It’s a mad mad mad mad world

Shinzo Abe, Japan’s new prime minister, has some exciting new ideas about how to make Japan’s economy grow. How about the government borrows a lot of money and spends it on building bridges and roads all over the country?

If that doesn’t sound so new, it is because it isn’t. It is what Japan has been doing for 20 years, and it is the main reason why Japan is now the most heavily indebted nation on the planet – and still not growing a lot. Its debt-to-GDP ratio stands at an eye-watering, world-record 230 percent, which already guarantees that the country’s pensioners-to-be (and Japan has a lot of those) will never be repaid with anything of true value for the government bonds they kept patiently accumulating in their pension funds, and that they optimistically keep calling ‘assets’.

But never mind. The Keynesians agree that this policy was a roaring success, and that this is why the country needs more of it, as, strangely, Japan has still not regained self-sufficient growth after 2 decades of such a policy. Hmmm. Well, in any case, surely the next set of roads and bridges are going to make all the difference. I suggest that this should be called the ‘Krugman-doctrine’, after the outstanding Keynesian thinker, Paul Krugman: even if a few trillion of new government debt and a few trillion of newly-printed paper-money have not revitalized your economy, the next trillion in government deficit-spending and the next trillion in new central-bank money will finally get the economy going. “Just keep the foot on the gas pedal until the economy grows, damn it!”

Mr. Abe also plans to force the Bank of Japan into printing more money, and this is surely going to be a great success, too. Most economists of the Keynesian and monetarist persuasion, i.e. most economists, agree that the Bank of Japan has not really been pulling its weight. Unlike, for example, the Bank of England. The Bank of England more than quadrupled its balance sheet since the start of the crisis to a size that is now almost a third of UK GDP. In the process, the Bank of England also monetized a third of the nation’s public debt. The Bank of England truly deserves to be called the queen of ‘quantitative easing’!

Now, the Bank of Japan’s balance sheet is even larger than a third of the country’s GDP but most of that is a legacy of its earlier programs of ‘quantitative easing’, which have – come to think of it – also not led to self-sufficient growth but let’s not get distracted. In any case, since 2008, its balance sheet has only expanded by a meager 40%. Pathetic.

Such differences in monetary activism are not without effect: At the beginning of 2012 and measured in ‘real terms’, the Japanese economy was about 3 percent smaller than at the start of 2008, while the UK economy was — well, also about 3 percent smaller in ‘real’ terms than at the start of 2008.  And if you think that 2012 made any difference, it didn’t: Both countries re-entered mild technical recessions in the course of 2012.

But in any case, the generally accepted verdict of the international commentariat and of the economics profession, which is predominantly Keynesian and pro-state-intervention, is that the Bank of England did a better job than the Bank of Japan. Why? Japan suffers from ‘crippling deflation’, and the United Kingdom, thanks to the Bank of England’s excellent monetary policy, doesn’t. The benefits are self-evident:

When Mr and Mrs Watanabe did their grocery shopping in 2012 in their three-percent-smaller economy they paid about two percent less on average than they did in early 2008 for the same goods. In the UK, however, when Mr and Mrs Smith did their grocery shopping in 2012 in their equally three-percent smaller economy, they paid 15 percent more for the same goods than in early 2008.

How that is a benefit to Mr and Mrs Smith is beyond me but I guess these journalists and economic commentators must know something that we don’t, as they all agree that all this ‘crippling deflation’ – of not even 1 percent per annum! – is really what is holding Japan back. Well, why does all the inflation in the UK then not propel that economy forward?

The central planners are now looking for an even better plan: have the central bank print even more money! Evidently, the problem with the previous plan was simply this: it was not ambitious enough. Mr. Abe will give the Bank of Japan a new goal of 2 percent inflation. The previous target was 1 percent inflation, which the Bank of Japan did not achieve. But Mr. Abe will help the Bank of Japan achieve their new goal by encouraging them to print money without limit, a policy that is currently the latest vogue among monetary central planners the world over, and will surely be a great success and lead to lots of new, lasting and well-paying jobs and great growth and wonderful innovations. The world’s finest central bank bureaucrats have already endorsed it: Bernanke calls it ‘open-ended quantitative easing’, Mr. Draghi ‘unlimited bond buying’. Such policy instils a lot of confidence. This is yet more proof of what a creative politician Mr. Abe is.

