January 2004

What Have Governments Done With Our Money?

For those who pay attention to such things – and at one time ALL the top macro-hedge funds gunslingers, the Soroses and Druckenmillers, the Robertsons and the Steinhardts, paid very close attention indeed to such statistics – the Bank of Japan has been engaged in a great deal of frantic ‘anti-deflationary’ pumping in recent times.

Indeed, so prodigious has this been that money is now being lent overnight between Tokyo’s flooded banks at small negative rates of interest! 

So rapid has been the build-up that, in only the past nine quarters, it has comprised a whopping 52% boost to the monetary base (a datum composed mainly of currency plus reserve accounts at the Bank) and has entailed a numerical addition to its stock so large (around Y37 trillion or $400 billion) that it has matched that accumulated in the whole of the previous fifty quarters stretching back to when the late-80s Bubble was at its height.

Though this has translated into less than a 5% gain in the benchmark M2+CDs measure – and so has confounded a Japanese elite desperate to ignite a little domestic inflation – it surely has worked its malign magic elsewhere in the world.

In the US, by contrast, there are those who worry about the fact that the weekly Fed data show that the money supply there is falling – and, on some measures, at the most rapid pace in the last four decade’s statistical record, as we will see below –and so they worry that the spectre of deflation is about to stalk the land again.

Such are the subtleties of modern international finance, however,  that these two phenomena are closely interlinked in such a way that both US and Japanese broad monetary aggregates are failing to reflect the true picture of ongoing, central bank-sponsored credit creation and so their sluggishness – while not without consequences – may be gulling the Fukui’s and Haru’s who run the BOJ, as well as the Bernankes and Greenspan’s who lead the Fed, into believing that, far from doing the ill which they palpably are, their actions are not, in fact, taking full enough effect to satisfy their inflationist bent.

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