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PlurkBy Paul Jackson
If Koo’s right about this, then he’s found a way to reconcile large parts of monetarist and Keynesian economics, a feat that could indeed be considered the Holy Grail for disciples of the dismal science.
‘As I indicated in my book, it's one of those recessions that happens once every God knows how many decades, where monetary policy is largely dead in the water,’ he says. ‘I mean there are no borrowers. And if the money multiplier is zero negative, what can monetary policy do? Those people in the financial sector in Japan are fully aware of this difficulty. But politicians, academics and media who are never faced with the real situation only remember what they are taught in universities, where neoclassical economics always assumes there are plenty of borrowers. They tend to bash the Bank of Japan for not doing more.
‘If the Bank of Japan says, “We're going to go for an inflation target,” then something has changed dramatically, because everybody knows that the Bank of Japan has no tools to achieve an inflation target with the monetary multiplier zero negative.
‘But for the DPJ government, this is their first time, and with deflation their immediate instinct is to blame it on the BOJ. So they're going through a learning process too, I think. And at some point they'll realize that with the money multiplier dead in the water there's no point in bashing the BOJ.’
LearningfromthePast
In his book, Koo recalls the controversial quantitative easing experience of the Bank of Japan in the early noughties. The move had little apparent impact on the economy, with some observers saying this showed the ineffectiveness of the approach, while others claimed it wasn’t handled correctly.
‘We actually tried all of this back in 2001 to 2006, right? And we increased to 30 trillion yen the reserves—that's 6 times the legal reserve requirement. So that means the money supply should have increased by 500 percent and we should have had a 500 percent inflation rate. And absolutely none of that happened.
‘And we see the same thing in the UK today, the same thing in the US today, a massive increase in liquidity which [Bank of England Governor] Mervyn King once said, “We’re not like the Japanese. We’ll do it quickly and in massive amounts and we’re going to get the money supply going.” But he's not saying that anymore. He's realized that it doesn't work.
‘Ten years ago it was the LDP that was going after the BOJ and [economy minister Heizo] Takenaka was trying to threaten removal of the BOJ's independence.
‘Except for people like Takenaka, who never understood anything, a lot of people in the LDP began to realize what I'm saying, and they stopped applying pressure to the BOJ.’
Koo says he helped influence the debate within the LDP on such matters, partly through his proximity to former Prime Minister Taro Aso.
‘Aso was in the Koizumi government from the beginning to the end and he was the one who kept Takenaka from running amok. On very many occasions it was Aso who came out on the side of the Bank of Japan and told Takenaka to shut up, and Takenaka had no theoretical reason to argue back because the demand for funds wasn’t there.’
john
The entire problem with the western banking system is that the bank owns the government! It doesn’t matter who sits in the presidents seat if the central bank controls the money because if they really want to the central bank can collapse the economy and the politicians don’t get reelected! Politicians in theory at least have some responsibility to the people but not the fed or other central banks in the western banking system. It’s time the governments took back the power to issue money for the people and out of the hands of the banksters!
Dana Surmane
Watching Japan for thirty years has been troubling. I think one of the reasons that the U.S. is in so much trouble is that the stimulus money was essentially stolen — not used to get people working at all. The same sort of thing seems to always happen in democracies. As we all seem to be clumping us against the same fence, you begin to wonder what the next step really is. Anyway, thank you for giving Richard Koo a chance to air his intriguing views. Still, I think that the critical problem that he and most of the theorists have is in not being able to come to terms with the reality that no present government is capable of committing itself to an honestly administrated long-term stimulus or fiscal policy. With that much cash and/or tax benefit largesse available to politicians, it just serves to corrupt them faster. Sometimes we all seem to be heading toward the North Korean form of government and finance.
σ1
This is a great article and I will be sure to read the book. It tackles both of the great misconceptions about Japan – the relative efficacy of fiscal v monetary policy, and the “out of control” public debt.
I do have to say though that in the long run surely there is something to be said about the “quality” of fiscal policy. I understand that some “shovel ready” spending is necessary to ensure any given crisis does not spin out of control, but in spending public money the government should always be very mindful of where the long term efficiencies comes from – I think this has been the big failure of the LDP, and now the DPJ. The LDP was much more interested in the political implications of the use of public money and indulged in pork barrel politics – public benefit be damned. The DPJ does not seem so beholden – but I am not seeing any long-term, daring or coherent fiscal spending/innovation agenda just yet.
Kevin Cousins
Richard Koo’s book “The Holy Grail of Macroeconomics” is I believe the key to understanding the current environment. Read it together with McKinsey’s “Debt and deleveraging: The global credit bubble and its economic consequences” and you have an excellent framework for macro trading over the next few years.
Despite being easy to read, it may also be an important step forward in economic theory.
Agata
Thanks a lot for the advice. I will gladly read also the second book. Japan is good example that a new approach is essential. So time to get some knowledge on those new ideas which can become even more important in the future. Regards.
Agata
Very good article and really interesting point of view – nice to read something different. Now I really want to read Mr Koo’s book.
Barry Ritholtz
Fascinating article — thanks for the interview with Koo