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[00:00:31] This has been quite a way. I can't remember a B.O.J. change in monetary policy taking this long, but it is finally out at the Bank of Japan has officially confirmed that it is ending an era of negative interest rates.
[00:00:46] Now, this has been on the cards for many, many days now and months as speculation has mounted that this grand experiment that the central bank has been on,
[00:00:54] and made it an outlier among central banks around the world for so long is going to be over.
[00:01:00] This is the Debunking Economics Podcast with Steve Keen and Phil Dobbie.
[00:01:07] Yes, it's all changed to the Bank of Japan. Negative interest rates are no more. They weren't the only ones who tried it, but they were last ones to give up on it.
[00:01:15] So what was the reasoning behind it? What good did it do and what's going to change now?
[00:01:19] Or is the Bank of Japan ignoring a bigger issue that perhaps has very little to do with interest rates? Well, look at that this week on the Debunking Economics Podcast.
[00:01:33] So something happened in the last week or so that hasn't happened for 17 years. The Bank of Japan lifted interest rates immediately not by much from a negative 0.1 to 0.
[00:01:44] It was the last country to have negative interest rates. So what can we learn from in Japan or what can Japan learn from the rest of the world perhaps Thomas who's a listener to this esteemed podcast?
[00:01:54] It would be great to hear us talk about the Japanese economy and monetary policy over the years, so here we are, we are nothing if not compliant.
[00:02:02] So first Steve, the obvious question will you know how will such a small move make any difference but be actually before any kind of thing they'll do that again.
[00:02:12] First off Steve, before we ask the obvious question about how such a small move will make any difference. How exactly to negative interest rates work? I mean this would mean banks would have to pay to keep money in their reserve accounts presumably.
[00:02:26] So what was the behavior that the central bank was trying to drive by doing that with they're thinking well okay maybe you'll lend more if you have less sitting in reserves.
[00:02:36] That's basically the attitude and this is again where you've got central bankers but since central banks been run by their classical economists haven't got a clue about the actual structure of the economy is the spite of the fact that they're responsible for major organs like treasuries and central banks.
[00:02:52] And they still operate under the delusion and it is a delusion that banks lend out reserves.
[00:02:58] And so the idea is what if you take a negative rate on reserves that will encourage them to lend it out because they're going to disappear anyway the muzzle in the mouth of the public is only one problem.
[00:03:07] They can't bloody well do it unless and there's only one endless cause and that is unless loans are in cash.
[00:03:13] Physical damage and then it's feasible yes physical physical cash you've got to carry it out of the bank because the this is in one and obsessive these days about double entry bookkeeping because when you do a double entry by definition there are two entries on the line.
[00:03:31] And if you show reserves going down you can't show deposits going up that breaches the accounting rule that assets minus liabilities minus equity equals zero so it's an accounting error and you can't do that.
[00:03:44] And then if you do it correctly where you've got the reserves going down and loans going up and how does the borrower get the money so suddenly the borrower has gotten more debt but hasn't got more money.
[00:03:54] The only way that's feasible is if they get cash and so if you actually want to have the neoclassical fantasy of banks lending out reserves and they've got to be involved in a so it's a convoluted process of first of all taking the relicronic reserves taking taking bonds to get extra electronic reserves.
[00:04:14] So selling selling the bonds to get you go to convert using the reserves to buy cash off the central bank one for one exchange and then lend out the cash.
[00:04:25] And the various terms there's a Heath Robinson machine in the UK.
[00:04:30] There's a what's his name the old Bruce Fettis and Australia and who's the third one in America I can't take it the name it's Heath Robinson and it'll come to me at some point anyway.
[00:04:44] Anyway, convoluted.
[00:04:46] Which they don't do stay don't do so reserves just so we're all on the same page so reserves money getting to reserves because I have paid cash in for example into my bank but it's not used because they don't need to I mean we don't have
[00:05:03] any action reserve banking if a bank wants to give a loan it doesn't give two who's how much it's got sitting in reserve it's the those reserves are used if there is into bank transfers going on they'd use those they'd use those reserves wouldn't they but
[00:05:17] the other main thing is that that is the reserves of the conjured between government spending in the private sector and this is because we when you look at how reserves created use their depositing cash but of course you don't make the cash unless you do if you do you being a I'll report it to the authorities of course.
[00:05:34] Yeah, so the government comes in the government back up at the old so the government makes the makes the notes you deposit in trade in in a bank which then banks have to convert from physical form into reserves by the interest of the bank.
