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But quantitative easing lowers interests, so that people can more easily take out a housing loan, so they can fix the "rotten interior" -- they can replace the

But quantitative easing lowers interests, so that people can more easily take out a housing loan, so they can fix the "rotten interior" -- they can replace the rotting wood, they can replace the moldy roof, and by doing so, they stimulate the economy. "Putting a fresh coat of paint on a house" also stimulates the economy. You have chosen some strange metaphors for criticizing an economic program. If your point is that Japan needs more production and less consumption (you did not say this, but you were not clear about what you were looking for) then it is worth noting that lower interest rates also allow businesses to borrow and invest at lower rates.

pastProlog 12y ago
> people can more easily take out a housing loan So now you have underpaid people creating a housing bubble in Tokyo and going into debt. This does succeed in kicking the can down the road for a few years. But when the music stops in this game of musical chairs, the crisis is actually worse.
- Animats 12y ago
  So now you have underpaid people creating a housing bubble in Tokyo and going into debt. Which happened in 1989. Japan never came back fully from that. See "https://en.wikipedia.org/wiki/Japanese_asset_price_bubble" https://en.wikipedia.org/wiki/Japanese_asset_price_bubble"
efjhewjfnkew 12y ago
I didn't mean for it to be interpreted too literally. Since QE increases the value of the stock market at the expense of a currency's value, it is actually eating away at the wealth and savings of individuals and redistributing it to stockholders. These stockholders tend to already be quite wealthy themselves. Herein lies the problem. Very wealthy individuals tend to spend a much smaller fraction of their accumulated wealth than members of the middle class. Take that as you may, but at some point these massive stockpiles of capital grow so large that they can't possibly be entirely spent. As the stockpile languishes, it becomes wasted capital: money that has essentially fallen out of circulation within the economy. Another way to think of it is that one person can only do so many things at once, which means there is an upper limit to how much capital a single person can put to good use. When you go from many people with moderate amounts of wealth, to a few people with lots of wealth, you severely limit the amount of creative work that capital can be used for. ...or at least that's my armchair understanding of things.
- logfromblammo 12y ago
  This is correct. The concentration of capital grows so large that the owner literally cannot spend it faster than it grows. If it was simply vaulted and ignored, deflation would result, from that cash being removed from circulation. Thanks to our central banks, any deflation pressure is seen as a license to print more money, which is a tax on non-circulating savings. To avoid this, holders of cash do their best to invest as much as possible. Investment is emphatically not economically equivalent to spending. It's a lot like spinning your cash around in place so everyone knows you can still spend it. It does not create jobs or help the middle class; only actual spending does that.
  - tsotha 12y ago
    In theory investment creates jobs by providing companies the cash they need to grow. But right now the government is flooding the financial markets with newly created money, so investments by wealthy people probably aren't having any effect.
  - deciplex 12y ago
    > Investment is emphatically not economically equivalent to spending. It's a lot like spinning your cash around in place so everyone knows you can still spend it. It does not create jobs or help the middle class; only actual spending does that. This is a little strong, isn't it? Investment can certainly lead to job creation for the middle and working classes, if that investment is going into enterprises that need more labor and have the potential for growth. Whether there is much potential for growth after decades of regressive tax policies and hoarding by the upper and ruling classes, with everyone else living paycheck to paycheck, is quite debatable (my money is on 'no'), as is how much new labor is actually needed in the first place. But private investment can certainly create jobs and economic growth.
- brc 12y ago
  You're right that QE erodes the savings and income of not-rich people - the middle class and the poor. You're wrong in your theory that accumulated wealth does nothing. In a QE world, the very rich don't sit on cash - that would mean losing money through currency decreases. There is no such thing as 'wasted capital' - rich people store their wealth in a variety of vehicles - whether in banks (where it is re-lent out for many uses), public stock ( where it is used for company investment and operations), and private investment, such as investing in pre-IPOD start ups and private equity. Even Apples massive cash hoard is put to good use, somewhere. What there is a shortage of, is productive investments where lots of capital can be deployed to get a healthy return. This is a function of multiple problems, of which uncertainty is one. It's a very cartoonish model to imagine a daddy warbucks with a big pile of cash saying 'I just don't have time to spend this'. In actual fact, there would be a team of investment managers saying 'we can't find any good places to invest, so we're letting the bank invest it for us, for the time being'. The answer to Japan's problems is cutting government spending and debt. This has always been the answer, this will always be the answer, whether you're an individual with 20k in debt or a country with 200b in debt. The key is to realise that there is no magic Keynes multiplier.
rebootthesystem 12y ago
Not that simple. Not that simple at all. You can't prop-up anything artificially. Once the artifice disappears --and it always does-- if a solid infrastructure isn't in place failure is almost guaranteed. Here's another imperfect analogy: Movie marketing. My rule of thumb is: If a motion picture is marketed with more intensity than the average picture it is almost certainly bad. Let's equate the marketing to QE. While marketing is in place lots of people go to see the movie. Artificially. Once it stops, the foundation is so weak (the movie is so bad) that viewer traffic pretty much evaporates. This is not intended to be an accurate analogy. Please don't waste any time tearing it apart with minutiae arguments because it is flawed in a million ways. The point is to make an attempt to illustrate that an artificially stimulated market is exactly that, an artificially stimulated market that might not be able to remain healthy on it's own So, people buy homes because interest rates are low yet their station in life, their salary, their income, their savings don't improve one iota and when QE stops, interest rates come in and inflation follows and quite a few of these people simply can't afford what they bought. This, of course, isn't a new concept.
csa 12y ago
> But quantitative easing lowers interests Interest rates have been low -- very close to zero -- for a long time now (two decades?). Real interest rates have been negative over the same time period. Interest rates can't really be lowered in any way that is meaningful to the middle class. If you talk to "regular" people, overall economic confidence is extremely low. People with super-secure jobs (e.g., with the government) are rat-holing their money away while it earns little interest and negative real interest. Many folks don't consume even within their means due to the desire not to appear to be a conspicuous consumer to their peers and/or irrational economic fears (e.g., losing their unlosable job). Said another way, the velocity of money in Japan is extremely low, and it doesn't show any signs of recovering. > If your point is that Japan needs more production and less consumption I don't want to speak for the OP, but the reality is exactly the opposite -- they need to consume more, and there is tons of excess capacity right now. > lower interest rates also allow businesses to borrow and invest at lower rates. So few businesses are borrowing money compared to those in a healthy economy. Investment is often put off until (or past) the time it is needed due to the perception of economic uncertainty. Any investment in a business that can be delayed or done cheaply (i.e., penny-wise pound-foolish) is delayed or done cheaply... no amount of low-interest money can incentivize them more. They need to see real signs of a long-term strengthening of the economy before they are willing to take the long-term approach that Japan is so famous for. The one potential "good" outcome for QE is that the yen will weaken (e.g., I fully expect ~180 yen per dollar or more to happen) and this will make Japanese manufacturing extremely competitive internationally. The problem is that this weakening of the yen creates other forms of turmoil and uncertainty in the rest of the economy.
- jpatokal 12y ago
  Manufacturing is only ~18% of the Japanese economy, and that share is shrinking fast as Japan outsources its factories to China and SE Asia. For the rest, 180 yen to the dollar would just drive higher inflation through eg. fuel prices despite stagnant wages, further weakening the economy. That said, I'm not seeing 180 yen to the dollar any time soon, by most measures the yen is already undervalued. (With the glaring exception of yen vs national debt, but that particular ticking time bomb is not showing imminent signs of explosion.)

