Japan and the lunatics

Here’s Milton Friedman during the early stages of Japan’s Great Deflation:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

.   .   .

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Friedman never would have dreamed that Japan’s nominal GDP in 2013 would be far below 1993 levels.  Nothing like that has ever happened in a country with a fiat money central bank.  Ever.

But Friedman would be even more shocked by the reaction of the rest of the world to Japan’s insane descent into deflation and falling NGDP. Japan is being attacked for running excessively expansionary monetary policies by the Very Serious People:

Referring to the Bank of Japan’s move to ultra-loose monetary policy and similar action by other central banks, Axel Weber, former Bundesbank president and now chairman of UBS, warned that the spread of the approach was “heading into dangerous territory”.

Mr Weber, speaking at the World Economic Forum in Davos, said that the current generation was “living at the expense of future generations” because monetary policy was encouraging people to pull out all the stops to continue consuming heavily. “We are trying to keep a speed limit for our economies that is simply unsustainable,” he said.

The debate on whether monetary policy could do more to boost growth or whether further action would have negative side effects came as International Monetary Fund forecasts again suggested the world recovery would be slower than previously hoped.

Mr Weber’s comments echoed concerns in China and at the central banks of Germany and the UK that Japan’s move to an ultra-loose policy was a bid to drive down the value of the yen that could lead to retaliation from other countries also seeking to boost the pace of recovery through stronger exports.

China’s official Xinhua news agency said on Tuesday that Japan’s “decision to crank up money printing presses is dangerous” and might lead to “currency wars“.

Sir Mervyn King, Bank of England governor, said on Tuesday that if a number of countries sought to lower their currencies it would be “hard to be optimistic about how easy it will be to manage the resulting tensions”.

Jens Weidmann, the Bundesbank president, meanwhile, had described Japan’s new government’s pressure to make the BoJ more proactive as an “alarming infringement” of central bank independence that could lead to “politicisation of the exchange rate”.

.  .  .

Mr Weber’s concerns over monetary policy were supported by Nouriel Roubini of the Stern School at New York University, who had backed the initial moves towards unorthodox policies such as quantitative easing in the financial crisis. “We must care about it,” Prof Roubini told delegates in Davos.

I don’t really have anything to say, other than that the world economy is in the hands of a bunch of people who are stark raving mad.

PS.  This post is not about the merits of a higher inflation target in Japan, nor how Japan is actually doing in RGDP terms.  Comments on those subjects will be ignored.

PPS.  There are recent indications that Japan is already backing away from a 2% inflation target.  Which makes the complaints all the more absurd, if that were possible.



30 Responses to “Japan and the lunatics”

  1. Gravatar of Doug M Doug M
    24. January 2013 at 06:10


    I like where you are going. A pet peeve of mine is “the fed sets interest rates.” The Fed sets one rate. The market sets the rest of them.

    It still has a problem with the zero lower bound. After the Fed cuts the front end of the curve to zero, then what?

    It also would suggest that “operation twist” is a step in the wrong direction.

  2. Gravatar of RPLong RPLong
    24. January 2013 at 07:16

    FWIW, I stopped reading Krugman, DeLong, and the Mises blog when the balanced tipped too far in the direction of calling people who disagree lunatics.

  3. Gravatar of Aneece Aneece
    24. January 2013 at 07:29

    RPLong, I humbly submit that a persons record of correct analysis is more important than the loose use of the word “lunatic”. Boneheaded policy has destroyed millions of lives, and will mar millions more. It’s not crazy to be wrong, but the VSP’s among us lack the ability to adjust their beliefs when reality impinges.

    Kocherlakota was wrong, which isn’t crazy. But he didn’t persist in his wrongness in spite of experience. That would have been crazy.

  4. Gravatar of ssumner ssumner
    24. January 2013 at 07:40

    RPLong, Good point. They call people they disagree with lunatics. I.e. people who hold defensible positions, such as the position that fiscal stimulus is not effective.

    There is no defensible argument that Japan has an easy money policy. NGDP has been falling for 20 years, it’s the tightest fiat money policy in world history.

    To those who say “That’s a matter of opinion” My response is “Oh really? So if I say that Zimbabwe has tight money and a quadrillion percent inflation, merely because interest rates are high, that’s also a matter of opinion?”

    Or am I a lunatic?

    Where do we draw the line?

    BTW, I meant lunatic in a good way. 🙂

    OhMy, You said;

    “So many years since this blog started and there is still no test that would make it possible to recognize tight money in real time.”