[00:05:46] reserves by the intent during the cash to the to the central bank which has got its own vault of money if they ever do that it's quite unlikely that they do the kid to get into circle circulate through what automatic tele machines and so on but the reserves themselves are the intent and double entry bookkeeping terms when the bank makes a loan to you it puts an amount of numbers inside your
[00:06:09] deposit account which is your it's your asset in its liability and it records exactly the same numbers against his loan account which is its asset in your liability and you look at when the government spends of course it also puts money in people's bank accounts people don't see it because you see tax ocean rather than government spending but when the government's running a deficit in the aggregate is putting more money into private bank accounts than it's taking out so you know the government spending exceeds taxation in that case
[00:06:38] and the balancing item on the bank's account is the increase in reserves so reserves are created by government spending and and and yeah and the banks now banks cannot lend them out the deals into bank transfers you say but fundamentally there was a non-income earning asset asset for banks almost like a separate currency it's almost like this is the that a currency the shoes between banks rather than a currency the shoes to spend
[00:07:05] might my expression is sort of like like the like being oil and a car rather than petrol or electric charge okay you don't put oil in your petrol tank you certainly don't put oil in your battery so they circulate separately but it's an essential part of the working
[00:07:19] the engine just as just as reserved might lubricate the finance system so if there's not enough reserves then you might find this less into bank transfers and then I guess if that was the case if there wasn't that lubricant
[00:07:32] then maybe you would be finding more difficult to give loans I mean if you if you it may be overplay but I mean there's a some influence that that's the factor in things like the northern rock collapse for example
[00:07:45] yeah because what you have is seeing a bank's making transfers between themselves all the time they are they knit them out where they can but fundamentally what that's what deserves to use for to make transfers from one bank to another
[00:07:56] now if you have a bank you don't trust and that was a case of the northern rock at some point banks would refuse to accept their their transfers they would also refuse to send reserves to in to transaction with the northern rock because they didn't expect to get them back
[00:08:13] you have all these you know what they call repower agreements so you sell within agreement to buy back on that's part of short term liquidity
[00:08:20] if you get cut out of that market then bang here so it's like having a again using the engine analogies like I think the silver silver to seize up on a vi
[00:08:28] so the situation in in Japan are binomics as it's been called this idea that they'll have negative interest rates it was it's founded on a fallacy then so it will have made no
[00:08:38] no not a lot of difference but the other other policy gets it's founded on is that banks would then pass on this negative interest rates
[00:08:46] to deposit it so you know your deposit account would then get a negative interest rate rather than earning a positive return frankly I'm not particularly worried about that
[00:08:54] because you know they go down to local auto teller to get mail out these days like a charge for a year over no matter how much money I take out
[00:09:01] I'd rather see the banks changing and negative rates and slicing your arm off when you're in need of cash for a street vendor
[00:09:08] but that's fundamentally the problem about passing on negative rates when the reserve system is negative rates for the private system
[00:09:15] is that if you did that people would say I don't want that one to give me a manning and cash at least the cash doesn't doesn't deteriorate
[00:09:21] that's okay so what a world bank do we do if a bank is faced with extra cost they're not going to say we're going to
[00:09:27] to charge you proportional to the amount of your deposits they're just going to say we're going to charge you to have an account
[00:09:32] you know we're going to charge you to have a credit card we're going to charge you to have a deposit account we're going to increase our bank charges
[00:09:37] and that's not going to change your spending behavior in any way what server is it well no there did much change where you saw your money
[00:09:42] and that's one reason the year that a lot of these central bank types are also push negative rates and interest on reserve accounts
[00:09:49] also push for the abolition of cash because they're my idea was if you have a negative rate into a positive account
[00:09:54] that's going to encourage you to spend and in its own way that's about like does Ellie and currency which is actually
[00:10:00] there's a good idea to cause higher circulation from a set amount of money but that would mean abolishing cash
[00:10:08] and like my I'm I'm I'm I'm plackably opposed to that because they don't want people who don't understand money
[00:10:16] controlling money but that's what we have right now if they abolish cash that if it even more stupid ideas
[00:10:21] they could put into process so this is one reason that I you know I don't support the idea of negative rates
[00:10:27] if they knew what they were doing maybe but they don't and that's one reason why we have stuff that's common
[00:10:32] and it's hard to argue that it worked anyway isn't it because if you look can you see well okay negative rate started back in 2016
[00:10:38] it looks like bank lending has been falling consistently since 2016 so the reason that it was put there for just hasn't worked
[00:10:45] absolutely and there's two thing that there's too much private debt this is the other thing but central
[00:10:49] conventional central bankers don't get their head around we should private debt
[00:10:54] should be of the order in my opinion of this is an opinion not a thing I can derive analytically
[00:10:59] between 25 and 75% of GDP that's because you have to have a certain amount of debt for
