Economic Japanification: Not What You Think
In 1944, the US led other countries in putting together the Bretton Woods system, in which most currencies were pegged to the dollar, and the dollar was pegged to gold.
In 1971, however, the US defaulted on this system, rendering the dollar no longer redeemable for or fixed against gold. After that, all currencies rapidly fell vs gold, and along wit
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Basically, we engineered a way for the whole world to need dollars (most major oil producers would only sell oil in dollars), and as a result, the forces of supply and demand hold open our trade deficit to provide the rest of the world with dollars.
Export-driven countries like Germany and Japan were able to rise to the occasion on the other side of
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When the Fed’s balance sheet rose sharply from 2008-2014 via QE, it didn’t necessarily translate into broad money supply going up because there was no direct mechanism to turn base money into broad money. However, in 2020, the combination of QE and large fiscal deficits (literally sending checks to people) did cause the broad money supply to go up
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When Paul Volcker became the chairman of the US Federal Reserve in 1979, after years of the United States being unable to control its worsening inflation problems, he proceeded to sharply increase interest rates to approximately 20%, which is associated with finally quelling inflation. The inflation-adjusted yield on bank accounts was very high at
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expanding the monetary base is very different than expanding the broad money supply. Many people think that QE alone is inflationary, but it’s not. At most, QE alone is anti-deflationary, or inflationary for asset prices in particular. On its own, QE doesn’t result in more money in peoples’ pockets chasing more goods, or higher commodity prices.
A p
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In contrast, during the three decades prior to 2020 (pre-pandemic), Japan never ran a budget deficit larger than 8.3% of GDP. Their deficits were big and persistent, but gradual:
Lyn Alden • Economic Japanification: Not What You Think
As the yen strengthened in those early years, along with general global economic problems, Japan developed a rare trade deficit, which is unusual in its multi-decade history.
When the Bank of Japan began massive QE in late 2012, it began sharply weakening the yen vs other currencies throughout 2013. And then, in 2014, the US Federal Reserve ended th
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Follow the (Broad) Money
There are two primary ways to increase the broad money supply significantly.
The first method is that banks have to lend more, which increases the “money multiplier”, or in other words makes the broad money supply many times larger than the base money supply. Inversely, if debts are paid off, that destroys broad money.
The s
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While the US runs persistent current account deficits, Japan runs persistent current account surpluses, which is how these substantially different NIIPs were built.
This will be interesting for the United States over the next decade. Unlike Japan, which funds its own fiscal deficits domestically, the United States has historically been partially rel
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