But even the Bank of England can certainly do better. In the UK the discussion centres on the question of whether the Bank of England should adopt ‘nominal GDP targeting’. The notion behind these considerations is that the central bank’s current target of holding inflation steady at around 2 percent might have still unduly restrained it in its money-printing efforts. How so? – Well, whenever inflation was above 3 percent, i.e. 1 percent above the target, for more than 3 months – and despite economic stagnation, inflation was that high for long stretches of time over the past four years – the governor of the Bank, Mervin King, had to write explanatory and apologetic letters to the Chancellor of the Exchequer, George Osborne. Now, writing grovelling letters that are read out in public and reprinted across the country might be rather embarrassing even for you and me, but Mervin King is a highly decorated civil servant and a Knight Grand Cross of the Most Excellent Order of the British Empire. For somebody like him, writing those letters must have been truly embarrassing and hurtful, and such embarrassment might have made him a bit more cautious when printing yet more money and buying more government bonds. Who knows, without such strictures on inflation – which were violated anyway – the Bank of England might have expanded its balance sheet not 4.5 times but 6 or 7 times, to the great benefit of Mr and Mrs Smith.

So here is how nominal GDP targeting would work instead. Let’s say the target is a nominal GDP of 5 percent, meaning the combination of real growth and inflation should be 5 percent every year. Why 5 percent? – Well, why not? Surely, some econometrician can explain why 5 percent is a good number for the UK. Think about it. More than half of UK GDP is now accounted for by the public sector, not by private citizens and companies. The UK is already closer to Soviet Russia than to unconstrained capitalism anyway, so it is about time these things are properly planned centrally. The central plan of the UK government will stipulate that the comrades over at the central bank should deliver 5 percent nominal growth. So if the official inflation rate is 3.5 percent and the official real growth rate is 0, and nominal GDP is thus 3.5, as has happened frequently in recent years, or if the inflation rate is 4.4 percent and the growth rate -0.5, and nominal GDP thus 3.9, no apologetic letters have to be written about creating ‘too much inflation’. Instead, it has to simply be acknowledged that the central committee’s growth plan of 5 percent nominal has not yet been reached, but that the central bank bureaucracy will speedily correct this – by printing more money. Thus, silly concerns about inflation will no longer constrain the Bank of England’s enthusiasm for ‘quantitative easing’ and other unconventional methods. There will be fewer limits to unlimited money printing.

Of course, the Bank of England would meet its 5 percent nominal GDP target if it created 5 percent inflation and no real growth, and as we all know, this is precisely what it has achieved before. But not too worry. Remember the Krugman doctrine: the next round of QE and of deficit spending will finally do the trick and stimulate the economy for good. Really. It will be different next time!

Well, how would that work, you may ask? How could more aggressive money-printing lead to ‘real’ growth? Clearly, through more borrowing. If credit is very cheap more people and more companies – and the state! – take out more loans and accumulate more debt. Voila! — Sure, this is the type of policy that has lead to the housing boom and subsequent crash, and to the 2008 banking disaster, but in any case, the civil servants, the bureaucrats and their Keynesian and monetarist advisors just know that this is the policy we need today – just more of it because of the crisis. The UK is – next to Japan, ironically – the most highly indebted society on the planet. Surely, it needs more cheap credit, more borrowing and more debt!

As I already indicated above, I am convinced that 23 years after the fall of the Berlin Wall, socialism has finally won, certainly in the sphere of money where the monetary central planners, i.e. the central bankers, play an ever bigger role and enjoy ever more power and public adoration. In the UK, the debate about the country’s next central bank governor, the Canadian ex-Goldman banker Mark Carney, is filled with hope, anticipation and excitement, and with the importance it bestows on the role of the ‘star bureaucrat’ it is certainly worthy of a proper command economy. Mark Carney is a central planning superstar, so says Chancellor of the Exchequer George Osborne, who seems to have become an expert on the international ranking of central bankers, and who pronounced Mr Carney the ‘finest central banker of his generation’. Previously, the ‘finest central banker of his generation’ was the American Alan Greenspan whose reputation inflated with the bubbles he blew, and collapsed when the bubbles burst. On this account, Mr Carney is still early in his career, having inflated only a little housing bubble in his native Canada so far. The exact nature of his UK mission is clear: print more money faster than King did, and find new, clever and complicated sounding explanations for why this is a good policy and to the benefit of the public at large. Carney has already started the latter part of his mission by instigating the public debate over nominal GDP targeting.

None of us knows what 2013 may bring but I venture a prediction: much more state paper money will get printed or created electronically around the world. Much, much, much more. None of this will create real growth, real wealth, real prosperity, real, lasting jobs, and real capital.

In the knowledge that we live in a truly mad, mad, mad, mad world, I wish you all the best for 2013!

This article was previously published at


  • Paul Marks says:

    The only difference between the British and Japanese situations is that in Japan at least the people KNOW the government is spending wildly and the government bank is creating money (from NOTHING).

