http://globaleconomicanalysis.blogspot.com/

“Japan’s problem is deflation, not inflation as far as an eye can see,” wrote Paul McCulley, a member of the investment committee, and Tomoya Masanao, the head of portfolio management for Japan, in a report on the Web site of Newport Beach, California-based Pimco. “An ‘all-in’ reflationary policy is what is needed.”

The BOJ may also consider promising to refrain from raising interest rates until inflation becomes “meaningfully positive,” McCulley and Masanao said.

this is just craziness as mish points out.

Japan has the highest debt-to-GDP level of any industrialized country to the tune of 227% of GDP. It has built bridges to nowhere, held interest rates at .1% for a decade, tried massive amounts of quantitative easing, Keynesian stimulus, and even at times sold Yen to buy dollars.

The result is two decades of total failure. Japan’s recession is 19 years running. The Nikkei hit 38,900 in 1990 and sits at 10,800 today, down 72% two decades later.

Japan has already gone “all in”. It has tried everything under the sun for two decades including Keynesianism, Monetarism, and selling its own currency to sink it. All it has to show for its efforts is a massive pile of debt equaling 227% of GDP.

how does one look back on the past 20ish years in japan and claim they haven’t inflated enough?

Definitions of Insanity

• In One Sentence: Insanity is doing the same thing over and over and over and expecting different results each time.
• In Two Words: Paul McCulley
• In One Word: Keynesianism
• In Another Word: Monetarism

http://krugman.blogs.nytimes.com/…

The big policy news this week has been the Fed’s decision to buy $1 trillion of long-term bonds, going beyond the normal policy of buying only short-term debt. Good move — but it’s probably worth pointing out that yes, this does expose the Fed, and indirectly the taxpayer, to some risks. And in so doing, it blurs the line between fiscal and monetary policy.

Now, the Fed isn’t taking on any serious default risk — Treasuries are backed by the full faith etc of the US government, and agency debt is de facto backed by the same, although the market doesn’t seem to believe that. Anyway, the Fed is for these purposes a government agency itself, so all this is debt between different parts of USG.

The Fed is, however, creating a new liability: the monetary base it creates to buy these bonds. In effect, it’s printing $1 trillion of money, and using those funds to buy bonds. Is this inflationary? We hope so! The whole reason for quantitative easing is that normal monetary expansion, printing money to buy short-term debt, has no traction thanks to near-zero rates. Gaining some traction — in effect, having some inflationary effect — is what the policy is all about.

The problem may come when the economy recovers, and inflation starts to become a problem rather than a hoped-for outcome. Basically, there will come a time when the Fed wants to withdraw that extra $1 trillion of money it created. It will presumably do this by selling the bonds it bought back to the private sector.

But here’s the rub: if and when the economy recovers, it’s likely that long-term interest rates will rise, especially if the Fed’s current policy is successful in bringing them down. Suppose that the Fed has bought a bunch of 10-year bonds at 2.5% interest, and that by the time the Fed wants to shrink the money supply again the interest rate has risen to 5 or 6 percent, where it was before the crisis. Then the price of those bonds will have dropped significantly.

And this also means that selling the bonds at market prices won’t be enough to withdraw all the money now being created. So the Fed will have to sell additional assets; if the rise in interest rates is at all significant, it will have to get those assets from the Treasury. So the Fed is, implicitly, engaged in a deficit spending policy right now.

My back of the envelope calculation looks like this: if the Fed buys $1 trillion of 10-year bonds at 2.5%, and has to sell those bonds in an environment where the market demands a yield to maturity of more than 5%, it will take around a $200 billion loss.

I’m not complaining; I think quantitative easing (it’s really qualitative easing, but I give up on trying to fix the terminology) is the right way to go. But we should go into it with our eyes open.

Good lord. Would someone sit this man down and explain to him Austrian economics?! Or just correct his misunderstanding of the Austrian business cycle theory?! Bill Anderson says:

Hey, Krugman, you don’t have to worry about that, as there is not going to be a recovery, or at least not a recovery anyone can recognize. With the government trying to further distort the structure of production (something Keynesians like Krugman fail to acknowledge as even existing) via inflation, and with the tax and regulatory policies forcing up business costs, the economy will have a difficult time rising to meet former levels of production.

Still, I find it absolutely pathetic that the supposed star of the economics world has no concept at all about the destructive nature of inflation. The guy really believes that debasing the currency is a good thing. That must be the upshot of an MIT education these days.

If you’ve got the time check out Steve Horwitz’s “The Costs of Inflation” from FEE. Roger Garrison’s “The Continuing Relevance of Austrian Business Cycle Theory” and Peter Lewin’s “Capital and Its Structure”.

Check out the comments to the main story. When I last looked not one of them disagreed fundamentally with Krugman’s statements.

http://news.yahoo.com/…

With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy. To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Fed Chairman Ben Bernanke and his colleagues wrapped a two-day meeting by leaving a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most — if not all — of next year.

The decision to hold rates near zero was widely expected. But the Fed’s plan to buy government bonds and the sheer amount — $1.2 trillion — of the extra money to be pumped into the U.S. economy was a surprise.

“The Fed is clearly ready, willing and able to be the ATM for the credit markets,” said Terry Connelly, dean of Golden Gate University’s Ageno School of Business in San Francisco.

Wall Street was buoyed. The Dow Jones industrial average, which had been down earlier in the day, rose 90.88, or 1.2 percent, to 7,486.58. Broader indicators also gained.

And government bond prices soared. Heralding a coming drop in mortgage rates, the yield on the benchmark 10-year Treasury note dropped to 2.50 percent from 3.01 percent — the biggest daily drop in percentage points since 1981.

The dollar, meanwhile, fell against other major currencies. In part, that signaled concern that the Fed’s intervention might spur inflation over the long run.

When the FED buys government bonds that is directly inflationary. If they don’t offset the printing of money through other means Wall Street will directly gain from this injection and we will all lose. Unless you are looking to get a mortgage.

Update:

http://www.youtube.com/watch?v=aW2V50AS7K0

Same clip but checkout what they do near the end. CNBC wasn’t happy about listening to the opening statements… or at least Ron Paul’s.

http://globaleconomicanalysis.blogspot.com/…

In a fiat world, money is printed into existence by the central bank – in the United States the Fed. Given there is nothing backing up this money, it is inherently worthless. However, one can think of as real. It was printed (even if only electronically), therefore it exists.

In addition to the previously mentioned money supply, fractional reserve lending allows credit to be extended by banks and financial institutions on top of that inherently worthless money. Indeed, banks and financial institutions have leveraged credit to base money at ratios of 30-1, 50-1 or even higher.

It’s pretty amazing if you think about it: Credit is extended with 30-50 times leverage on inherently worthless paper.

Ponzi Financing

Borrowers have to pay interest on the amount borrowed. However, the interest and the debt cannot possibly be paid back except by an ever expanding Ponzi scheme of lending. That scheme can last only as long as everyone believes the debt can be paid back and the market value of that debt keeps rising.

It’s a faith based system in which banks extend loans and hold the credit on the books (or in many cases off the books in various structured instruments). The banks are thought of as being well capitalized as long as the value of credit on the books in relation to their reserves meets some ridiculously low minimum set by the Fed.

This is how the system works, using the term “works” loosely.

Day of Reckoning

The day of reckoning comes when asset prices start falling, defaults soar, and the value of credit on the books starts plunging. That day of reckoning has arrived.

A great writeup. Take the time to read it.