Here's the thing: you actually need a strong middle class to buy your products. No amount of artificially inflating the value of the stock market through quantitative easing will give you a healthy economy. QE is like putting a fresh coat of paint on a house with a rotten interior: it makes things look pretty, but the structural integrity of the building is almost non-existent.
Employees working themselves to death for little pay is only aggravating the problem, rather than solving it.
You only have to look at the US and Euro economies post 2008 to see the real world benefits of QE. Europeans went down the austerity route and are stuck with consistently underperforming economy and the threat of deflation. The US has turned the corner and is a job creating machine again including the first real signs of inflationary pressure through rising wages. The most unusual thing I can see about Japan is it's trying to take the US and Euro approach together at the same time. Their problem is deflation. Deflation tells consumers not to buy as you wait 6 months and it'll be cheaper. It's a deadly downward spiral. So the Japanese are trying to stoke their economy to create inflation which in turn spurs consumption. Yet they go into this with a massive amount of debt already so are raising consumption taxes at the very time they need consumption. Something has to give.
I agree. They eased and increased taxes at the same time, which was not a smart move. Now they're back to square one, and they don't have much room left to maneuver because of the already high debt. If they wanted to accomplish their goal (more inflation) they should have stuck with the hail mary, rather than changing the play right in the middle of it.
This, plus Japan's anti-immigration policy and rapidly ageing population, spells a pretty bleak future for Japan. They need some really radical reforms, not just economic policies that devalue their citizen's purchasing power and then get cancelled out by a huge raise to the consumption tax less than a few years later.
What Japan really needs is a major reform of their overbloated corporate and banking infrastructure, combined with less-xenophobic immigration policies and improved workforce participation by women, but I'm not holding my breath.
>> They eased and increased taxes at the same time, which was not a smart move.
Increased sales taxes which was an especially dumb thing to do. The folks that spend the largest percentage of their income are hardest hit by sales taxes.
>You only have to look at the US and Euro economies post 2008 to see the real world benefits of QE. Europeans went down the austerity route and are stuck with consistently underperforming economy and the threat of deflation.
I don't think it was a comparison between austerity and QE that was on display. If anything, it's more a comparison between a Keynesian approach and austerity (even given the relatively anemic Keynesian implementation on which we settled). But, even that is not a fully valid comparison.
More to the point, austerity just seemed an insanely bad choice, and I am not sure that it is illustrative of QE being a good choice.
QE was more a boon to the stock market than anything.
Likewise (and ironically), the record profits that companies are realizing is due to automation and increased productivity--two things that are largely responsible for the stubborn unemployment that has actually dogged a broader recovery.
To my mind, the jury is still out on QE and, for that matter, on the sustainability of this "recovery" in the long run.
Then we can never look at any real world examples for guidance because there are always too many variables.
That leaves us with untested partisan theories pushed by ideologues.
I mean, how can it be that all the American conservative economists that have been predicting massive inflation since 2008 have not changed their theories at all?
> Deflation tells consumers not to buy as you wait 6 months and it'll be cheaper.
I live in Japan for many years and I have never seen such thing as deflation here. Prices have remained stable for most items or have increased a little bit. The idea that stuff becomes cheaper as you wait is ludicrous in Japan.
Inflation/deflation indexes are massively skewed if you don't incorporate the right things into it. How sure are you that these indexes are factually correct?
Keynesian economists think that Japan's real estate implosion was deflation.
Back in reality, Japan hasn't suffered any real deflation in 25 years. Which is why their prices are among the highest for pretty much everything.
The deflation argument is a fraud cover for the failed Keynesian experiment. It's meant to give them the ability to endlessly print to debase the debt that the failed experiment took on. That's why the US Fed pretends to worry non-stop about deflation, while they massively expand the monetary base and hold rates at zero; it's a lie to provide cover for the massive inflation programs.
