Wednesday, June 24, 2009

Why Japan has spent a generation in the doldrums

From The Times:
With recovery elusive, a population doddering into old age and perhaps a decade of deflation in prospect, Japan may start mulling the most radical monetary policy of all — the abolition of cash.

Unorthodox, untried and, said one Bank of Tokyo Mitsubishi strategist, “in the realms of economic science fiction”, the recommendation has nevertheless begun floating around Tokyo’s corridors of power and economists have described Japan as particularly suitable as a testing ground.
If you want to witness the lunacy of monetarism, this is it. The argument goes like this: monetary policy is zero bound since you cannot have negative interest rates, people will just switch out into cash. Therefore, if we eliminate cash and force all money to be held electronically, we can decrement accounts and have negative rates.

It's utter rubbish. Suppose your dollar account was being decremented, and you were not allowed to hold dollar bills. Would you begin spending, or would you rush your savings into another currency, or maybe even gold?

A high savings rate means that the Government can buy more economic output without having to sterilize that fiscal action through taxation. The real question isn't why does Japan have cash, it's why does Japan bother to tax? Answer: it has no clue what it's doing.


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