Sunday, April 7, 2013

Stop the Stimulation

I'm not sure about you, but I'm getting tired of central banks stimulating their economies.
No means no!
How did the concept of "printing money" get turned into the concept of "stimulus"? Printing money is an indirect tax on anybody who saves. [Unlike direct taxes, which are paid by those who work (employment taxes) or those who consume (sales taxes).]  Printing money is not likely to have a significant effect on the economy unless the printed money is invested into projects with higher values of return on investment than the money would have been invested by those peopled taxed by the "inflation" (or less "deflation".)

The reason that "printng money" may have turned into the concept of "stimulus" is that stock markets indexes often increase whenever Central Bank propose printing money. So, non-economists often think that printing money is a good thing because the "DOW JONES was up for the day." But this stock market rise is not an indicator that printing money is a good thing. Why? Because printing money will cause the value of everything to go up. Stock market gains after a Central Bank proposes printing money are not a proof that printing money is good for an economy. It's like cheating on a test in high school. At first, it looks like your grades are improving, but it's not sustainable in the long-run.

Japan's Central Bank is once again hoping that they can cover up their indirect taxes in the sweet-sounding wording of "stimulus." According to the AP,

"Japan is taking aggressive action to lift consumer prices, encourage borrowing and help pull the world's third-largest economy out of a long slump."

Journals are one of the main culprits in this "stimulation" fiasco because they seems to report whatever Central Banks tell them to report. How many journalists actually take the time to look into the historical data on whether printing money improves an economy?

Here's why I think that printing money is not going to solve Japan's lack of economic growth:
Falling prices means that people are more likely to save rather than consume. Higher savings leads to higher growth if the savings are placed into wise investments (and by wise investments, I mean those investments with large values of rate of return on investment.)

Sure, you can print money, but who do you think is better able to make choices on where to invest? (Government? Or Individuals?) This is not an easy question to answer. But if you study history, you are likely to think that individuals are better at choosing investment with large values of rate of return than are governments because the highest growth rates have been achieved when there is limited government interference in an economy. A lot of the printed money ends up going into government bonds (i.e. useful work that governments spend rather than individuals invest.) Remember: printing money doesn't affect the amount of useful work being generated in a country. It's just a tax that takes from those who save (invest) and gives to governments to waste. Printing money doesn't instantaneously change the number of power plants or the amount of petroleum in reserve.

So, I'm doubtful that printing money will solve Japan's lack of growth. But I know of at least one idea that Japan could return to growth:  restart the ~52 nuclear reactors that are shut down. The biggest stimulus to the Japanese economy would be to turn back on these nuclear reactors. This will drastically increase the amount of useful work in their society. It's real simple. If Japan wants to return to growth, they just have to turn back on their nuclear reactors.  (For more information on Japan's nuclear reactors, check out the following article I wrote in Feb 2012. As of Mar 2013, only 2 of Japan's 54 nuclear reactors were operating.)

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