[00:11:05] working capital for corporations you need it to buy large consumer items which is what houses
[00:11:10] should be cars and so on you need it for entrepreneurs so there's a reasonable reason to have some
[00:11:16] in existence for those reasons we of course you know Japan picked a 225% of GDP as it's
[00:11:23] nothing at sea yeah private debt that order and that's just I mean that is at the highest in the world
[00:11:29] it wasn't no in fact Denmark there was something rotten on the state of Denmark is 240% of GDP
[00:11:36] with its peak level now pre-conventually economics completely ignores private debt
[00:11:41] and it is private debt and credit are the most important determinants of economic activity the
[00:11:46] usual story economists don't know what the efforts are talking about so when you look at that the
[00:11:52] Japan peaking a 225% of GDP I think about at about 93 94 it's been gradually coming down because
[00:11:59] you've reached saturation level and of course that's what gave us the bubble economy in the 80s and 90s
[00:12:03] in in Japan it's why at one stage the Niki was 40,000 points and they could fell down to seven ultimately
[00:12:10] its launch of Japanese real estate was at one stage the most expensive on the planet all that extra
[00:12:16] credit money just created asset bubbles didn't create extra productive resources now people have
[00:12:21] you know nobody's buying home speculative items in Japan anymore due to the Japanese
[00:12:27] impurity of power is no longer worth California which it was worth at one stage I think it was about
[00:12:31] 10 square kilometers with the same valuation as California all that stuff is over so
[00:12:38] and you can't encourage people to borrow more money thanks don't want to do it anyway to the private
[00:12:43] sector after being burnt as badly as they were and if you will have economists in bloody central
[00:12:48] banks trying to encourage more lending and yeah I think their private debt is starting to climb a
[00:12:52] little bit and we are seeing a bit of an asset bubble in the in the showmark and I mean the Niki has
[00:12:59] been as been booming along lately yeah they're certainly turning up I mean any asset marker when
[00:13:04] you see it rising there's almost always which I think pretty universally always increasing private
[00:13:10] credit behind it and yeah they'd be doing it again because again the bubble economy we are talking
[00:13:16] 1980 to 1990 a lot of those bank pardon me bankers have died replaced by new bankers and they are now
[00:13:24] back trying the same old game of pumping out debt there because again if they're trained by
[00:13:29] mentioned economists they don't know what the estate are doing so we're back in the world of
[00:13:33] the effective solutions now a lot of people talk about Japan as a great example of MNT
[00:13:37] in that government spending has been very high you know they are the poster child for MNT for some
[00:13:43] people but debt is you know if you look at government down we don't like to use that word but let's
[00:13:48] just use it for simplicity but you know the the amount that has been spent versus the amount that
[00:13:53] has been collected in taxes and the like it's been building up so it was 60% of GDP in 1990 now it's
[00:14:00] more like 235% so a bit of debts are right but is that just going too far? No there's a debt again
[00:14:06] as again as government debt when you know when you're a debt's why you don't want to use the
[00:14:09] word neither do I it's outstanding government bonds that's what it actually amounts to on which
[00:14:14] they pay a trivial amount of interest which feeds back into the into the the root of the non-government
[00:14:20] economy but it can what you've got is that is creation of the fear money which is taking
[00:14:27] in the place of no creation of credit money and at the same time I don't I'm not aware of Japan's
[00:14:31] current export surplus but I presume it's still an export surplus so so it's making money out of
[00:14:37] conversion of foreign currency into yen as well in terms of creating a creating money out of that
[00:14:42] conversion so for all those reasons it can cope with whether with a stagnant credit sector which
[00:14:48] largely has been producing zero or negative amounts of credit money in the system but that basically
[00:14:53] shows you can continue a fear money system going even with the drag put on it by an overly borrowed
[00:14:59] private sector with too much private debt but it is a stagnant economy though it's not just the
[00:15:03] fact that people are borrowing the economy as stagnant the money supply is growing at something like
[00:15:08] 2% a year which doesn't seem enough isn't enough and I don't get you've got to have a growing
[00:15:12] economy again decking out there's the usual caveat about about climate change but the economy
[00:15:18] growing you basically need the money creation to be equal to the rate of economic growth divided
[00:15:23] by the velocity of certain every of money and if you want like a you know this is 3% or say
[00:15:30] it's including some inflation as I'm like a 4% growth you need 2% so there they are and that is
[00:15:37] constricting the system so what you again have is that no capitalist economy has grown without a
[00:15:43] growing money supply virtually ever there may be my fund a couple of you know quarters where that
[00:15:48] doesn't apply but that's the general rule so what you've got is with the credit system which is
[00:15:52] staffing the economy because of too much lending for the bubble economy and still the hangover
[00:15:57] of excessive debt and all the real estate speculation and you're going to have a government
[00:16:01] restricting its deficit you've got an economy growing too slowly and financial terms
[00:16:06] on their financial authority say hey why don't you guys grow physically faster it just doesn't work
[00:16:11] that way it's so yeah they're really constraining the performance of the economy by constraining
[00:16:16] money creation and yet people who are not advocates of MMT would look and say hang on you want to
[00:16:20] use this is your place to child look at it you know they have they have they have used MMT to its
[00:16:27] its fall in that the government has borrowed the bankers bought up those bonds this is what MMT is
