I couldn’t help but wonder how Japanese finance minister Takahashi Korekiyo led Japan to a period of strong economic expansion while other nations were mired in the Great Depression as detailed in this Ambrose Evans-Pritchard commentary last week.
Be that as it may, if QE as conducted is causing asset bubbles, then we should deploy central bank stimulus more creatively, should it prove necessary. We know how to do it. The methods were pioneered by Takahashi Korekiyo, who pulled Japan out of the Great Depression early in the 1930s. His brilliant feat is now the model for what Japan is (covertly) doing again under Abenomics.
Takahashi turned the Bank of Japan into an arm of the treasury – “fiscal dominance” – and ordered it to finance the budget deficit. You can deploy QE in any way you want. It could be used to build houses, injecting the money into the veins of the economy, instead of the veins of hedge funds. There is no reason why it cannot be administered by an independent Fed or Bank of England, choosing the calibration level as they see fit.
As it turns out, one rather large “vein” of the Japanese economy in the 1930s was military spending and this sector was the recipient of much of the budget deficit largess as detailed in Paul Kennedy’s excellent The Rise and Fall of Great Powers.
Despite – and in some ways because of – these economic difficulties, the finance ministry under Takahashi was willing to borrow recklessly in the early 1930s in order to allocate more to the armed services, whose shares of government spending rose from 31 percent in 1931-1932 to 47 percent in 1936-1937; when he finally took alarm at the economic consequences and sought to modify further increases, he was promptly assassinated by the militarists, and armaments expenditures spiraled upward. By the following year, the armed services were taking 70 percent of government expenditures and Japan was thus spending, in absolute terms, more than any of the far wealthier democracies.
This added context is kind of important…