    In Britain most people are told (by the media and by THE GOVERNMENT ITSELF) that government spending is being “tough” and that monetary policy is sound.

    In reality government spending is higher (yes higher)in Britain than it is in Japan, and monetary policy is worse (yes worse) in Britain than in Japan.

    Most of the City of London (not all of – the commodity markets are real) is one big welfare zone, actually WORSE than Japan.

    The British situation is as hopeless as the American situation is.

  • chuck martel says:

    Technological advancements are great. In bygone times, for instance during the reign of Severus, the state was forced to physically debase its coinage in order to inflate the money supply. Primitive mint workers melted down the coins, adulterated the molten mass with base metals of low value, and recast the coins. Presto, more money! But it was a hassle. Now that we have computerized accounting, all it takes is a keystroke, no glowing crucible, no molten gold poured into a die, it’s just a lot more efficient to finance a state with imaginary money. Don’t even worry about having to scoop together a stack of paper notes to pay for your cosmetic surgery, just swipe the card.

  • Paul Marks says:

    Chuck Martel – alas yes.

    New technology can be used for evil, as well as good.

    And it is being used for evil.

  • James says:

    “The British situation is as hopeless as the American situation is.”

    At least the Americans still have some gold. Maybe less than the 8,000-odd tonnes they officially claim, but still probably far more proportionately speaking than the UK. Plus all that European gold in New York – possession is nine-tenths of the law.

  • The idea that Keynsians believe in making public investments that are not viable propositions is a pathetic man of straw argument. In that the Japanese actually did make such “bridges to nowhere”, they are incompetent or “incompetent Keynsians”.

  • Paul Marks says:

    Ralph Musgrave – you are simply not telling the truth.

    Lord Keynes did like some government spending more other government spending – but he was perfectly clear that ANY government spending would achieve his “effective demand” nonsense.

    See both J.M. Keynes “General Theory…..” and opposing works (such as “The Critics of Keynes” editied by the late Henry Hazlitt, and “Where Keynes Went Wrong” by Hunter Lewis).

    By the way THERE IS NO SUCH THING AS “public investments”.

    An “investment” is something that someone does with their own money (or money voluntarily entrusted to them) in the hope of a financial return to make a profit.

    For example a road or bridge (or….) would only be an “investment” if it was both voluntarily financed and made in the hope of financial return (even if it is made by public donation it is NOT an investment – unless there is a plan for a financial return to make a profit).

    If you mean GOVERNMENT SPENDING then say so.

    The government is NOT the public. If something is done by “public subscription” that means the government has NOT done it.

    And government spending is NOT investment. As it is neither voluntarily funded nor done to make a profit.

    When someone (such as Barack Obama) talks of “public investment in education, health……” they are telling lies.

    • “he was perfectly clear that ANY government spending would achieve his “effective demand”..”. That does not prove Keynes was in favour of non-viable or uneconomic forms of spending!!!!!

      His point was that extra spending EVEN IF IT IS PATENTLY NONSENSICAL will still raise demand. He actually cited an example: having people dig holes in the ground and fill them up all day long. Though of course there are some simpletons around who think he actually favoured having people engage in the latter daft activity.

      “An “investment” is something that someone does with their own money..” What, so hospitals prior to the introduction of the NHS were investments, and thereafter suddenly ceased to be “investments”?

      Or take the M6 toll road near Birmingham. That’s an investment (assuming it was privately funded, which I think it was) whereas other parts of the M6 are not an investment?

      Re Hunter Lewis’s book “Where Keynes Went Wrong”, I’ve read it. It’s on the bookshelf in front of me right now.

      • Robert Sadler says:


        As Paul Marks says an investment is where voluntarily sourced funds are placed in a project with an expected positive rate of return (i.e. interest) and your initial outlay eventually repaid. In other words, you expect your money back plus profit. Whether it is a hospital, road or restaurant.

        When a government pays money for a new hospital, this is not investment, it is expenditure. This is not done for any return but for political reasons. The money is not sourced voluntarily but is taken by force from the productive people in society (many of them investors). Because the government does not care about profit and is making expenditure purely for myopic political ends the project is loss making. As such, the result of government paying for a new hospital is a net loss for the productive people in any given country.

        • My Concise Oxford Dictionary defines “investment” as expenditure which produces either a “worthwhile result” or which “repays the cost”. In the case of government funded investment obviously the “worthwhile result” criterion applies. Whereas in the private sector the “repays cost” criterion applies.

          Money for NHS hospitals is not taken by force in the sense that about 90% of the people of this country want a system where people do not pay at the point of delivery, but pay an annual health insurance premium, or a roughly equal amount per person with the rich paying a bit more.

