A time of unqualified promises … In Japan, newly appointed Bank of Japan Governor Haruhiko Kuroda will on Cyprus bank Wednesday convene a two-day policy meeting, his first after assuming office and pledging to do – again those words – "whatever it takes" to end years of deflation. While Kuroda's supporters would probably stress that "whatever it takes" is in this instance a process rather than an event, the BOJ is widely expected to take radical new steps in its quest to achieve a 2 percent inflation target within two years. Media have reported the central bank intends to move to begin "open-ended" bond purchases directly rather than in 2014, as well as to start buying longer-term bonds and possibly expanding the range and scope of purchases of other assets such as equities. − Reuters
Dominant Social Theme: Japan has a new political broom that will sweep out the stables and make the Land of the Rising Sun prosperous again.
Free-Market Analysis: We used a provocative headline (above) to remind readers that when central bankers promise to "stimulate" they are really talking about printing more money that inflates the money supply and causes, eventually, price inflation.
This is what Japan's newly elected leaders now propose to do. Why the Japanese would be enthusiastic about the degradation of their hard-earned currency is difficult for us to tell. In fact, we don't think there is as much enthusiasm as we are led to believe.
In any case, the issue here is whether such Keynesian programs CAN stimulate the larger economy, and of course free-market types we would answer in the negative.
This is an important point. The whole idea of central banking is based on good, gray functionaries pulling monetary levers that have the intended effect. Ludwig von Mises's great tome, Human Action, shows us that regulation NEVER has the intended effect, and monetary activities are not immune to this larger law.
It is impossible for central bankers to do what they have set out to do. At best, they can only substitute a larger set of difficulties for a smaller one – until the entire empyrean structure topples over and it is necessary to begin again from the bottom up.
It is not "rocket science." Corporate execs have a great deal of difficulty with forecasts – and that's in the private sector, examining competitive issues that are well-known to them. How can banking technocrats confidently expect that their solutions will generate requisite results in multi-trillion dollar economies?
People will often do what is least expected of them … that is, they will operate in their own self-interest and react to stimulus in ways that may often surprise. There is no plan in history that has survived contact with its intended contact.
And yet central bankers continue to try via the bluntest of instruments – the manipulation of the rate and value of money – to "steer" economies in the direction they claim they want them to go. This article from Reuters is a cautious affirmation of this sort of doctrine, examining Japanese political promises and the possibility of their fruition. Here's more:
So far Kuroda, and Prime Minister Shinzo Abe, have been very successful in convincing one constituency − investors − that they mean business. Tokyo shares have risen sharply and better yet the yen has fallen against the dollar, improving the global competitiveness of Japanese exports.
Even Japanese consumers seem to be putting faith in the idea that a determined central bank with a printing press can cause prices to rise. A quarterly survey of consumers by the BOJ released on Monday showed that nearly three quarters expect prices to rise in a year's time, though only 9.5 percent expected their own income to also go up.
That raises a somewhat ironic possibility. A sensible household, and Japanese households do seem sober in their approach to personal finances, might react to the prospect of higher prices and stagnant incomes by deferring purchases and cutting back on luxuries, thereby causing the very deflation the threat, or promise, of inflation is supposed to end.
… Japan and Europe, promising to do "whatever it takes" will prove a powerful tool, but a bit of a wasting asset. The longer we go, the less believed it may well be.
This last point is especially well-taken. Central bankers like to think that they can "jaw bone" economic results. In the short term this may be so but not in the long term. Long term, the results have to manifest themselves or central bankers run the risk of losing credibility.
In any case, we would argue that bankers and central banks HAVE lost credibility. The system that got its start some 100 years ago has begun to run its course. It is surely impossible for those in the West to believe in the promises of economic central planning and we highly doubt that the Japanese as a whole are much more optimistic.
The jury is out on the Japanese monetary gambit. But sadly, even if those implementing it achieve their goals we don't believe the cure shall prove effective in the long run. No, there is considerable history showing us these monetary solutions are ephemeral at best.
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