Oct

QE2 and Japan

Lately, the debate among those who follow the capital markets is whether the Federal Reserve will engage in further asset purchases with new (read: printed) money. This process is called “quantitative easing” (“QE” for short). The “easing” refers to the effect on the interest rate, i.e. the cost of borrowing money. Because the Federal Reserve has already purchased assets vis-a-vis this method back in 2008, this round is being dubbed QE2.

There are countless problems that printing money to lower the interest engenders. The destruction of the price mechanism which coordinate disparate economic activities, financial bubbles, transfer of wealth to business operators from wage earners, a general price rise for goods and services, and an overall decrease in living standards are only some of the ill effects attributed to inflation.

If you don’t really care much for economics or monetary theory, you can look at recent history and currents events to know the outcome of such a policy. The Bank of Japan, Japan’s central bank, has been at quantitative easing in one form or another for two decades now. It began this policy of deliberate inflation after its own real estate bubble popped in 1991. Since then, the BoJ’s policy has been relentlessly “easy money” (i.e. low interest rates and lots of money printing). What do we learn this morning?

Bank of Japan Cuts Rates to as Low as Zero Percent

Appears as if this policy hasn’t “jumpstarted” anything in Japan. The Japanese economy remains terribly stagnant and on life support. The BoJ is largely responsible for this crisis because they’ve handicapped the savings and investment (i.e. capital accumulation) process that leads to growth.

We’d be wise to look at Japan before continuing our own experiment with endless low interest rates and constant inflation.

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