No serious economist believes the old wives tale about deflation keeping consumers on the sidelines while they wait to save 1 cent (or yen) on a can of soda next year. But it's got "truthiness" so it keeps getting brought up in these HN discussions.
> No serious economist believes the old wives tale about deflation keeping consumers on the sidelines while they wait to save 1 cent (or yen) on a can of soda next year.
A serious economist is able to differentiate between goods that can (and will) be delayed an a consumable like a can of soda. Cars are an example of a consumer good where consumption observably is affected by deflation.
Yes. This whole "deflation makes customers delay their purchases" thing is annoying precisely because there really are much better reasons for worrying about deflation, and serious economists are warning against deflation all the time. It is just for different reasons, mostly having to do with the fact that the economy runs on debt, and deflation kills debtors.
Yeah, economics has become very political and it doesnt help that the subject is pretty poor anyway in terms of evidence. The HN economics discussions are cringeworthy, just people shoving half understood falsehoods around.
The deflation is often masked by advances in technology.
A new 150,000/month condo in Tokyo in 2014 has much better facilities than a then-new 150,000/month condo in Tokyo in 1994. Indeed, the latter is probably struggling to achieve rents of half that today.
That has virtually nothing to do with deflation. This has to do with housing/land regulations in Japan, causing the value of apartments to decrease over time. There was an excellent article about that on HN a couple of months back, by the way.
On top of that, buying a new apartment has nowhere got cheaper than it was 10 years ago. Prices have been pretty much stable until they pumped up the tax recently.
> Yet they go into this with a massive amount of debt already so are raising consumption taxes at the very time they need consumption
The Japanese government needs to cut deep in spending, and that's what they have NOT been doing for the past 20 years. As long as they don't try to fix the debt problem, nothing else is going to work in the long term.
There has been almost zero spending reduction in Europe. They're calling a slow-down in spending expansion, austerity, when in fact there has been no austerity.
how me the countries in Europe that have substantially reduced government spending over the last six years.
In fact, spending as a % of GDP has increased.> Show me the countries in Europe that have substantially reduced government spending over the last six years.
>In fact, spending as a % of GDP has increased.
Because e.g. in Greece, GDP shrank over 30% in the last 5 years. Have you ever looked at the things a country spends its taxes on? How should it out-save it shrinkage without destroying the very infrastructure it's economy needs to flourish?
> cato.org
Cato is good PR agency, but you should not take them seriously on anything economics-related. Just look who works there, I wasn't able to find a single phd in economics there, only public relations staff (people who studied politics, sociology etc, practically no one who actually did research in any field before working there).
But quantitative easing lowers interests, so that people can more easily take out a housing loan, so they can fix the "rotten interior" -- they can replace the rotting wood, they can replace the moldy roof, and by doing so, they stimulate the economy.
"Putting a fresh coat of paint on a house" also stimulates the economy. You have chosen some strange metaphors for criticizing an economic program.
If your point is that Japan needs more production and less consumption (you did not say this, but you were not clear about what you were looking for) then it is worth noting that lower interest rates also allow businesses to borrow and invest at lower rates.
I didn't mean for it to be interpreted too literally.
Since QE increases the value of the stock market at the expense of a currency's value, it is actually eating away at the wealth and savings of individuals and redistributing it to stockholders. These stockholders tend to already be quite wealthy themselves.
Herein lies the problem. Very wealthy individuals tend to spend a much smaller fraction of their accumulated wealth than members of the middle class. Take that as you may, but at some point these massive stockpiles of capital grow so large that they can't possibly be entirely spent. As the stockpile languishes, it becomes wasted capital: money that has essentially fallen out of circulation within the economy.
Another way to think of it is that one person can only do so many things at once, which means there is an upper limit to how much capital a single person can put to good use. When you go from many people with moderate amounts of wealth, to a few people with lots of wealth, you severely limit the amount of creative work that capital can be used for.
...or at least that's my armchair understanding of things.
This is correct. The concentration of capital grows so large that the owner literally cannot spend it faster than it grows. If it was simply vaulted and ignored, deflation would result, from that cash being removed from circulation.