          To describe the NHS as an institution which is run for “myopic political ends” is ridiculous. Moreover the NHS produces health care much more efficiently than the American and largely private health care system. On that basis, which is the better investment: NHS hospitals or American private ones?

          Are roads an economic nonsense and built and maintained for “myopic political ends”? Bureaucrats responsible for building roads actually do very careful cost benefit analyses to make sure economic benefits exceed costs – which I’m sure they don’t always get right.

          The fundamental difference between a public and private investment is the METHOD OF CHARGING CUSTOMERS. That difference has precisely nothing to do with the viability of the investment.

          However, there is obviously a downside risk to public spending: politicians often spend money in ridiculous investments. Give politicians a chance, and they’d throw even more down the drain. But then the private sector goes badly wrong sometimes: fraudulent or criminal behaviour by banks, credit crunches, etc. In a totally free market alcohol would be dirt cheap and we’d all be “drunk for a penny and dead for twopence”. As to education, children of the most feckless 20% or so of the population would never learn to read or write.

      • Paul Marks says:

        I apologise for assuming you had never read an anti Keynesian work.

        However, this shows that my basic point is correct.

        Conversation with you is pointless.

        As shown by your comment that government road schemes are “investments”.

        The chances of productive interaction between Keynesians and Austrian School people are zero. Our differences are not over details (the sort of thing that can be sorted out by debate and discussion) they are differences of PRINCIPLE.

        Therefore, in the name of peace, I again request you leave.

  • Paul Marks says:

    James – good point.

    Which is, I suspect, why the State of Texas has asked for its gold to be physically returned from the American government and the Federal Reserve. Other States, private organisations, and individuals would be well advised to do the same.

    History shows that Federal government (and banks under its influence) can not be trusted with gold. Nor should people inform the government that they own gold or silver (or, obviously, arms and ammunition).

    I agree that both the American government and the New York Federal Reserve are likely to have less physical gold than they claim they have. However, they are unlikely to admit that – till they really have to.

    Therefore the first European governments that ask for the physical return of their gold are actually likely to get it.

    Only European governments who leave things a bit late are likely to run into trouble.

    As for Mr Brown in Britain (or the similar antics of those in charge of the Swiss Central Bank).

    Like the antics of the American Federal Reserve such actions at least border upon TREASON.

    The disposal of the nation’s gold reserves (or a large part of them) obviously undermines the political independence of a nation (as well as its chances for economic surival).

    In the times that are soon to come – fiat currencies will be of little (if any) use.

    • chuck martel says:

      According to contemporary Keynesians and their close relatives the Bernankeites, gold is a “barbarous relic” from another age that has been superseded by a fiat system that can be continuously manipulated to achieve optimum economic growth and stable employment with acceptable inflation. If this is true, why is the Fed bothering to store any US gold at all in New York or Fort Knox or wherever? Why not ship the gold of others back to where it belongs and sell the US gold on the open market, like Brown did with 395 tons of British gold? If Keynes-infatuated Western governments actually believed their own theories they wouldn’t hedge their imaginary money with bullion. In the back of their mind, however, even they are not convinced of the legitimacy of unlimited money printing.

      • Paul Marks says:

        Good point Chuck.

        If the Keynesians were sincere they would not wait to be asked for the return of the physical gold.

        They would just give it up saying “we do not need this glitter stuff”.

        I am happy to take some off their hands……

  • @Ralph. This is what Keynes has to say in Part VI of Chapter 10 of the General Theory:

    “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”

    • Your point being what? I’m perfectly well aware of that passage from Keyes General Theory. I’ve read it.

      To repeat the point I made above in answer to Paul Marks, Keynes’s point about burying bottles was just a humourous illustration.

      This is all reminiscent of the occasion on which Krugman said about a year ago that a fake invasion from Mars would boost economic activity. Austrians then went ballistic because they thought he meant it seriously.

      Having said that, there is one part of the above quote from Keynes that is wrong. The phrase “there need be no more unemployment” is going too far. Obviously there will always be a finite amount of unemployment. So he should have said something like “there would be a reduction in unemployment”.

      • Robert Sadler says:

        Having said that, there is one part of the above quote from Keynes that is wrong.

        Well, Ralph if he couldn’t get something as fundamental as that right why bother to pay attention to him on anything.

        Further, why listen to someone (like Keynes or Krugman) who makes such pointless comments as these humourous illustrations? Ironically though, these are not merely illustrations. They are the logical conclusion Keynesianism. It is humourous that you cannot see it yourself.

