SmartMoney.com - Ahead of the Curve
The Looming Deflation Crisis
biz.yahoo.com
Wednesday August 15, 4:47 pm Eastern Time
Now there's a new secret from Japan that we'd be wise to learn — even though it doesn't begin with a ``k.'' It's ``quantitative easing.''
It's a tool of monetary policy that the Bank of Japan — Japan's equivalent of our Federal Reserve — is starting to use to spark its once-great economy back to life. And if Alan Greenspan doesn't start using it here in America pretty soon, our post-boom economy is going to slip into a long recession just like Japan's did after its boom busted.
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But the problem with qualitative easing is that sometimes, no matter how low you make interest rates, nobody wants to spend or to borrow. Even with interest rates at zero, when you expect more economic contraction, you'd rather have your money in the bank than in stocks. And when you expect more deflation, you'd rather keep your money in the bank than buy consumer goods that will just be cheaper next year.
That's where quantitative easing comes in. With quantitative easing, the Bank of Japan expands the money supply by, in essence, cranking up the printing press — and using freshly printed money to buy up government bonds. The BOJ has already been buying 400 billion yen in bonds each month; on Tuesday, it announced that it's throwing the printing presses into high gear and buying 600 billion yen's worth. (A dollar's worth about 122 yen.)
If you're like most people, the very thought of the government printing money raises the dreaded specter of hyperinflation — images of interwar Germany come to mind, where it took a wheelbarrow of inflated paper money to buy a loaf of bread. But after years of deflation — in which just a little money would buy a wheelbarrow of bread — a little remedial inflation is exactly what the doctor ordered. Like any treatment, it has its own risks and a little bit goes a long way. But left untreated, deflation is a deadly disease that eats away at the value of all goods, services and assets in the economy.
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Here in the U.S., the Fed has been doing nothing of the sort. Interest rates keep getting lower and lower, but the Fed has done little to actually inject fresh money into the economy. Sure, so far this year the Fed has lowered interest rates further and faster than ever before. And there's a lot of uninformed talk in the media about a supposed explosion in the growth rate of the money supply, as measured by M1, M2, MZM or M-whatever. But don't be fooled: It just isn't true. The way to tell if the Fed is actually creating money is to look at numbers the media generally ignores: the Fed's own balance sheet. That reveals that the ``monetary base,'' the liability side of the Fed's balance sheet, is hardly growing at all. It has grown only 4.6% since year's end, after actually contracting 2.7% in 2000. |
