Cold War Economics


Academics and economic authorities are all shooked up by recent news from Japan: Shinzo Abe’s new administration forces Bank of Japan (bye-bye, central bank independence!) to implement ‘the-mother-of-all-quantitative-easing-programs’: a 2% inflation target within two years time to escape from 2 decades of deflation, by:


  • 1.- doubling the monetary base (money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen; Under this guideline, the monetary base — whose amount outstanding was 138 trillion yen at end-2012 — is expected to reach 200 trillion yen at end-2013 and 270 trillion yen at end-2014″)
  • 2.- increasing Japan Government Bond (JGB) purchases increasing the Bank of Japan amount outstanding at an annual pace of about 50 trillion yen, in order to further decline interest rates across the yield curve…
  • 3.- …and along the yield curve, since BoJ may buy JGBs with maturities up to 40-year bonds, with the average maturity of the Bank’s JGB purchases being extended from slightly less than three years at present to about seven years



One way to see how this new strategy has shaken the foundations of Economics and political institutions is to read the (jolly) reactions by KrugmanStiglitzSmith and many others. Another way to see it is to understand how this strategy definitely changes the main instrument used by central banks to control the economy from interest rates to the monetary base. This is basically what defenders-of-the-liquidity-trap discurse in particular (and Keynesians, generally speaking) have been demanding from authorities to do, as we’ve seen last week: ‘the price is wrong’ because we cannot have negative interest rates, so forget fears of inflation when our problem is economic depression and deflation, expand the monetary base dramatically and help reducing interest rates all along the yield curve through market intervention.


With the European Central Bank and the neocons in the UE strongly against a push for reflation and an aggressive program of bond purchases, particularly in assistance of peripheral countries (here an excelent review by Simon Wren-Lewis on ‘what does the ECB think is doing?’), the years to come may witness a new Cold War Economics in two instances:


  • First, it may introduce a new currency war between the 3 currency areas (euro, dolar and yen, to be added to the old currency war with China). Will European authorities still claim a ‘strong euro’ is the desirable outcome? If so, we will make our friends in US, China and Japan very happy to be the currency area that ‘faces the music’.
  • Second, ideologically, Abenomics means on one hand “the end of Central Banking independence” and on the other it represents the largest experiment of market interventionism-keynesianism-whatever-you-may-call-it in decades.



For now it seems to be working: Japan is getting access to lower costs of financing.




In any case it is deffinitely shocking to see Spanish liberal Prime Minister Mariano Rajoy claiming to be on the interventionist side. I bet this is a unpleasant demand in Ms. Thatcher’s memory to ask for…



Probably, for years to come, macroeconomists will be talking about this ‘war’. We’ll see who ‘wins’.

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