        • “if he couldn’t get something as fundamental as that right why bother to pay attention to him on anything”. Reason is that I’ve never come across anyone who didn’t make mistakes – and occasional serious mistakes. E.g. I back Positive Money with my time and money despite the fact that I think they make mistakes.

          “Further, why listen to someone (like Keynes or Krugman) who makes such pointless comments as these humourous illustrations?” I have no problem with the occasional bit of humour. Do you? In fact the Cobden Centre itself had a deliberately humorous article on 31st Dec. OK by me.

          Moreover, far from being “pointless”, Keynes’s hole digging and “bottle digging up” illustration actually had a lot of “point”. Those silly hypothetical activities illustrate a fundamental point which is that the multiplier effect of an activity (assuming the multiplier is a valid idea, which it might not be) is entirely separate from the viability or otherwise of the activity.

          • Captain Skin says:

            Methinks Ralph should read some Bastiat. Specifically the section “What is seen, and what is unseen.” The most famous of this section being “The fallacy of the broken window

            • Paul Marks says:

              Captain Skin – the Keynesians can not be reached by this essay.

              On “Wikipeida” the leftists even have a link from the article on Bastiat – claiming that this very essay is argument IN FAVOUR of Barack Obama’s “Stimulus”.

              It is like Ralph Musgrave and “Where Keynes Went Wrong”.

              He has read this book – it is right in front of him. Yet nothing in it can reach him.

              The divide (between us and them) is one of fundemental principle – and like all such divides, words are not going to settle it.

              Sooner or later (as the international economy collapses) – there will be blood.

  • Paul Marks says:

    Ralph – you are talking nonsense (as always).

    You are not wanted here.

    Go away.

  • Gary says:

    It is not that the Keynesians chose bad investments, it is that when you rig rates by printing money it becomes impossible to choose what constitutes a viable real investment. The only investment that can be safely made under those circumstances is to buy shares in the money printer and his proxies.

  • Paul Marks says:

    The only element of truth in the Keynesian position is in J.M. Keynes’ introduction of the German edition of the “General Theory…..” where he (in his backhanded way) admits the truth. And, again in a backhanded way, he de facto admits that he has NOT refuted Say’s Law (which he does not even state correctly in the “General Theory….”).

    Increasing the money supply (what is now called “monetary stimulus”) in order to finance deficit spending by government (what is now called “fiscal stimulus”) is not some fancy way of “replacing private demand which has fallen due to a change in animal spirits” (or whatever) it is just disguised WAGE CUTTING.

    In a free economy if the demand for labour falls the price of labour (wages) falls, so that full employment can be maintained. But where the government has undermined the market with regulations and pro union laws (where the government has made “wages sticky downwards”) mass unemployment may result.

    What to do?

    Repeal the government interventions?

    Oh dear me no – that would never do (not to a statist like Keynes).

    So if wages are “sticky downwards” (due to the government) one must INCREASE PRICES (thus de facto cutting wages – in a very blunt and stupid way). That is what the print-and-spend policy is REALLY about.

    But what if the unions (the ones that the government has given all this power to – see W.H. Hutt’s “The Strike Threat System”) see that one is trying to trick them?

    Which they will – union people (whatever else they are) not being stupid. They are not going to really fall for the “money illusion”.

    So what to do?

    Keynes (in the introduction to the German edition of the “General Theory….”) lets the cat out of the bad about his real position.

    Government wage controls, denial that prices are rising, the full bag of tricks of a totalitarian government.

    So that is where this “liberal” Keynes ends up – he ends up with the people in black leather carrying whips.

    “But it worked in the United States during World War II”.

    The blunt instrument of holding down real wages whilst REAL (“black market”) prices did indeed get rid of unemployment.

    In an incredibly ham fisted and stupid way. There was no REAL recovery in the economy till after the war (during the period of the so called “do nothing Congress” which actually reversed many of the World War II and New Deal interventions) see Robert Higgs on this.

    So this is where Keynesianism leads.

    Either peace time totalitarianism.


    If that is “success”…….

    Why not reverse the government interventionism in the labour market that caused the long term mass unemployment in the first place?

    Oh no that is unacceptable – that would be laissez faire. People like Herbert “The Forgotten Progressive” Hoover were as OPPOSED to that as Roosevelt was.

    It reminds me of what Mises said about the mess in Eastern and Central Europe after World War One.

    Children were being killed in wars over what language was to be used in the government schools in various countries.

    Why not (says Mises in “Nation, State and Economy”) all the parents and voluntary institutions deal with education. Surely that would be better than having children KILLED in wars over what state monopoly system was to control them?

    But not – Mises was just denounced as a black hearted reactionary.

    And the killing went on.

    That is wh

Comments are closed.