Rambling on about the Economy, More Mean Words about an Academic, etc., etc.

I couldn’t post the following as comment here since it was too long. Please read through the original post and comments if you want to make sense out of it.


My point is we should not criticize the person, but the idea. I think you’re missing out if you automatically discount ideas via their source.

There are only so many hours in a day, so many years in my life. I have no time to give voluntarily to people who have only wasted my time in return for my past attention. So the deal is this: I’m willing to read anything written in the English language about Japan by any idiot as long as it appears in a major media or other influential outlets (say, WaPo or Foreign Affairs) and is not overly long. It is, like a murder case, significant in its own right. To give an example that you would understand, liberal commentators regularly read and watch the likes of Rush Limbaugh, but won’t visit some raving right-wing blogger getting five hits a day. I also respond to any non-spam comments on my blog. I invite people to a dialog; it would be wrong for me to turn around and refuse it.

"The Japanese monetary base has taken similar leaps in past years while money supply remained stubbornly stable. ... You’ll have to turn to a real economist to have a meaningful discussion about the long-term implications if any of future exchange rates and short-term fluctuations in the US monetary base."

Don't we have an obligation to try and figure out this stuff for ourselves? How are we suppose to vote if we have to turn to various economists to determine long-range implications?

No, no more than we have the obligation to solve the Four Color Theorem—both of which BTW I have tried my hands at, unsuccessfully, at various moments in my life. Otherwise, 100% (give or take a few nano-percentage points) of the voting public would be disqualified from voting. In any case, fluctuations in the monetary base are a short-term phenomenon.

i.) The increase in the US monetary base dwarves that of Japan's during the BOJ quantitative easing period (especially if you allow for the time factor).

I think this highlights the point that fluctuations in the monetary base are a bad point to launch an argument on the long-term consequences of Obama/Bernanke’s economic policies.

I think it very unlikely the Fed will be able to reduce these holdings any time in the near future.

Okay, let’s see what happens.

iii.) The BOJ's quantitative easing was made easier by Japan's trade surplus and a high amount of savings within Japan.
iv.) America's will be made all that much harder by the exact opposite, a high level of borrowing and a trade deficit

You could also make the argument that the Fed has carried out a far more massive expansion of the money supply without creating hyperinflation or an asset bubble. In any case, since I don’t have the economic and financial expertise, I’ll just have to wait to see the long-term outcome.

v.) Japan's debt is mostly to Japanese savers, America's debt is to a large extent to foreign holders. Of course, the "foreigners" don't want to dump their bonds for obvious reasons, but other than blatant self-interest, there's nothing to stop them from doing this. They've no sense of duty to America.

By implication, I assume that it is the “sense of duty to Japan” that will keep Japanese pension fund managers buying those low-yield government bonds and holding on to them in the face of rising inflationary expectations in the future. Okay, let’s see what happens if and when the time comes.

Having spent more time on this issue over the last week, I will say that at this point, the Fed could still find some way to avoid future inflation. However, I see absolutely no political will to do so. When push comes to shove, my expectation is the Fed will keep on printing. We'll have to wait and see. (I predict very serious inflation in six months to three years.)

I have to confess that the lack of inflation (and the disappearance of hyperinflation in all but the most god-forsaken locations of this planet) since, say, the nineties, has mystified me. So let’s see if you prediction of “serious inflation” (would you care to put a number to that? 6% in US dollars? 7? 10%? 20%?) comes true.

By decoupling I mean I fail to understand why China needs America as much as America needs China…. Why can't China just make goods for themselves?

I hope I’m not misquoting you here by way of abridgement. The Chinese government obviously saw the value of keeping the export and related sectors booming in order to generate income and wealth. If it sees a serious threat of dollar inflation coming and stop buying up the foreign exchange generated by Chinese exports, this will push up the yuan, which in turn will cause Chinese trade surplus to fall and external investments to rise. The U.S. trade balance will depend to a great extent on how exchange rates and inflation rates balance out. I don’t see this in terms of one “needing” the other more than the other way around. BTW, it’s really the Chinese government’s decision to make (if it wants to) in the short-run, since it is the one that is buying up the foreign exchange generated by the Chinese trade surplus (and net inbound foreign investment) to maintain exchange rates at the desired levels.

Of course Chinese economic actors can and do make lots of stuff, some of it for the Chinese market, others for exports. They might, or might not, be able to satisfy the entire domestic demand for manufactured goods and tradable services. But I don’t think even the USSR tried that during the height of the Cold War.