Thanks to our central banks, any deflation pressure is seen as a license to print more money, which is a tax on non-circulating savings. To avoid this, holders of cash do their best to invest as much as possible.
Investment is emphatically not economically equivalent to spending. It's a lot like spinning your cash around in place so everyone knows you can still spend it. It does not create jobs or help the middle class; only actual spending does that.
> Investment is emphatically not economically equivalent to spending. It's a lot like spinning your cash around in place so everyone knows you can still spend it. It does not create jobs or help the middle class; only actual spending does that.
This is a little strong, isn't it? Investment can certainly lead to job creation for the middle and working classes, if that investment is going into enterprises that need more labor and have the potential for growth. Whether there is much potential for growth after decades of regressive tax policies and hoarding by the upper and ruling classes, with everyone else living paycheck to paycheck, is quite debatable (my money is on 'no'), as is how much new labor is actually needed in the first place. But private investment can certainly create jobs and economic growth.
In theory investment creates jobs by providing companies the cash they need to grow. But right now the government is flooding the financial markets with newly created money, so investments by wealthy people probably aren't having any effect.
You're right that QE erodes the savings and income of not-rich people - the middle class and the poor.
You're wrong in your theory that accumulated wealth does nothing. In a QE world, the very rich don't sit on cash - that would mean losing money through currency decreases.
There is no such thing as 'wasted capital' - rich people store their wealth in a variety of vehicles - whether in banks (where it is re-lent out for many uses), public stock ( where it is used for company investment and operations), and private investment, such as investing in pre-IPOD start ups and private equity.
Even Apples massive cash hoard is put to good use, somewhere.
What there is a shortage of, is productive investments where lots of capital can be deployed to get a healthy return. This is a function of multiple problems, of which uncertainty is one.
It's a very cartoonish model to imagine a daddy warbucks with a big pile of cash saying 'I just don't have time to spend this'. In actual fact, there would be a team of investment managers saying 'we can't find any good places to invest, so we're letting the bank invest it for us, for the time being'.
The answer to Japan's problems is cutting government spending and debt. This has always been the answer, this will always be the answer, whether you're an individual with 20k in debt or a country with 200b in debt. The key is to realise that there is no magic Keynes multiplier.
>You're wrong in your theory that accumulated wealth does nothing. In a QE world, the very rich don't sit on cash - that would mean losing money through currency decreases.
Correct, but they still don't spend money. The very wealthy are known to hoard money, it doesn't matter in which "vehicle" they store their money in.
>There is no such thing as 'wasted capital' - rich people store their wealth in a variety of vehicles - whether in banks (where it is re-lent out for many uses), public stock ( where it is used for company investment and operations), and private investment, such as investing in pre-IPOD start ups and private equity.
It's not wasted capital, but it doesn't stimulate the economy either. They are not contributing to investment, in the real economic sense.
>Even Apples massive cash hoard is put to good use, somewhere.
Wrong.
>It's a very cartoonish model to imagine a daddy warbucks with a big pile of cash saying 'I just don't have time to spend this'. In actual fact, there would be a team of investment managers saying 'we can't find any good places to invest, so we're letting the bank invest it for us, for the time being'.
It's still not real investment. I think you don't understand what the "I" component in GDP is. [0]
>The answer to Japan's problems is cutting government spending and debt. This has always been the answer, this will always be the answer, whether you're an individual with 20k in debt or a country with 200b in debt. The key is to realise that there is no magic Keynes multiplier.
Wrong again. Greece cut their government spending a lot, they don't seem to be in great shape. The reality of the matter (while counterintuitive) is that deficit spending helps stimulate the economy. As long as Japan wants to devalue their currency, government spending is the last option left to stimulate their economy.
It absolutely does matter what vehicle the rich store their wealth in.
If they store it in a bank, it boosts the lending capabilities of that bank.
If they buy stocks, it provides financing for public companies.