[00:16:33] advocate but look you've still got stagnant economy you're still doing that way and that's why I'm
[00:16:37] I'm not you know I'm conversant with and and and support MMT and it's an analysis of how
[00:16:44] government creates money that I and I add to it the role of the credit system and that is quite
[00:16:50] compatible with MMT which is it's you know my minskis often makes it easy to combine analyzing
[00:16:56] the two's that's what I do practically but the bottom line is there there was also just too much
[00:17:03] profit debt it should be reduced and that's why I get in favor of a modern debt chubbily to use
[00:17:07] the government's capacity to create money to cancel profit debt because a major constraint on people
[00:17:13] spending is their own personal debt situation whether that's personal or corporate they look at
[00:17:18] that debt they think oh I don't want to spend too much and it's a save more money and when the
[00:17:22] private sector tries to save more money since it can't actually create money what it ends up doing
[00:17:27] is slowing down the circulation of money you can you get less growth coming out of it so if you
[00:17:32] wanted to really be effective in it isn't just a case of you know that the government create
[00:17:36] the fear of money I'd also be using its capacity to cancel private debt and reduce the debt burden
[00:17:42] which is the major the private debt burden is the major reason why people aren't investing in Japan
[00:17:47] right okay well look when we come back we'll look more at that monetary policy the fact that the
[00:17:52] central bank is holding so many of the government bonds but also you know there's such a big
[00:17:57] thing as being made out of what seems like such a small move what is the significance of that
[00:18:02] we'll look at it when we come back Steve Bungie can always broadcast me and Steve back in a moment
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[00:19:14] this is the debunking economics podcast with Steve Keane and Phil Dobby so yes we are looking at
[00:19:28] Japan this week on the debunking economics podcast the fact that they have moved from negative
[00:19:33] territory to zero in terms of what their interest rate is it's it happened in the last week or so
[00:19:42] I mean it's aside from the fact as we discussed in the first half that you know it's a fallacy to
[00:19:47] think that negative interest rates are going to have any impact and clearly it's had no impact because
[00:19:52] it's not impacted the level of borrowing by banks which is what it was intended to do but for
[00:19:57] not but for minus 0.1 to zero I mean a lot of people are saying this is very significant because
[00:20:02] it marks a move out of negative territory but it's such a small move is it going to make any
[00:20:07] shot of difference whatsoever not really now I mean this is just basically removing an embarrassment
[00:20:13] from you from your school textbook you know you white out a number you shouldn't have in there
[00:20:17] and hope nobody notices but unfortunately because there isn't much news about
[00:20:21] you know in this area of language pants suddenly in the news for what is actually basically
[00:20:27] removing an error not church not a whole new regime which is the way people are prescribing
[00:20:33] the only ones of course where they I mean you're going into negative territory as well
[00:20:37] and so in the switland was doing that for a while as well and the trouble they basically thought
[00:20:41] the center private banks would pass on negative rates which is a cost for them to negative interest
[00:20:48] on the deposit accounts and you know this is where competitive issues come in do you want
[00:20:54] to be the first bank offering a negative interest rate on deposit accounts so it didn't happen
[00:20:58] so again that's another embarrassment it was so that slowly removed so inflation's interesting in
[00:21:05] Japan isn't it in that they haven't had a lot of it now they're starting to get it it seems like
[00:21:08] they're starting to panic and yet it's exactly what they wanted in fact if you've got massive private
[00:21:14] debt inflation's going to help with that yeah inflation reduce at the level of outstanding debt
[00:21:19] this is one reason why we get out of the 70s and 80s crosses so easily the vocaloid
[00:21:24] than not easily we have the vocaloid recession at the time with the deepest recession since
[00:21:28] the great depression it's obviously been exceeded by the global financial crisis but that
[00:21:34] the one reason and minskie spoke about this before it happened as well he's what said that if you have
[00:21:40] high high debt levels and high inflation then the inflation itself erodes the debt burden
[00:21:46] and enables you to get back to restart the next stage at the cycle more effectively so inflation
[00:21:52] does reduce the real debt burden and that's one reason why the great depression was so great because
[00:21:56] rather than inflation they had deflation prices are falling at up to 10% per annum for the first two or
[00:22:02] three years of the great depression and that meant as Fisher put it the more people paid the more
[00:22:08] they owed the fact that there were people were paying down debt was a major cattle cause of
[00:22:13] the falling prices people are doing liquidation sales to get money in and using money to pay their
[00:22:18] debt down and so on and what you get was you said the more they just paid them all they owe the
[00:22:22] debt burden actually rose from 30 to 32 as a proportion of GDP even though the absolute level of
[00:22:29] debt was falling by again about 10% of GDP and their low inflation is there anything to do with
[00:22:35] what the Bank of Japan has been doing or is it I think part of it is cultural is now we have
[00:22:40] seen an increasing wages lately but I mean there's a culture within Japan from what I hear where
[00:22:46] you know people have worked for one company all their life you really can't ask for big wage
[00:22:50] increases although we are starting to see 5% pay rises now but what is the cause for lack of inflation
[00:22:58] or even I mean that being through years of deflation as well which is very problematic for an economy.
