In the Long Run Maybe Even Keynes will be Dead
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.