pastProlog 12y ago

> people can more easily take out a housing loan So now you have underpaid people creating a housing bubble in Tokyo and going into debt. This does succeed in kicking the can down the road for a few years. But when the music stops in this game of musical chairs, the crisis is actually worse.

Animats 12y ago
So now you have underpaid people creating a housing bubble in Tokyo and going into debt. Which happened in 1989. Japan never came back fully from that. See "https://en.wikipedia.org/wiki/Japanese_asset_price_bubble" https://en.wikipedia.org/wiki/Japanese_asset_price_bubble"

efjhewjfnkew 12y ago

I didn't mean for it to be interpreted too literally. Since QE increases the value of the stock market at the expense of a currency's value, it is actually eating away at the wealth and savings of individuals and redistributing it to stockholders. These stockholders tend to already be quite wealthy themselves. Herein lies the problem. Very wealthy individuals tend to spend a much smaller fraction of their accumulated wealth than members of the middle class. Take that as you may, but at some point these massive stockpiles of capital grow so large that they can't possibly be entirely spent. As the stockpile languishes, it becomes wasted capital: money that has essentially fallen out of circulation within the economy. Another way to think of it is that one person can only do so many things at once, which means there is an upper limit to how much capital a single person can put to good use. When you go from many people with moderate amounts of wealth, to a few people with lots of wealth, you severely limit the amount of creative work that capital can be used for. ...or at least that's my armchair understanding of things.