[00:23:03] Well that's basically again the the aftermath of having the bubble economy in the 80s and 90s
[00:23:08] I mean the incredibly fast rate of increase in private debt mainly fueling people buying
[00:23:15] both shares and houses so you have that huge increase in real estate prices and huge increase
[00:23:20] in the NICI but it also meant this is a peculiarity of Japan Japan has a high level of private debt
[00:23:28] to GDP than America or Europe largely because Japanese corporations work in a conglomerate called
[00:23:34] a caretzu and in the caretzu there's a bank which is basically compliant and provides the funds
[00:23:41] that the other industrial elements like Mitsubishi or Mitsui and so on those particular care
[00:23:46] et cetera want for investment so what you have is a high level of debt financed investment in
[00:23:52] Japan compared to America and the aftermath of this has been that people because the companies
[00:23:57] themselves now carrying the debt and still have to service it they focus their revenues on
[00:24:03] on debt repayment rather than on innovation so again you get stagnant level of investment coming out
[00:24:10] and a slowly growing economy and with the slowly growing economy you don't have much in the way
[00:24:15] of domestic pressures for wage rises or corporations passing on you know higher government spending
[00:24:22] as American corporations did during the COVID period so you don't have those inflationary pressures
[00:24:28] and again because of seeing right largely stagnant demand you again have a potential for you know
[00:24:38] workers not to be demanding wage rises corporation not increasing their markups you get falling
[00:24:43] prices out of that and that comes back and amplifies the debt problem. And then as you say
[00:24:48] lack of innovation and they have a problem now don't they in that you know we think Japan we think
[00:24:53] they are still exporting cars but China is exporting more than Japan now and when it comes
[00:24:59] to electric cars it looks like China is well ahead. Yeah and this is the irony I mean
[00:25:06] everyone in the old movie The Rising Sun I forgot was Wesley Snipes I've forgotten who the other
[00:25:11] made major American actor was I think it was actually John Travolta but the point of that movie was
[00:25:18] a Japan's taking over everything I think at one point in the movie they're lying
[00:25:22] for the Japanese were trying to understand domestic consumers in America and Travolta said at one
[00:25:27] stage the secret to American culture is Japanese technology well that's gone by the way side so
[00:25:33] so the innovations stopped at the end of the bubble economy if you read larger because the
[00:25:38] corporation were carrying too much debt to be able to both invest and service the debt so investment
[00:25:43] dried up you didn't have the level of innovation and now Japan if you talk about Japan as a
[00:25:48] center of innovation people say what about my iPads what about my Tesla what again what about
[00:25:54] Japan is so Japan has fallen by the way side in every sense. And yeah they still have high
[00:25:59] productivity but I think that is just a leftover isn't it you know that they had high level of
[00:26:04] mechanization that's still there so they still get high productivity per worker but it's probably
[00:26:10] not going anywhere. Yeah and you know you don't have the the expenditure of Japan was penetrating
[00:26:18] export markets back in the 1890s it was huge 1970s 9090s that's come to an end of it without
[00:26:28] the innovation you can't penetrate the other markets and so the innovation has shifted to America
[00:26:34] where it initially began and also shine. So what about the the level of government bonds then
[00:26:39] held by the by the Bank of Japan it's been increasing I mean it's 54% is the last number I've
[00:26:45] seen of all Japanese government bonds are held by the the Bank of Japan and they are going to keep
[00:26:51] buying them that's the same they're ending their yield curve control which is basically buying up
[00:26:55] bonds to try and control the interest rate and they're still you know they're going to be still
[00:26:59] doing that as as needed but in a less rigid way than before perhaps but so I mean that percentage
[00:27:06] could increase is that a problem or is this you know MMT argument that will perhaps you know
[00:27:12] that it doesn't really matter. Let's say in MMT because again we do do the accounting do the double
[00:27:16] entry bookkeeping and you see that the only role of government bonds effective role is to make
[00:27:22] sure that the reserve account of the the account of the central treasury at the central bank
[00:27:28] is non-negative so it's normally called consolidation is CRF consolidated revenue fund or some term
[00:27:33] like that that whatever the checkers called in in the UK and another term the same thing what actually
[00:27:40] happens at the moment is the treasury the government runs a deficit the treasury is required
[00:27:46] to issue bonds equal to the deficit plus the interest on existing bonds those bonds are then
[00:27:52] issued they're normally auctioned I think the central banks actually control the auctions
