'ArtM72' pid='20471' datel Wrote:I fear the stock market positive response to the quantitative easing is simply a reflection of more money being spent at the NIKKEI casino as opposed to more money being actually invested in economic growth (i.e. demand and subsequent supply). This I fear has been the case with the US economy. Wall Street is no longer about being a source of funds for growth capital. It is now largely a playground for the "investing" public and more money into the economy just provides stock market price inflation. When you think about it, how many companies have you seen in a negative light when the need for a secondary is mentioned? Say the word "secondary" and investors scatter these days. Announcing a secondary is like declaring yourself a leper. Shouldn't raising capital through secondaries be seen as a primary purpose of the stock exchanges and thus a good thing? What's my point? I don' know. IOC's secondary was put to good use finding more gas. Japan needs that gas to grow their economy. How does Japan finance that purchase? Doesn't really matter to me I guess so long as IOC is the supplier.
Yes, Art, those secondaries. Companies still do them, and there has been a bumper issuance of corporate debt due to the low interest rates, but probably the casino elements of stockmarkets have taken over.
What happens in Japan is the most interesting, and important economic experiment of our time:
- Two 'lost' decades (they're not that lost, on closer inspection) have shown that balance sheet recessions after financial bubble burst (the Japanese crash in the early 1990s was three times the relative size of the US crash in 2008/9) has a habit of not curing itself easily, especially when deflation and deflationary expectations is ingrained and interest rates are at the zero bound
- Probably only really outsized measures can break the vicious cycle, Japan. Krugman urged them to do what they're going to do now as far back as 1997, and waiting that long the risks of drastic reflation have considerably increased, as the size of the outstanding public debt has balooned. Drastic reflation bears the risk of a bond market rout (people like Kyle Bass are betting on one, although he has done so for quite some time already)
- The US is in far better shape, as much more decisive actions were taken in the immediate aftermath of the crisis, but a considerable amount of the balance sheet recession dynamic lingers on, so we have much to learn from what is going to happen next in Japan. It's a sort of open air lab for us.
- I would say, on evidence (some of that above), doubling the monetary base in two years might not work outside of the realm of the Nikkei. For some time, I have been of the opinion that it's probably necessary to monetize part of the public debt directly
For the uninitiated, what is a balance sheet recession?
This is the situation in which the private sector saves so much more than it invests (in an effort to repair balance sheets which were greatly damaged by a financial crash) that interest rates have to be deeply negative in order to equate the two. Since the latter isn't possible, there is a bit of a policy problem. Doing nothing isn't an option because the private sector savings glut will drive demand downwards (a process that can feed on itself), somwhere, the shortage of demand has to be compensated.