Thursday, July 21, 2011

Lest we forget the BOJ when we think of the US of A

In formulating rate expectations for the FED in the coming year, there are the usual measures from analysts forecasts to market measures, be they from the futures, forwards, or swaps market, or more exotic species such as implied probability modeling.
While no two economies are identical I think it remains useful -- from a pedagogical standpoint -- to recognize history as a teacher. The current Federal Reserve Chairman, Ben Bernanke, has done the utmost from a conventional monetarist standpoint to expand the FED's balance sheet, in an attempt to reflate the economy at the micro level in order to see the results in aggregate. This has not worked and is unlikely to without intervention through fiscal policy. In the aftermath of The Great Recession, there was much discussion of the shape of the recovery with many pointing to the so-called Zarnowitz Rule as predictor that the recovery would be V shaped. That wasn't the case; we remain in the horizontal portion of an L shaped recovery and the United States is likely to be mired with moribund employment growth and the aftermath of an asset bubble bursting as a liquidity trap situation is never pretty (see the chart of the Bank of Japan Target Rate since 1990).

When the BOJ lowered from 6% in June 1991 to 0.5% in September 1995 how many predicted that the 0.5% rate would hold for almost three years before being lowered again in September 1998?
When rates went to zero in February of 1999 who predicted that they would stay there till July 2000?
It is fully acknowledged that the United States does not have the structural problems of Japan but it does suffer from the sclerosis of a political class that is wholly removed from the realities of working life; the pre-requisite for political office remains either substantial wealth or the ability to raise massive campaign funding through one's social networks. Promethean policy initiatives given way to the rhetoric of the ridiculous. One century later, the works of Max Weber and the critique of C. Wright Mills remains as relevant as ever when view current events.