[00:27:57] and they're purchased effectively by the by the reserve that are being created by that that deficit
[00:28:03] and previous deficits if there's not enough reserves outstanding the central bank buys the bonds
[00:28:08] in the secondary market to enable those reserves to exist to buy the new ones now all this complicated
[00:28:14] process could be replicated simply by the the treasury running a deficit and then reducing bonds
[00:28:19] equivalent to the deficit and selling them to the central and they would say they do and they'd
[00:28:23] do that they're buying it I mean you know without necessarily understanding the process they would
[00:28:27] say they're buying it I'd assume because they're trying to keep interest rates low so that
[00:28:33] the cost of borrowing stays low and also the cost of them servicing their debt doesn't really
[00:28:39] matter if it's the central bank that's buying it up but all of that keeps interest rates low and I
[00:28:44] guess also it means there's less bond bonds being sold to those pesky foreign buyers who do want
[00:28:51] to be paid and they want to be paid in an international currency yeah but at the same time you know
[00:28:58] they're doing that for a merit for Japan as a policy decision or if you want people want to buy
[00:29:05] Yendon and I know bonds it's not like the American situation where they have to exist and
[00:29:09] be tradable in the national markets because of running a continuous deficit with Japanese running
[00:29:15] a surplus they've really got no need to be trying to bring in foreign currency by bond sales as well
[00:29:20] so it's very hard to get all of those you know people can do it obviously but it's not like it has
[00:29:27] to happen as a case for American bonds so they're doing all right the exports are starting to pick up
[00:29:32] but as I say they're not making as many cars as China is now China is leading the way in electric
[00:29:37] car manufacturing but this they're making about five million cars a year Japan not quite as much
[00:29:43] but it generally this year exports of 12% higher than the than the year before
[00:29:48] so I mean it's you know the economy is not dead but it is moving slowly and of course they've
[00:29:54] got an aging population and low migration I mean they they you know so they've got an increasing
[00:29:59] number of people wanting welfare older people who are working less I mean people do work a lot
[00:30:05] longer though because one in ten people in Japan are over 80 over 29% are over 65 and I read
[00:30:10] somewhere just an extraordinary portion of the population that 70 are still at work because they
[00:30:15] can because they have healthy diets so it's indeed in lots of ways it's in interesting countries
[00:30:20] no because it's so different to the rest of the world be carnal feeling that they you know
[00:30:25] they're finding their way but there's no real opportunity to shine again is that they've those days
[00:30:30] are behind them oh yeah and I mean a large part of the reason that Japan grew so rapidly during
[00:30:36] the post-second World War period when you look at the data it comes out of the fact that there was
[00:30:44] so many Japanese living from the countryside to the city and then every one of them the
[00:30:49] refrigerator of some sort of vehicle etc etc and that gave you like a positive feedback within
[00:30:56] the country itself through innovation and they're the first I think there was Toyota
[00:31:00] and they would have been what had been Suzuki I think the first Japanese motorbike was made by an
[00:31:06] engineer called Suzuki Humpirusly attaching I think it was actually a surplus military engine
[00:31:16] and not talking a small one inside a small one inside a plane to a motorbike and so it wasn't
[00:31:22] just that they were exporting stuff out of the sea they had a domestic positive feedback amplifying
[00:31:28] feedback loop between people's needs and corporate investment and so on so that's when it started
[00:31:34] really growing and by the gut times it got 90 and 80 it was you know becoming one of the balls dominant
[00:31:38] economies but then yet you have that you know the bubble economy that what have been assets by a
[00:31:43] secular speculation and that's been the end of them and now the population decline is set in so
[00:31:48] rather than that population transfer boosting demand you now have a stagnant population meaning
[00:31:53] you can use mum and dad's fridge not your own so you don't have the domestic source of demand
[00:31:58] either so what's the solution there now what and what is the monetary policy now if you were
[00:32:04] if you were in charge of the Bank of Japan if you were the governor as Steve
[00:32:09] Kinnitzu maybe that kind of like that and everyone was looking for what you're gonna do
[00:32:14] you presumably you'd keep interest rates level does it not really mad at three know from
[00:32:18] what you've been saying it's a thing I want to get yeah I want to go down to go private private
[00:32:22] debt levels I mean luckily looking at the private debtor in there we've redefined the private
[00:32:26] debt level so it's not didn't quite 225 now about 215% as the peak level of debt back in
