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In the Long Run Maybe Even Keynes will be Dead

April 4th, 2013 - 1:35 pm

Here we go:

The Bank of Japan unleashed the world’s most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows.

New Governor Haruhiko Kuroda committed the BOJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014, a dose of shock therapy officials hope will end two decades of stagnation.

The U.S. Federal Reserve may buy more debt under its own quantitative easing program, but since Japan’s economy is about one-third the size that of the United States, the scope of Kuroda’s “Quantitative and Qualitative Monetary Easing” is unmatched.

It’s true. My back-of-the-envelope math goes like this:

Obama Stimulus: $785 billion in a $14.7 trillion economy
BOJ Stimulus: $1.4 trillion in a $5.8 trillion economy

Japan’s stimulus is 1.8 times the size of ours, and our GDP is 2.53 times the size of Japan’s. So adjusting for that, Japan’s stimulus program is effectively 4.6 times larger than ours was. We would have had to spend $3.6 trillion dollars to match BOJ’s efforts. Let’s spell that out in long hand: $3,600,000,000,000. That’s almost the size of the entire federal budget for fiscal 2013.

Like BOJ’s plan, the Obama stimulus was spread out over about two years, so the speed part comes out in the wash.

The Smartest Man in Any Room™, Paul Krugman, suggested that to be effective, the Obama stimulus should have been $2 trillion. What BOJ is doing is almost double what Krugman said would fix the ailing US economy. Well, here we have an island laboratory where Krugman’s wildest fantasy has come true. Soon enough, we’ll know if there’s any life left in Keynesian economics.

My two cents say that there isn’t.

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All Comments   (11)
All Comments   (11)
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There's a difference between monetary and fiscal stimulus. Krugman was talking about fiscal, the BoJ is doing monetary. This isn't, strictly speaking, a test of Krugman' theories in the linked article. Of course, monetary stimulus is also a theory he's fond of, and this will certainly test that, but they are different things.
1 year ago
1 year ago Link To Comment
This ain't keynesian economics.
Keynesian deficit spending is only ever supposed to even out cyclical unemployment. It won't touch structural unemployment or structural low growth.
Calling it keynesian economics gives taking on debt so politicians can spend it on their supporters undeserved legitimacy.
It is fantasy economics.
1 year ago
1 year ago Link To Comment
If this doesn't work, just double the money supply! Then people will spend the money just to get rid of it before it becomes utterly wortthless!!! PROBLEM SOLVED!!!!1!!!
1 year ago
1 year ago Link To Comment
Pushing on a rope. They can pump the money supply to the moon, but if nobody wants to buy stuff, it won’t do much.

I’ve become convinced that central banks can actually limit deflation, to a point. But they can’t create inflation.

We’ll see soon enough, though. So I'm kind glad to see them trying it. Interesting times, indeed.
1 year ago
1 year ago Link To Comment
1 year ago
1 year ago Link To Comment
In 1998 Krugman predicted that by 2005 the internet would have no more influence than the fax machine. What a brilliant mind!!!!!
1 year ago
1 year ago Link To Comment
I think you should be counting the trillions that Bernanke has been printing up in the basement and using to buy US debt.
1 year ago
1 year ago Link To Comment
BUT.... Obama's stimulus, IIRC, immediately became the new baseline for FedGov budgets. Effectively resulting in a $785b stimulus + %5ish budget increase every year since Feb 2009.

How does that figure into your math, Steve?

Oh, and Japan's stimulus ain't gonna work.
1 year ago
1 year ago Link To Comment
I warned in 2009 that the stimulus would end up baselined. And, golly, there it still is.
1 year ago
1 year ago Link To Comment
Oh Steve, you silly boy. If the BoJ experiment fails to produce the recovery of Krugman's dreams, it will simply prove that he underestimated the real need and that the BoJ didn't stimulate enough. There is no end to Krugman's need for stimulus. It would be easier on us all if he would just go to his bunk.
1 year ago
1 year ago Link To Comment
That was my first thought, but then I figured he'd say it wasn't implemented properly, or blame other external reasons for the failure. They never run out of excuses.

"The situation was worse than we thought!"
"No one else could have done any better!"

Losers make excuses.
1 year ago
1 year ago Link To Comment
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