Bank Of Japan Will Inject Massive Amounts Of Liquidity – Central Bankers Are Trying To Revive Weak Economies All By Themselves – Desperate Attempts Will Do More Harm Than Good

By Paolo von Schirach

April 5, 2013

WASHINGTON – As expected, Haruhiko Kuroda, new Bank of Japan Governor, announced that the BOJ will vastly expand the money in circulation. The only news in all this is that the amount of stimulus that will be injected is even larger than experts predicted.

More and more stimulus

And so Japan now joins the club of once upon a time vibrant economies (Europe and the US having started this) that are now paralyzed by slow or zero growth, and are desperately trying to kick start their systems via a flood of cheap money. Japan wants to fight deflation, the US and Europe want more economic activity that will stimulate investments, growth and jobs.

Good plans; terribly wrong policies. In a nutshell, what’s fundamentally wrong with this Central Banks directed approach is that Central Banks cannot be a substitute for vibrant economies managed and fine tuned by competent policies. Sure enough, if an otherwise healthy person is under shock because of a sudden trauma, an emergency room doctor will apply whatever emergency therapy the circumstances may require. But if you send to the emergency room a chronically ill, debilitated old patient, it would be foolish to assume that the same emergency therapies will heal him.

Old societies cannot be rejuvenated by Central Banks

And this is the problem with the West. We have old societies tied up by unworkable social compacts that over time caused the growth of social spending to a fantastic degree, while the political deals in place, all about subsidies and protection of vested interests, objectively stand in the way of dynamism, new investments and growth.

Japan is a sclerotic, hopelessly immobile geriatric ward. To think that because of Bank of Japan bold new policies there will be a sudden societal rejuvenation, is about as realistic as the dream of medieval alchemists to manufacture gold by mixing this and that in their primitive laboratories. It does not work.

US Stock market bubble?

By the same token, Ben Bernanke of the US Fed is beginning to look like another ill prepared sorcerer apprentice. He wants to create jobs through easy money. What he has manufactured instead is looking more and more like another stock market bubble. How so? Well, because by keeping interest rates artificially low he has forced investors desperately seeking higher returns to put their money into stocks, thereby jacking up their prices. How bad is this? I am not sure. And nobody really knows how bad a bubble is until it bursts.

Fix the fundamentals

Once again, it is a sign of profound political and moral weakness that modern societies are asking Central Bankers to do what civil society and elected leaders should do. Monetary authorities can help growth. But they cannot be a substitute for vibrant economies and effective economic policies. And they cannot, simply cannot make growth happen if the fundamentals (sadly) are not there.

Their desperate attempts to revive sclerotic, if not moribund, societies in the end will do more harm than good. In Disney’s Fantasia, the expert sorcerer comes back just in time to fix the huge mess created by his unwise underling. Alas, in the real world there will be no such saviors.


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