[00:32:33] 1994 211% but it's now it's been rising as you say since 2008 and it's got from 156% up to
[00:32:44] 186% now going back in the wrong direction frankly I'd be using I'd be using government money
[00:32:50] put correction policy to pay down private debt and in Japan's case a lot of that would be corporate
[00:32:55] debt and by reducing level of corporate debt you'd free corporations up to consider investment
[00:33:00] and innovation rather than the current obsession they have and they've had for 30 years now
[00:33:05] of paying down corporate debt so you just but you you'd pay off that debt and issue more government bonds
[00:33:11] which would be bought by the central bank so you get up to you're beginning up to at some point
[00:33:15] you're gonna reach 100% central bank owns all the bonds I mean in general it's a problem with that
[00:33:19] not not at all I mean again bonds are not borrowing this is again you've got to do the double
[00:33:26] entry book keeping anybody tells you bonds is the government borrowing from the public
[00:33:30] doesn't know what they're talking about in double entry book keeping terms and if you don't understand
[00:33:35] that you don't understand money period so it's basically selling an asset to the private sector which
[00:33:42] can be a dangerous asset as Americans have found because when they're putting up rates who actually
[00:33:47] reduce the value of bonds and you then affect the solvency implicit or actual of the American
[00:33:52] banking system not a problem in the Japan situation with rates still at zero but yeah they don't
[00:33:58] they don't you know the bonds are not necessary to finance government spending they're necessary
[00:34:05] so the treasury has a positive balance of the bank the bank of Japan account they could handle
[00:34:11] twice that much debt with twice that many bonds owned by the central bank and it's and the
[00:34:17] inflation that we're seeing there now is that just a is it transitory are they just late to the party
[00:34:24] once causing it when you look when you look at the level of inflation again this is largely
[00:34:28] imported cost Japan is not devoid of raw material but pretty close so with imports it's going
[00:34:34] to be importing extra cost pressures from high oil prices and things like that and like overall
[00:34:40] in general when you look at the average level of the inflation rate before and after COVID
[00:34:49] Japan was well below the global average it's now rising a bit this may be affecting high
[00:34:54] oil prices but its and supply changes options are still going to be partial because COVID is still
[00:35:01] affecting productivity people denied that it's happening but people who deny that happening a
[00:35:05] second bed so they have some cost pressures but again far less inflation than I was seeing in the
[00:35:12] United States or the UK it's an interesting case study in lots of ways isn't it in that they here
[00:35:18] we have what you'd want to see as the answer to you know the damage we're doing to the planet
[00:35:24] in that they've got a population that is not growing I mean they don't want to take a large
[00:35:28] migrant intake they've got an aging population they've got an economy which is flatlined
[00:35:34] I mean if we if you want to look after the planet we don't want more people we don't want growth
[00:35:39] so how they manage to maneuver their way through this flatline population flatline economy
[00:35:46] is going to be an interesting case study to the rest of us just a shame that they've got this
[00:35:51] debt burden to muddy the waters a bit yeah and and doctor trouble that people look at that and say
[00:35:56] oh yeah that's you know Japan is stagnant because of high levels of government debt again that's
[00:36:00] correlation not causation and there's so much of that in the way economists allegedly reason
[00:36:06] about the real world so just do do you think if you if you got rid of that forget the government
[00:36:11] debt if you got rid of the private debt do you think we would be seeing growth back in the
[00:36:14] Japanese economy or is the yeah because they're starting to be able to invest again I mean again
[00:36:19] it's innovation is do you have you have investment of the sort of replacement level and updating
[00:36:23] technology in the close of innovations and financing innovation when you might lose money out of
[00:36:28] the innovation and you're borrowing money from the banks rather than relying upon equity
[00:36:33] finance to the same scale than America does then yeah you're going to have less you
[00:36:38] you have more innovation you market a Japanese corporation finally producing a decent electric car
[00:36:45] and giving it a competition to Tesla and to the Chinese manufacturers so you would potentially
[00:36:51] get some growth out of that so guys the question how did they get into the I mean okay it's
[00:36:56] uh it's historical and it came from a bubble the burst in effect but they the fact that they are
[00:37:03] still so high up there in terms of like what are they spending all this government money on if it's
[00:37:08] not if it's not seeing you know an effective reduction in in in private debt what's the government