    Yes, but that’s not my fault. I’ve been beating the drums for NGDP futures market from day one. It’s only criminal negligence on the part of the government that we don’t have one.

    Bill, I’d rather distinguish between easy/tight money, and easy/tight credit.

  5. Gravatar of Jaap de Vries Jaap de Vries
    24. January 2013 at 07:50

    Japans decision making is very slow, central bankers need to be replaced and they are aiming their easing too little on the longer durations. It seems like their measures are not enough to achieve the 2 % inflation target. Besides the BoJ has a big credibility problem due to lack of actions in the last 20 years (!).

  6. Gravatar of Geoff Geoff
    24. January 2013 at 07:55

    If my own personal nominal income would otherwise have fallen by half, for reasons such as an increase in consumption relative to investment, or being outcompeted, or making a series of bad investment decisions, or whatever, then should there be introduced a central bank that starts buying my assets, which raises my nominal income back up to “trend”, then there is a good argument to be made that “monetary policy is VERY loose…concerning me.”

    Why not whole countries?

    I am not saying Japan’s current NGDP growth reflects tight or loose money, I’m just pointing out the possibility that constant growth NGDP could mean very tight money, very loose money, or neither, depending on what otherwise would have occurred to local money and spending in a context of private competitive money markets whereby there is an increase, decrease or no change to the fundamentals of that economy.

    Too often I am seeing people making arguments as to the tightness or looseness of monetary policy by arguing from definitions (such as prices, interest rates, total spending, etc).

    Sure, if you define tightness or looseness in terms of a particular observed statistic, and you get sidetracked on it, then you may end up concluding money is super tight or super loose, even though the fundamentals of the economy as they pertain to money actually lead to a much different conclusion.

    Now, one can argue until the cows come home that “the job” of a central bank is to do X, or Y, or Z, but the market is always independent of such judgments. It “behaves” in its own way, and your judgments never transcend it. Even if you observed your defining statistic as volatile, or stable, it could very well mean the market is telling you something vastly different.

    It is entirely possible that Japan’s monetary policy is extremely loose, because the various nominal statistics otherwise would have been outright falling at a high rate, but the incredibly loose monetary policy is making these statistics fall only modestly, or even rise modestly.

    Imagine the nominal income of a lazy, irrational, unproductive, destructive, morally corrupt person, to be rising at a nice stable 0.1% annual growth rate over time. To Mr. Smith, that person’s nominal income might be way too high than what is justified. To Mr. Jones, that person’s nominal income might be way too low than what is justified.

    It all depends on how much nominal income you think “should” be earned, apart from the market itself.

    If you won’t consider what the market would have generated in terms of money and spending in Japan, then there is no way for people to agree as to whether money is loose or tight in Japan!

    You use the terms “insane”, “lunatic”, etc, to describe those who disagree with you about monetary policy in Japan. Yet you don’t seem to realize that the only reason you have to use such extreme language is because there is no rational grounds available to settle such disagreements, because nobody can point to what the market would have done, since it is unobservable.

    It is like two gulag prisoners in the former Soviet Union arguing over whether or not the current potato production is “too high” or “too low.” Both call each other all sorts of names, because neither can point to the market and settle it rationally, since there is no market for potatoes that can show them whether or not the existing potato production is earning profits or losses.

    Same thing with money in our economy. Those arguing over the extent of monetary policy are forced to resort to name calling and intimidation tactics, because there is no market to refer to to settle this dispute.

    Now, rather than leave these people to fight themselves to the death, as that is the ultimate settling mechanism for such socialist disputes, I am the type of person to throw my hat into the ring, and I’ll say that if I had my way, I would send everyone who disagrees with my monetary policy prescription (i.e. I am the sole monetary issuer, or second best, the sole primary dealer, all backed by the force of the state of course) to prison, or maybe worker camps, so that I don’t have to live amongst those insane lunatics anymore. How dare they question my definition of what optimal monetary policy should be. They are trying to destroy the world.

  7. Gravatar of Geoff Geoff
    24. January 2013 at 08:04


    You can deal with lunatics by threatening them with violence. That’s how all monetary policy disputes are ultimately settled anyway.

    The only question is whether you want to soil your hands by doing it yourself, or cower behind “the law” and hope the politicians do it for you.

  8. Gravatar of Brock Brock
    24. January 2013 at 08:50

    I have this dream. It’s related to online education and “badges”.

    Imagine if very written opinion on the Internet had at least the option of attaching a certified “Badge” from a “MOOC” (or similar) indicating the writer’s actual level of expertise in a subject.

