Eppur si muove: stagnation and regime chance at the ECB and Bank of Japan

If there are deadly sins of monetary policy, timidity deserves inclusion. Timidity in a monetary authority facilitates hyperinflations and prolongs depressions. It sucks basically. The ECB and the Bank of Japan give as a good case study in what abandoning timidity can achieve.

To recap, in case you’ve had your head under a rock (or you’re Mario Draghi), Europe is a mess, unemployment has risen to 12% and Spain, Greece, Italy, Portugal and Cyprus are in depressions. Inflation ticked down in March for the third month in a row, hitting 1.7% in March, well below the ECB target and well below what would be required to drag Europe out of a depression. Yikes!

Japan’s position is arguable worse. A multi-decade stagnation and demographic catastrophe has resulted in zero nominal growth since the mid 1990s and an lot more retired people than is normal. How do you respond to situations like these?

One is the ECB approach of pussy-footing bordering on a parody of prudence. The Japanese tried this for some time and it didn’t work for them either. They recently elected Shinzo Abe, who is a bit of a nationalist knob-head, but who recently appointed Haruhiko Kuroda to the Bank of Japan, who seems alright and they have promised an end to pussyfooting and a return to growth.

The BoJ pledged to double both its purchases of Japanese government bonds and Japan’s monetary base. It also adopted a two-year target of 2 per cent inflation. Japan’s QE (or KaraokQE as one wag puts it) has also been revamped and repowered.

On the other hand, in Europe “Mario Draghi, president of the European Central Bank, has signalled that an interest-rate cut is rising up the bank’s agenda, saying it stood “ready to act” as economic weakness creeps further into eurozone countries unaffected by the sovereign debt crisis.”

…has signalled… interest-rate cut…moving up the agenda…”ready to act”… if they aren’t acting now, when will they act? Am I losing my mind here or is this economic vandalism on a grand scale? I’d swear but I’m hoping Scott Sumner will quote me one day and I don’t think he likes cursing.

From 2008 until November last year, Japan and the ECB allowed aggregate demand to follow a roughly similar trajectory. The result of this was a steep recession followed by a weak recovery. In November Japan zigged while the ECB didn’t even zag. This is illustrated below in the share price indexes (the Eurofirst300 and the Nikkei 225) I’ve cribbed from the FT. I like to use pictures when words fail me.

Stagnation and regime change

Wait a second…lets just look at the last couple of years and play “spot the regime change.”

Stagnation and regime change - Copy

Oh, oh, oh! I found it!

For those who think central banks cannot achieve reflation, that they are prisoners in a liquidity trap, that all is lost and that only “structural reform” (kicking the poors) or exploding deficits can save us, I say eppur si muove.

Look at that uptick. That is what the beginning of a recovery looks like. That is what regime change looks like. And that, is what Mark Carney will need to provide us with in the UK if we are ever going to get a decent recovery. Japan and the UK have led monetary revolutions before, we can but live in hope.


PS Of course, my chart underestimates the disaster that is the insane ECB, because the European core economies (read Germany) contain relatively more large companies than the rest and thus the index sharprice index I used underestimates the disaster.



2 thoughts on “Eppur si muove: stagnation and regime chance at the ECB and Bank of Japan

    1. Have you ever read uneasymoney by David Glasner? He has a good line in calling the it the Bank of France the ‘insane Bank of France’ for its behaviour in the ’30s.

      I’m basically following him in my terminology.

      Simon Wren-Lewis also (more politely!) made the same point recently.

Comments are closed.