[00:37:14] money being used on well I haven't been to Japan for quite some time but if you have experienced
[00:37:19] the quality of Japanese infrastructure compared to what the the ship you see in America and the UK
[00:37:25] I think that might be where the money is going and so I mean just just an example of we I say to
[00:37:31] know is it way back in the early 2000 but I say to know a sort of peripheral city of Tokyo on
[00:37:38] the rim of the largest external rail system you can get from the thing a 30 kilometers away to
[00:37:44] Tokyo in a matter of minutes all the roads all the pedestrian areas are raised above the roads
[00:37:50] you didn't to cross the road you walked over the road you didn't have a press of button and
[00:37:54] you know wait for the traffic to stop you're walking above the traffic so the quality of infrastructure
[00:38:00] is just that much higher in its government maintained so you know I think people outside Japan who
[00:38:06] were saying or Japan stagnant and in a situation of you know of the of the London were you were
[00:38:12] basically walking down Oxford Street as a case of how do I get past the next bunch of homeless
[00:38:17] people asking for a handout it's yeah a much much richer society on that front or tell you trying
[00:38:23] to try to get the train into London you know there's it feels like there's a 50-50 chance as to whether
[00:38:27] they'll be running that day which is just a dire situation so the not that the homeless people are
[00:38:32] not in a dire situation as well yeah I mean the country's falling apart so if the I need as you're
[00:38:37] saying in Japan I'm sure you know thick stuff works so it is just the case of paying off that private
[00:38:43] debt and things will start to you know make good again so Steve Kinetsu what would you
[00:38:51] interest rates then are they less important you just would you would you give them the you know
[00:38:56] that the country's got a history now of what's been called extraordinary policy with negative interest
[00:39:01] rates would you introduce an extraordinary policy of saying well we're going to go back to fixed
[00:39:04] interest rates because they don't really matter too much largely yes so it's actually quite fascinating
[00:39:09] and that in familiar there's ages ago I had a brilliant book on specific that I'm unfortunately
[00:39:13] capable of student never returned it but by as a Swedish statistician called Aaron Burke
[00:39:19] and the title was data reduction basically so he used that to reduce data to information
[00:39:23] a brilliant orientation now in that book which is written in the 1930s he used the interest rate
[00:39:30] of the example of a constant yeah so the whole obsession with varying interest rates are
[00:39:34] trying to change the economy comes out of Hicks's misinterpretation of Cain's just a little bit
[00:39:38] to the you know what's called the ISLM model investment saving liquidity money which was the way
[00:39:44] the mainstream thought about the the where the economy function not Cain's in a role but that's
[00:39:50] what they thought it was because Hicks they got it from Cain's in fact he made it up himself
[00:39:55] in 1935 before he read Cain's a general theory and this basically said investment is controlled by
[00:40:02] the interest rate and now you look at the modern garbage that neoclassicals put out and what they
[00:40:06] call dynamics the castigest general equilibrium models they name out consumption the focus and
[00:40:10] think consumption is controlled by the interest rate so that's why interest rate has become an
[00:40:14] obsessive tool of government policy misinterpretations of Cain's and stupid neoclassical models that
[00:40:21] believe when you go shopping you're calculating along term interest rate and the long term impact
[00:40:27] whether you buy that extra bar of chocolate on the inheritance you're going to give to your
[00:40:33] descendants in two centuries time I wish I was joking but that's the basic idea behind those
[00:40:39] models they made interest rates absolutely central and as Cain said is interest rate don't matter
[00:40:44] what matters to people expectations of profit low expectations of profit you've got low investment
[00:40:49] high expectations you get high investment interest rate is largely relevant unless you increase
[00:40:53] it so much as you crush the economy which is what happened on the bottom so on Japan then just
[00:40:57] finishing and we don't give financial advice obviously we're not that sort of podcasts but if we were
[00:41:02] I guess if you were looking to see when Japan going to bounce back you wouldn't be concerned about
[00:41:07] interest rates or the policies of the bank of Japan you just be looking at that that level of private
[00:41:12] debt to see how quickly that's coming down that's the one enough for sure the moment is going up
[00:41:15] wrong direction guys yeah because they're borrowing to invest in the share market clearly
[00:41:20] back to the same old ways anyway we'll leave it over now good to talk Steve catch you next week
[00:41:25] thank you mate bye the Deep Unking Economics Podcast
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