If it shows up at the Federal Reserve, you can pretty much bet everything you own that it was tried out at the Bank of Japan first. And if it was the brilliant brainchild of someone at the BoJ, then you’re guaranteed it failed spectacularly. Which means, obviously, the “ideal” technocrats at the Fed intentionally copied something they knew had already proved ineffective and useless.
QE is hardly the only example of this.
More than halfway through the year 2016 when nothing was going to plan, Haruhiko Kuroda’s gang decided they needed a little extra push on the economy. Even though Reflation #3 was stirring underneath, and though Japanese authorities always projected confidence about conditions no matter how badly it was doing, officials worried after having gotten nothing out of NIRP earlier in the year something more would be required.
To try and goose inflation expectations some more, the central bankers hit upon the idea of “overshooting.” On September 21, 2016, the BoJ simultaneously announced Yield Curve Control (which we’ve covered) as well as making the following “commitment” beside YCC:
The Bank will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds the price stability target of 2 percent and stays above the target in a stable manner. [emphasis added]
How corrupt that they still referred to bank reserves, the byproduct of every form of QE, including Japan’s QQE, as the “monetary base.” Technically true insofar as mainstream definitions go; however, since said definitions are half a century outdated this amounts to useless trivia intended to mislead the public.
The purpose, in lieu of any actual contribution to the effective monetary base in practice by the global banking system, is to make the public and businesses in it believe in “money printing.” Not see it for themselves, or hear about it directly from someone in the real economy experiencing it, because there isn’t any. Believe it as a matter of “trust.”
If anyone in Japan thinks the central bank is credibly promising to be irresponsible with its printing press, then it is assumed by Economists and central bankers (same thing) that those Japanese people will act today consistent with expectations for inflation tomorrow. Becoming a self-fulfilling prophecy, inflation – therefore increased growth, the ultimate object – is achieved.
Year after year, decade after decade, the Japanese people politely but resolutely refuse.
So, the central bank merely changes the phrasing of these promises while doing absolutely nothing different monetarily.
And you’ll probably recognize this Japanese wordsmithing from 2016 in that less than two years later the Federal Reserve would go on to adopt the exact same position. Only, in May 2018 the Fed called its not-brand new commitment “symmetrical” rather than “overshooting.”
Reworded yet again earlier this year in August, today Jay Powell’s crew terms it average inflation targeting.
The point, and the method, is exactly the same in all three; promise to be irresponsible when no central bank has any clue in practice just how. What’s left is this ridiculous and absurd puppet show that never works. Yet, it is copied time and again while being uncritically celebrated in all the financial media as a powerful engine of economic efficacy despite never once achieving anything tangible.
As I keep having to point out, these are not serious people.
With Japan specifically, the commitment made in September 2016 was for continued expansion in the outdated “monetary base” until the CPI less fresh food reached 2%, moved above 2%, and then remained higher than that target “in a stable manner.” As you can probably guess already, Japan’s CPI less fresh food never once reached 2% let alone climbed above that level, forget staying above.
In fact, this specific inflation index rarely got as far as 1% (only three months out of 50 since introduced did the rate get halfway):
Remember, this “overshoot” stuff was committed to more than four years ago; which leads us to the next part of the official statement:
Through this commitment, the Bank aims to enhance the credibility of achieving the price stability target of 2 percent among the public.
Credibility enhancement: we couldn’t make inflation happen for more than a decade so now we commit to hitting a target we’ve never hit and letting inflation go above that target we couldn’t achieve because we can never get this inflation we keep promising no matter how many bank reserves we create in the process.
These are not serious people. But, and here’s the thing, these are very serious times growing more serious by the month, by the week, maybe even by the day.
You’ve undoubtedly already noticed, too, how Japan is once again experiencing outright deflation. The core rate referenced in the ridiculous “overshoot” policy dropped to -0.7% year-over-year during October 2020 according to figures released today. That makes it five out of the last seven months in deflation, and, if we include June’s zero, six out of the last seven non-positive.
More than that, -0.7% is the worst core inflation figure in Japan in 115 months, just about ten years. You have to go all the way back to early 2011 to find a similarly significant rate of core consumer price declines.
And it’s not as if the Bank of Japan has been sitting idle since the March global recession fueled by GFC2 smashed the world economy. On the contrary, oh no no, the Japanese central bank has leaned hard into its QQE (now well into its eight year) at a vastly accelerated rate; the “printing” has been in overdrive ever since February (below).
That’s eight months of spiraling higher and higher “base money” while inflation only sinks lower and lower. It’s not even a good puppet show:
What’s truly concerning is that here in Japan we find yet another indication of global deflationary forces still picking up in the wake of March; not COVID, either, since Japan like Europe and many other parts of the world had been near or even in recession dating back to the middle of last year. It’s an awful long time to be stuck with widespread contraction running concurrent to QE’s and “money printing.”
More and more there’s outright deflation because: the global economy hasn’t rebounded as it had been expected to by many, including central bankers, leaving it exposed to further consequences of this dead “V”; and, this QE business is no serious business at all, therefore no help to forestall or alleviate the negative forces clearly impeding the worldwide machinery of economic exchange.
Maybe the worst part of all is how this is happening in Japan. What I mean by that is that Japan doesn’t have a COVID problem whatsoever and never really did, thereby removing that as an excuse. The country was not once shut down and isn’t experiencing either a first wave or a second wave in the same respect as so many other places.
If Japan’s economy is sinking further, certainly seems to be, this acknowledges the second wave of deflationary dollar disease running rampant throughout the global economy. For all those still somehow thinking the response to it was ever going to be hugely inflationary, the Bank of Japan is about to exceed three-quarters of a quadrillion yen in assets with absolutely no sign of inflation, growth, or anything other than financial media credibility.
QE doesn’t work. It never has. These programs are not money printing because all they lead to is bank reserves while bank reserves are not a useful form of money. They are instead, in a word, accounting. The logic is as simple as it is unassailable.