    In the case of monetary economics, imagine if the great minds of monetary economics (Beckworth, Friedman if he were still alive, etc.) got together and created a certified collection of “things we are sure are true”, and perhaps additional modules for “and we’re pretty sure about this stuff too.” Basically, it’s graduate level coursework, or maybe high-400 and 500 level undergraduate stuff, but it’s online, anyone can take it, and once you demonstrate proficiency you get a Badge you can attach to your writings. (And of course there would need to be a system to prevent false presentation of badges)

    The purpose of this system isn’t to enforce conformity on the edges of the field’s research. That would hardly be helpful to human progress. The main point would be two-fold:

    1. Drive the fallacies long ago disproven out of the public discourse.
    2. Ensure that readers can tell the difference between an author with actual topical expertise, vs. someone who looks good and sounds smart. Hopefully this would solve the “Successful banker offering opinions on monetary economics despite only really being good at judging credit risks in the oil and gas markets” problem.

    A more advanced system would be a collar that any public speaker is forced to wear, which administers a strong shock to their throat whenever they say something that’s unambiguously wrong/bullpoop.

  9. Gravatar of Geoff Geoff
    24. January 2013 at 08:53

    “Imagine if very written opinion on the Internet had at least the option of attaching a certified “Badge” from a “MOOC” (or similar) indicating the writer’s actual level of expertise in a subject.”

    Imagine no single expertise judge.

    Imagine if the judges are wrong.

    Imagine if some of what you call “fallacies” are actually not, which then leads to inadvertent conformity.

  10. Gravatar of OhMy OhMy
    24. January 2013 at 09:11

    So many years since this blog started and there is still no test that would make it possible to recognize tight money in real time. Only ex post we can recognize tight money as in: “the NGDP fell so money has been tight”. It is a tautology then, not a new construct that would explain anything.

    Do you say that the Fed should set rates at 10% to make money loose? Of course not. It’s only ex post that you can say, “hey if the Fed set the rates to 10% in year X, it means the money was loose in year X-5”. A 20-20 hindsight coupled with a tautology.

    How can the Fed make money loose in 2013? Is there a way? Within legal limits to which the Fed has to abide? (as in: “no helicopter drops” which are Congress-controlled fiscal policy).

  11. Gravatar of Tyler Joyner Tyler Joyner
    24. January 2013 at 09:24

    Brock – That sounds more like a nightmare than a dream. I’m impressed that you managed to pack so many bad ideas into one short post.

  12. Gravatar of Bill Woolsey Bill Woolsey
    24. January 2013 at 09:29


    I am thinking that it is better to just make the claim that “tight” and “loose” money are not the responsiblity of the central bank.

    Perhaps we should just accept that “tight money” means “difficult to get a short term to maturity loan at normal interest rates.” An increase in the interest rate is a symptom of tight money. Interest rates are higher than normal. What is normal? What interest rates were in the past–in other words, based on some kind of myopic adaptive expectations.

    Rather than try to redefine tight or loose money in terms of the nominal anchor, just claim that the central bank should have no particular concern with tight money or loose money.

    Think of it like gasoline wholesalers saying that gas supplies are tight, which means they are having trouble filling orders at normal prices. High gasoline prices are a symptom of tight markets–prices are higher than normal.

    What are normal prices? Based on cost of production and a fair profit? Or, more realistically, what they have been in the recent past?

    What do you say instead? I am not sure.

    The quantity of base money is below the level consistent with the nominal anchor? Or is it that base money is expected to be below the level consistent with the nominal anchor?

  13. Gravatar of Geoff Geoff
    24. January 2013 at 10:44

    Bill Woolsey:

    I would argue that there is no such thing as “normal interest rates” in the way you think exist. When you say “normal”, what I read are your preferred rates, or what rates you think ought to exist. I am not lead to think that you are referring to the rates that other people set on their own terms.

    If A and B borrow and lend at 1%, while C and D borrow and lend at 100%, I say that because these rates are set according to their own judgments, there are no other rates other than those two specific rates. Neither are “more normal” than the other, which of course presumes the existence of a third “standard” rate. I would say there is no “representative rate” that is not these two specific rates.

    Interest rates can rise apart from changes in NGDP, by way of changed knowledge and preferences of goods over time.

    It seems like you’re saying that “normal” means “the past.” Past what though? 5 year loans? Between who? Backed by what collateral? Using what technology and capital?

    Using your reasoning, current rates are ALWAYS going to be “abnormal”, since present loan contracts are never exactly equal to past loan contracts. “Normal” would remain “what has happened up until now.” And since that would always be true going forward as well, “normal” would end up meaning “whatever exists in the past, present, and future.” Kind of loses its luster.

