Bernake's chapter on Japanese monitary policy

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Anonymous_IHB

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<p>Found this in the comments on the Calculated Risk blog. Read it, a highly recommended read. Basically it's a chapter written by Bernake about Japan's problems (which to me, sound a whole like our own) and what the BOJ (and possibly one day the Fed) should do about it. Some of it is pretty radical (ex. true no strings attached "helicopter" money for households?), well worth thinking about. Here is the blog comment below:</p>

<p>----------------------------</p>

<p>Suggested reading....to see where things may be heading:





http://www.iie.com/publications/chapters_preview/319/7iie289X.pdf





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Area Under The Curve | 12.03.07 - 12:50 pm | <a title="Link to this comment" href="http://www.haloscan.com/comments/calculatedrisk/1540116794384727537/#358458">#</a> </p>
 
If I understand what Bernanke has written (a big "if"), and if he intends this to be a solution to our problems here in the United States, then he intends to devalue our currency and promote inflation to stimulate demand and prevent deflation. This certainly seems to be the policy he is pursuing. The effect of this policy will be to raise the bottom of the housing crash in nominal terms while probably lowering it in real terms. In short, the median cost of a home may not drop below $400K, but we will all be making $200K and paying $10 for a cup of coffee. No matter how it happens, the bottom of the housing market will still be determined by affordability, we all might be able to afford more as inflation increases our earnings.
 
<p>IR,</p>

<p>I wasn't old enough to remember the late 70's and early 80's when inflation was in double digits within the US, but did wages across the board increase proportionally with the rate of annual inflation back then?</p>
 
<p>IR - that's how I read it too. Also, don't forget the part about taking questionable bank assets at face value to bail out the banks (<a href="http://www.rgemonitor.com/blog/roubini/228924">http://www.rgemonitor.com/blog/roubini/228924</a>)</p>

<p>Perhaps Bernake's nickname of "Helicoper" Bernake isn't quite right. Should be something more like "Robin Hood" Bernake as it'll involve taking from the rich to give to the poor...</p>
 
<p>Wages increased, blue, but not proportionately. Also, even if your wages went up, part went to pay taxes and SS and often you also moved into a higher tax bracket, whereas today, the brackets are compressed.</p>

<p>I think that people are now getting afraid to spend. As well as not being able to.</p>
 
<em>"did wages across the board increase proportionally with the rate of annual inflation back then?"</em>





Yes and no. The labor unions were much more powerful then, so they were able to negotiate cost of living adjustments as part of their collective bargaining agreements. People who were not in labor unions generally did not see their wages rise that fast. With the near collapse of organized labor in the 1980s, it is unlikely that wages will keep up with inflation in the future. Wages may rise as people leave jobs or threaten to leave to leverage their current employer, but being able to passively sit back and receive pay raises matching inflation is probably not going to happen.
 
<em>"Also, don't forget the part about taking questionable bank assets at face value to bail out the banks"</em>





I think lenders will be the recipients of Bernanke's "helicopter drops."
 
<p>Actually, he lists two distinct types of helicopter drops. One for people (ie. individual households) and another for institutions (ie. banks). </p>

<p>You could argue that a bankrupcy law change would be an invidiual household helicopter drop. Doesn't really seem fair to us renters though - if you're going to print free money for households and give it out, should go to everyone. Although you could argue that the bankrupt households are more likely to run out and spend the money rather than horde it, which is the whole point of the exercise.</p>

<p> </p>
 
I have this nagging suspicion that very little of price inflation will reach Joe Citizen in the form of wages, and even then staples will cost more than wages increase. But, there are too many variables to do anything more than guess.<p>


Got gold?
 
<em>>>I have this nagging suspicion that very little of price inflation will reach Joe Citizen in the form of wages</em>





IIRC, wages on average have not even been keeping up with inflation and adjusted for inflation are actually lower than they were in the early '70s.
 
IR, though unions are weaker than what they used to be, the market is what it always has been. When I can make more money working at the corner gas station than I can working as an Engineer, then my employer will be forced to keep pace with inflation.





All kidding aside, while the corner gas station will be forced to increase wages, competitors will try to pick me off for an inflated salary paid with tiny dollars long before people at the corner gas station earn more than I do. Therefore whether unions are strong or not, employers will be forced to be somewhat competitive. The strength of that competitive response will vary between different occupations, but the impact should be felt everywhere. Particularly in occupations that have been restrained by the growth of offshore outsourcing.
 
<p>Ok, so let's go over the list of "How to get out of a liquidity trap" ideas from Bernake's article about Japan:</p>

<p>- Fed rate dropping, though not as far as zero yet</p>

<p>-downward pressure on the currency - been doing that</p>

<p>-set an inflation target - yep - although it's a lot lower than the 3-4% in the article</p>

<p>-money financed transfers to individual households - looks like it, that's the stimulus plan announced today</p>

<p>- non-standard open market operations - I am murky here as I don't understand this finance stuff well. For the more experience though, pleas have a look and comment. What does "By a fiscal component I mean some implicit subsidy, such as would arise, for example, if the BOJ purchased nonperforming bank loans at face value (this is of course equivalent to a fiscal bailout of the banks, financed by the central bank)." mean? Is it just collateral to borrow at the window? Or is it here, sell me some subprime loans, I'll give you 100% of the original face value ??? And what does "I doubt that extensive nonstandard operations will be needed if the BOJ aggresively pursues relation by other means." mean? Does that mean if all the other measures fail, it's a taxpayer funded bailout? </p>

<p> ... and ... if all of the above fails to work, then what happens next???</p>

<p> </p>

<p>-</p>
 
<p><em>... and ... if all of the above fails to work, then what happens next???</em></p>

<p>I suspect we'll be finding out sooner than later.</p>
 
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