, and get going.
And while you’re at it, hire some of your highly educated young jobless people, and get them to be business analysts and advisors. Spend the money freely on lending the money wisely. Get principled managers to run the thing for you. Ask the clever people from Singapore for help – they’ve learned how to turn State-Owned Enterprises into great businesses.
Why not try it? After all – you’ve tried so many things. What’s one more potential failure?
2. Helicopter drop bundles of cash
Direct cash transfers. Sprinkle them liberally.
At least it’ll get to the lower income classes straight away.
And you know what? It need not be bank notes. It could be debit cards.
You could get clever about it as well. Not just “here’s a million yen” – but perhaps “Your card will get topped up to XX yen each week – which is enough to get a nice restaurant meal for a family of five. You can’t transfer the money – but you can spend it wherever you like. And it’ll only get topped up – you can’t save it.”
You want the amounts to be small and regular. And of course you’ll get some people trying to pay for stuff and exchange it for full refunds. But you penalise that behaviour quite heavily. And by making the amounts relatively small, people might just think “this is all too much effort – let’s rather have a beer and a bowl of ramen.”
It’s all very Keynesian.
3. JUST DO THE REFORMS ALREADY
I realise that I’ve probably angered my Austrian economist friends with those first two. So let me tip the hat in their direction and say “Agreed – Japan is a quagmire of regulations and taxes.”
This quote from an article on the Ludwig von Mises Institute website:
As is the case with Canada and Sweden, Japan has succeeded in achieving a relatively decent economy despite the very invasive and massive burden imposed by the taxing authorities. Taxes are very high at all levels in Japan. The rate is 50 percent for inheritance and death taxes; corporate taxes hit 40 percent very rapidly for almost all businesses; any decent individual income will put you in the 40 percent bracket; and then you have municipal taxes, prefectural taxes, property, vehicle, liquor, tobacco, gasoline, and others taxes. The list is nearly endless. Numerous and cumbersome government regulations prevent new entries to industry and being able to compete with the archaic corporate mammoths known as “zaibatsu” (Mitsubishi, Mitsui, Sumitomo, Yasuda, and a few others) who control and own most of the industries, and make changes at a glacial pace. In fact, since government regulations are so exceedingly high, it can be argued that most businesses and most industries are defacto “nationalized” and behave like state-owned enterprises.
Personally, I don’t see such an issue with the high inheritance, death and individual taxes. I think that those types of tax rates incentivise tax evasion and tax avoidance amongst the very rich – who weren’t going to be the big spenders anyway. And anything that does come from them – bonus.
But protective regulation that supports zombie-corporates? That’s a problem. You want space for small and medium sized businesses. They are the economic and job-creating machine.
Also – seriously – a sales tax?
Take a look at Kansas. Taxing consumption does not stimulate consumption. Come now.
I realise those are all a bit pie-in-the-sky.
But you never know.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
Justin November 10, 2014 at 10:32
Stumbled across your blog and absolutely loving it! A great source of procrastination, education and entertainment! Thanks man!Reply
Jayson November 10, 2014 at 11:29
No no – thank you! I always appreciate appreciation 🙂Reply
Zaheer June 29, 2015 at 14:16
So I know this post is pretty old. But what is your take on changing tax from being income based to being wealth based? So essentially you’ll be taxed on the assets you hoard while someone just about making enough money to survive will be taxed less.Reply
Jayson June 29, 2015 at 14:39
Haha – yes, I’ve just had to re-read the post!
My honest feeling: I think we’re going to have no choice but to change our taxation base to wealth over income.
As I see it: income taxes are messy. They tax both consumption and future wealth (taxes on lower income brackets limit consumption, taxes on higher income brackets limit savings/investment/capital-accumulation). Which is fine when you’re growing the income base.
But what happens when that inevitably stops growing? At that point, you get social stagnation. And then taxing income becomes a tax on subsistence. That is: it stops being redistributive.
Which hurts consumption – which, in turn, hurts capital (because capital’s return is based on its expectation of future consumption, for the most part).
Sometimes the argument feels very circular to me. You can either have lower returns to capital because of lower consumption, or you can have lower returns to capital because of taxes on capital. But the taxes on capital part seems to feel intuitively more appropriate, because it creates an economic environment where more people feel better off.
And isn’t it that what it’s all about? Feeling like you’re doing better, rather than feeling depressed about doing worse?Reply