    BTW, I notice that there is no explicit mention of any learning subjects in your attempt to define and explain various terms that I would argue such learning subjects generate. You seem to be focusing on past results of past knowledge and preferences, i.e. historical data, and trying to form relationships between those data, rather than taking into account that which is generating such data. I think that is a bad idea, because the data you’re observing is unique to the people of the past, including yourself. Past data is a function of past knowledge and preferences, which change in unpredictable ways in large part by virtue of studying that same past!

    The more you try to study the economic past in order to find some regularity in the sequence of events, the more you will change yourself now, in the present, in unpredictable ways. You won’t be able to infer future events any better using such induction methods. Your initial conditions, your “endowment”, will constantly change, thus requiring ever amendments to the model you thought was the final final FINAL one.

    Of course, you might feel a greater sense of certainty doing this. You might feel like you have a better understanding, but that feeling would be an illusion. I don’t have to tell you how such feelings of certainty that are based on sophisticated models of past relationships, can lead people to become apathetic, sloppy, and more likely to fail.

    I actually shudder at the potential apathy that would accompany permanent NGDP targeting. Entire populations within currency zones can literally nuke themselves to the verge of oblivion, and yet a portfolio that is maximally diversified in the investments of that territory, will never experience a nominal decline, since the return of such a portfolio is a function of aggregate revenues, which by definition is on a fixed growth path. Sure, the real return would decline, but I would never have to declare bankruptcy or insolvency. The incentive to be prudent would be much lower.

    For the gasoline example you mentioned, what if there is an actual increase in demand for gasoline due to people acquiring new knowledge and changing their preferences for goods today? Poof goes the reasoning based on past prices.

    And what is a “fair” profit? Every time you introduce a subjective element into your reasoning, e.g. “normal”, and try to define those terms more clearly, you’re still left with a subjective element. You went from “normal” to “fair”. How is that any less subjective?

    If you tried to define “fair” more clearly, then what would you say? That fair means “past profits in the recent past”? You’d again be trying to find relationships in past data that are unique, and making shaky inferences into the future.

    I think I would be throwing a monkey wrench into your reasoning by saying that the “anchor” you are referring to, is not really attached to anything well grounded, because the environment you are in changes by virtue of the very attempt of anchoring, which means your anchor and the entire foundation may move away from a non-subjective ground without you even noticing, because you aren’t even considering it!

  14. Gravatar of Steve Steve
    24. January 2013 at 11:36

    “Axel Weber, former Bundesbank president and now chairman of UBS”

    There seems to be a lot of patronage available to very serious central bankers.

    “Jens Weidmann, the Bundesbank president, meanwhile, had described Japan’s new government’s pressure to make the BoJ more proactive as an “alarming infringement” of central bank independence that could lead to “politicisation of the exchange rate”.”

    Want to start a pool on which multinational company hires Weidmann? Deutsche Bank? Siemens?

  15. Gravatar of Jim Glass Jim Glass
    24. January 2013 at 11:37

    Mostly off-topic but perhaps not entirely so…

    Yoram Bauman at the AEA convention on: The monetary policy of the afterworld and need for necroeconomic reform.


    (Will certain central bankers be consigned to Hades?)

  16. Gravatar of Brock Brock
    24. January 2013 at 11:59

    Ha! I’m totally aware of the 1984 possibilities of taking the idea too far.

    I’m also fully aware that, human nature being what it is, any system remotely like that would probably be taken too far and abused. I’m not saying the idea is good.

    But idylly I muse occasionally that there might be a better way of weeding out the truly, provably wrongbad ideas from the collective discussion. Of course people today know to ignore Flat-Earthers, but the Flat Earth hypothesis was disproven a long, long time ago. Do we really have to wait for centuries for wrongbad ideas to fully go away?

    Maybe we do. But idylly I muse occasionally of better ways.

  17. Gravatar of Lars Christensen Lars Christensen
    24. January 2013 at 12:00

    So true, so true…the actions of the BoJ might be what will keep the euro zone away from crisis in 2013.

    Weidman and King sound king Montagu Norman and Hjalmar Schacht in 1930. It is horrible…

  18. Gravatar of Tommy Dorsett Tommy Dorsett
    24. January 2013 at 12:17

    Lars – I think Schacht was gone by 1930…in fact, after stabilizing the currency in Nov 23′ and setting off a non inflationary boomlet, he became concerned about local govt borrowing and leverage. So he exited right around the cycle peak and before the 29′ wall street crash. Hitler persuaded him back in 33′ whereupon he monetized an infrastructure and construction blitz, returning Germany to full employment by the late 30s. The Bad Guys reflated first.