logfromblammo 12y ago
This is correct. The concentration of capital grows so large that the owner literally cannot spend it faster than it grows. If it was simply vaulted and ignored, deflation would result, from that cash being removed from circulation. Thanks to our central banks, any deflation pressure is seen as a license to print more money, which is a tax on non-circulating savings. To avoid this, holders of cash do their best to invest as much as possible. Investment is emphatically not economically equivalent to spending. It's a lot like spinning your cash around in place so everyone knows you can still spend it. It does not create jobs or help the middle class; only actual spending does that.
- tsotha 12y ago
  In theory investment creates jobs by providing companies the cash they need to grow. But right now the government is flooding the financial markets with newly created money, so investments by wealthy people probably aren't having any effect.
- deciplex 12y ago
  > Investment is emphatically not economically equivalent to spending. It's a lot like spinning your cash around in place so everyone knows you can still spend it. It does not create jobs or help the middle class; only actual spending does that. This is a little strong, isn't it? Investment can certainly lead to job creation for the middle and working classes, if that investment is going into enterprises that need more labor and have the potential for growth. Whether there is much potential for growth after decades of regressive tax policies and hoarding by the upper and ruling classes, with everyone else living paycheck to paycheck, is quite debatable (my money is on 'no'), as is how much new labor is actually needed in the first place. But private investment can certainly create jobs and economic growth.
brc 12y ago
You're right that QE erodes the savings and income of not-rich people - the middle class and the poor. You're wrong in your theory that accumulated wealth does nothing. In a QE world, the very rich don't sit on cash - that would mean losing money through currency decreases. There is no such thing as 'wasted capital' - rich people store their wealth in a variety of vehicles - whether in banks (where it is re-lent out for many uses), public stock ( where it is used for company investment and operations), and private investment, such as investing in pre-IPOD start ups and private equity. Even Apples massive cash hoard is put to good use, somewhere. What there is a shortage of, is productive investments where lots of capital can be deployed to get a healthy return. This is a function of multiple problems, of which uncertainty is one. It's a very cartoonish model to imagine a daddy warbucks with a big pile of cash saying 'I just don't have time to spend this'. In actual fact, there would be a team of investment managers saying 'we can't find any good places to invest, so we're letting the bank invest it for us, for the time being'. The answer to Japan's problems is cutting government spending and debt. This has always been the answer, this will always be the answer, whether you're an individual with 20k in debt or a country with 200b in debt. The key is to realise that there is no magic Keynes multiplier.

rebootthesystem 12y ago

Not that simple. Not that simple at all. You can't prop-up anything artificially. Once the artifice disappears --and it always does-- if a solid infrastructure isn't in place failure is almost guaranteed. Here's another imperfect analogy: Movie marketing. My rule of thumb is: If a motion picture is marketed with more intensity than the average picture it is almost certainly bad. Let's equate the marketing to QE. While marketing is in place lots of people go to see the movie. Artificially. Once it stops, the foundation is so weak (the movie is so bad) that viewer traffic pretty much evaporates. This is not intended to be an accurate analogy. Please don't waste any time tearing it apart with minutiae arguments because it is flawed in a million ways. The point is to make an attempt to illustrate that an artificially stimulated market is exactly that, an artificially stimulated market that might not be able to remain healthy on it's own So, people buy homes because interest rates are low yet their station in life, their salary, their income, their savings don't improve one iota and when QE stops, interest rates come in and inflation follows and quite a few of these people simply can't afford what they bought. This, of course, isn't a new concept.

csa 12y ago

> But quantitative easing lowers interests Interest rates have been low -- very close to zero -- for a long time now (two decades?). Real interest rates have been negative over the same time period. Interest rates can't really be lowered in any way that is meaningful to the middle class. If you talk to "regular" people, overall economic confidence is extremely low. People with super-secure jobs (e.g., with the government) are rat-holing their money away while it earns little interest and negative real interest. Many folks don't consume even within their means due to the desire not to appear to be a conspicuous consumer to their peers and/or irrational economic fears (e.g., losing their unlosable job). Said another way, the velocity of money in Japan is extremely low, and it doesn't show any signs of recovering. > If your point is that Japan needs more production and less consumption I don't want to speak for the OP, but the reality is exactly the opposite -- they need to consume more, and there is tons of excess capacity right now. > lower interest rates also allow businesses to borrow and invest at lower rates. So few businesses are borrowing money compared to those in a healthy economy. Investment is often put off until (or past) the time it is needed due to the perception of economic uncertainty. Any investment in a business that can be delayed or done cheaply (i.e., penny-wise pound-foolish) is delayed or done cheaply... no amount of low-interest money can incentivize them more. They need to see real signs of a long-term strengthening of the economy before they are willing to take the long-term approach that Japan is so famous for. The one potential "good" outcome for QE is that the yen will weaken (e.g., I fully expect ~180 yen per dollar or more to happen) and this will make Japanese manufacturing extremely competitive internationally. The problem is that this weakening of the yen creates other forms of turmoil and uncertainty in the rest of the economy.

jpatokal 12y ago
Manufacturing is only ~18% of the Japanese economy, and that share is shrinking fast as Japan outsources its factories to China and SE Asia. For the rest, 180 yen to the dollar would just drive higher inflation through eg. fuel prices despite stagnant wages, further weakening the economy. That said, I'm not seeing 180 yen to the dollar any time soon, by most measures the yen is already undervalued. (With the glaring exception of yen vs national debt, but that particular ticking time bomb is not showing imminent signs of explosion.)