Even if the rich hide their cash under a mattress for a long time, they provide a purchasing power boost to other consumers by reducing the freely available supply of currency.
Saying that the parent is wrong about Apple's cash, does not actually prove they're wrong. "Wrong." is not an argument.
There's practically nothing a rich person can do with their hoard to harm the economy, other than to take that capital out of the domestic economy or invest into a ponzi scheme or asset bubble.
When the ECB introduces such things as negative interest rates then yes, sometimes large amounts of capital does essentially sit and do nothing but be savings (in a healthy real-market economy this would naturally reduce interest rates), large institutional wealth is often as interested in capital preservation as it is in capital growth -- this pretty much what the bond market is all about.
Interest rates have been low -- very close to zero -- for a long time now (two decades?). Real interest rates have been negative over the same time period. Interest rates can't really be lowered in any way that is meaningful to the middle class.
If you talk to "regular" people, overall economic confidence is extremely low. People with super-secure jobs (e.g., with the government) are rat-holing their money away while it earns little interest and negative real interest. Many folks don't consume even within their means due to the desire not to appear to be a conspicuous consumer to their peers and/or irrational economic fears (e.g., losing their unlosable job).
Said another way, the velocity of money in Japan is extremely low, and it doesn't show any signs of recovering.
> If your point is that Japan needs more production and less consumption
I don't want to speak for the OP, but the reality is exactly the opposite -- they need to consume more, and there is tons of excess capacity right now.
> lower interest rates also allow businesses to borrow and invest at lower rates.
So few businesses are borrowing money compared to those in a healthy economy. Investment is often put off until (or past) the time it is needed due to the perception of economic uncertainty. Any investment in a business that can be delayed or done cheaply (i.e., penny-wise pound-foolish) is delayed or done cheaply... no amount of low-interest money can incentivize them more. They need to see real signs of a long-term strengthening of the economy before they are willing to take the long-term approach that Japan is so famous for.
The one potential "good" outcome for QE is that the yen will weaken (e.g., I fully expect ~180 yen per dollar or more to happen) and this will make Japanese manufacturing extremely competitive internationally. The problem is that this weakening of the yen creates other forms of turmoil and uncertainty in the rest of the economy.
Manufacturing is only ~18% of the Japanese economy, and that share is shrinking fast as Japan outsources its factories to China and SE Asia. For the rest, 180 yen to the dollar would just drive higher inflation through eg. fuel prices despite stagnant wages, further weakening the economy.
That said, I'm not seeing 180 yen to the dollar any time soon, by most measures the yen is already undervalued. (With the glaring exception of yen vs national debt, but that particular ticking time bomb is not showing imminent signs of explosion.)
Not that simple. Not that simple at all. You can't prop-up anything artificially. Once the artifice disappears --and it always does-- if a solid infrastructure isn't in place failure is almost guaranteed.
Here's another imperfect analogy: Movie marketing. My rule of thumb is: If a motion picture is marketed with more intensity than the average picture it is almost certainly bad. Let's equate the marketing to QE. While marketing is in place lots of people go to see the movie. Artificially. Once it stops, the foundation is so weak (the movie is so bad) that viewer traffic pretty much evaporates.
This is not intended to be an accurate analogy. Please don't waste any time tearing it apart with minutiae arguments because it is flawed in a million ways. The point is to make an attempt to illustrate that an artificially stimulated market is exactly that, an artificially stimulated market that might not be able to remain healthy on it's own
So, people buy homes because interest rates are low yet their station in life, their salary, their income, their savings don't improve one iota and when QE stops, interest rates come in and inflation follows and quite a few of these people simply can't afford what they bought. This, of course, isn't a new concept.
So now you have underpaid people creating a housing bubble in Tokyo and going into debt. This does succeed in kicking the can down the road for a few years. But when the music stops in this game of musical chairs, the crisis is actually worse.
Employees working themselves to death for little pay is only aggravating the problem, rather than solving it.