  19. Gravatar of Don Don
    24. January 2013 at 12:24


    We can’t blame Weidmann for claiming that central banks should be above politics. Totally self-serving. I agree that a good payday awaits him from some bank. Probably won’t make as much as Geithner. Together, they’ll be laughing all the way to bank^h^h^h^hoffice:)

    I find it interesting that the headlines for Japan range from “expansionary” to “backing off”. We are lucky to have a few blog that can cut through the spin.

  20. Gravatar of Max Max
    24. January 2013 at 12:49

    “What are normal prices? Based on cost of production and a fair profit? Or, more realistically, what they have been in the recent past?”

    Better: what they are expected to be in the future.

    Loose money = steep yield curve
    Tight money = inverted yield curve

    Loose here doesn’t mean too loose, and tight doesn’t mean too tight. Loose could be too tight, tight could too loose.

  21. Gravatar of Tyler Joyner Tyler Joyner
    24. January 2013 at 12:55

    Brock – Well I’m glad to hear you say that. Unfortunately I think that the downside to everyone having an opinion and the right to air it with few constraints means that there are an awful lot of bad opinions being voiced. The internet, somewhat counter-intuitively, allows people to restrict their incoming information to only things they want to hear, unless they actively seek out dissenting opinion.

    That’s just part of having an open society, though. You’ll never regulate human nature away.

  22. Gravatar of ChargerCarl ChargerCarl
    24. January 2013 at 14:10

    oh look, German central bankers giving awful advice. I’m shocked.

  23. Gravatar of ssumner ssumner
    25. January 2013 at 05:19

    OhMy, You said;

    “So many years since this blog started and there is still no test that would make it possible to recognize tight money in real time.”

    Well don’t blame me. I’ve been beating the drum for NGDP futures markets from day one.

    Bill, I’d rather distinguish between easy/tight money and easy/tight credit.

  24. Gravatar of Geoff Geoff
    25. January 2013 at 06:41

    Dr. Sumner:

    “Well don’t blame me. I’ve been beating the drum for NGDP futures markets from day one.”

    Borrowing from OhMy…

    So many years since this blog started and there is still no explanation of how fixed priced futures contracts can communicate the market’s expectation of future NGDP.

  25. Gravatar of GMC GMC
    25. January 2013 at 10:07

    “So many years since this blog started and there is still no explanation of how fixed priced futures contracts can communicate the market’s expectation of future NGDP.”

    The same way that fixed price treasury bonds communicate the market’s expectations of future interest rates. If you really wanted to you could write the futures contracts another way, but for practical purposes (“Are we over the forecast or under the forecast? And by how much?”) shouldn’t this be enough?

  26. Gravatar of Japan and the lunatics « Economics Info Japan and the lunatics « Economics Info
    25. January 2013 at 11:01

    […] Source […]

  27. Gravatar of Benjamin Cole Benjamin Cole
    26. January 2013 at 03:57

    “I don’t really have anything to say, other than that the world economy is in the hands of a bunch of people who are stark raving mad”–Scott Sumner.

    Central bankers and their kin have been ossified, cloistered, inbred.


    Quick: Of the last eight CPI reports, how many were up (meaning inflation) and how many down (deflationary)?

    Six of the last eight inflation reports were down–meaning deflation.

    Six of the last eight.

    Quick: Of prominent, or even un-prominent central bankers in the USA, who is warning about deflation?

  28. Gravatar of ssumner ssumner
    26. January 2013 at 05:46

    Geoff, You said “So many years since this blog started and there is still no explanation of how fixed priced futures contracts can communicate the market’s expectation of future NGDP.”

    That’s not the purpose of the contracts, the purpose is to predict the instrument setting that produce son target NGDP growth. I hav elots of post son the subject, and lots of journal articles.

    Ben Good point.

  29. Gravatar of TheMoneyIllusion » Why we’re in this mess TheMoneyIllusion » Why we’re in this mess
    26. February 2013 at 19:21

    […] required to end the deflation will likely lead to a lower nominal exchange rate.  Recall that the Very Serious People in Europe are outraged by Japan’s so-called “easy money” […]

  30. Gravatar of Why we’re in this mess – Gearsoftimes Why we’re in this mess - Gearsoftimes
    27. February 2013 at 02:22

    […] required to end the deflation will likely lead to a lower nominal exchange rate.  Recall that the Very Serious People in Europe are outraged by Japan’s so-called “easy money” […]

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