When they talk about the Bank of Japan increasing its debt purchases (or not), does anyone have a clue?

[Update #2: I appreciate that it’s a BORING topic. I do. But you see it in the headlines. It’s in America’s headlines, with the Federal Reserve. At the end of day, it’s a critical one, because it has to do with MONEY. You know, the juice. The stuff to make stuff happen.

I go to the side that the central banks aren’t doing enough to get economies moving. Especially, Japan. They seem to be sitting on their butts waiting for some mystery force to gin up the Japanese economy. It ain’t gonna happen until they turn on the printing presses more . . . ]

I actually read these ones about what central banks do for monetary policy. Bloomberg, through the Japan Times, reports, “BOJ policymakers reject plan to expand asset buying.”

For my readers who aren’t Finance Geeks, this is the short of it:

Our money comes out of thin air. Practically, that is. In the modern economy, a central bank will create bank balances in the various banks in the country. They do this, simply, by saying “now the central bank has on deposit with you X amount in (fill in the currency here: dollars, yen, etc.)” A second way they do this is by buying up bonds. When the central bank buys a bond, it writes a check on its own acccount. By the rules, this check is always good. (They can’t bounce.)

Now, you might wonder, what stops such a system from turning into one where the money just ends up a bunch of worthless-paper IOUs? Can’t a central bank just start making up money and numbers, to the point where the numbers don’t have any meaning anymore?

Yes, it can. And it did happen in places like 1924 Weimar Germany, in Hungary, in Japan for a bit after World War II, and recently in North Korea. It used to be a frequent occurrence in Latin America. But not so much in the United States. And not in Japan for the last 60 years or so.

This is because the central banks (U.S. Federal Reserve Bank, the Bank of Japan or BOJ) have been very careful not to create too much money. They have been careful not to buy too many bonds, and/or just start writing these checks that are always good.

The problem becomes when an economy is down-in-the-dumps to the point where there is no price inflation, and people worry about whether there will be enough demand for goods to keep the economy humming along at all.

In these cases, it seems safe to have the central bank be the ones out there creating more money. The more money they create, the more likely it is that someone will spend it. (Indirectly, it would be the more likely a bank will lend that central-bank-created deposit out to a company. This company will, in turn, spend it. A second company will then spend that money, and so on.)

This is what the U.S. Federal Reserve has been trying to do through something called Quantitative Easing. The Fed (under Ben Bernanke) has been buying $600 billion of U.S. government debt from the Treasury. The $600 billion of new money has been pumped into the U.S. economy and spent. The claim (or belief, or hope, maybe) is that this new money is boosting up demand for goods and services.

In Japan, some people want the Bank of Japan to do a similar thing, because of the Tohoku Earthquake and the figurative jolt to the national economy. The Bank of Japan already buys a certain amount of Japanese government debt every month anyway, because Japan has been in the economic shits for years and years now. But these folks want the Bank of Japan to buy up even more debt.

This debt would help to finance the Tohoku reconstruction. So, instead of raising taxes to help put back the homes, schools, roadways, cars to drive on them, trains, etc., the government would just rely on the fact that it can create money out of thin air. Thin-air money that the public still takes as a solid—because they have been doing so for some time. And it has kept its value because, even with more yen each year, it’s still very hard to come by.

I happen to think that economies don’t work very well unless there is an inflation of 2% or 3% a year. When it is less than that, there seems to be the urge not to spend, and to watch prices fall and everything slowly collapse around us. When there is an inflation of some modest amount, people seem to be more willing to do something with their money rather than just hold it. Even if this means putting it into some long-term investment just to beat inflation.

Part of Japan’s problem is that their money doesn’t circulate around the economy. Yen gets earned, yen gets saved in the bank. The pile in the bank (which is mostly held by rich people and corporations) just grows and grows. There is no chance that the rest of the people in the economy get to share any. At least when inflation is 3%, it is like you have a tax on money that’s just sitting there. You need to spend it or invest it, to put it somewhere, or else.

A tax works the same way, of course. But there, the government just takes it from you. With a modest inflation, you lose it unless you put it to work. It just seems fairer.

I don’t know what model the Bank of Japan uses; but, it seems to me, that for the past 20 years they haven’t had a clue about how much support the Japanese economy needs. It’s like they almost force it into eternal recession for the benefit of those people and groups that have a big pile of yen.

No one would want a hyperinflation. That would be a disaster. But I would think they’d keep buying “assets” (bonds) until inflation seemed to get to the point where the economy would hum (2% – 3%).

Not doing this seems to be the same kind of non-response I was talking about the other day. A job, where the role is simply to do nothing while the crisis continues.

[Update: The bottom line is that, Japan, much like the United States, has to keep doing things to jolt the economy. There is no “staying still”. Everyone worries about a return to the higher inflation of the 1970’s—the so-called stagflation. Well, let me tell you: the ’70’s weren’t that bad compared to the last few years. I am sure that in Japan, the ’70’s were even better. Because back then, politicians had to deliver. People forget that right before Richard Nixon resigned, in his speech he talked about how he hadn’t made any progress on the bad economy. The people were as pissed at him for the economy as they were about the bald-faced lying. The bad economy did Carter in, too.

See? Staying still would not have been tolerated in those days. People expect results. Nowadays, though, it seems these central bank presidents and elected officials feel that they can just shrug and say, “no”, and everything’s OK.]