I've been re-reading one of the great books on Japan's financial crisis, Princes of the Yen by Richard Werner (2003). We have often written about how independent central banks have a central flaw: their existence is undemocratic. Why? Because little matters more for an economy than how its money supply is controlled.
Central bankers know this, and control money supplies. Look to Japan in the 1990s. Despite an "obvious deflation problem" and a shortage of credit (despite low interest rates) that stopped most potential borrowers from doing so, the Bank of Japan (BoJ) refused to expand the money supply, says Werner.
Worse, at "crucial junctures" it even "actively reduced" the money in circulation. This cut domestic demand, deepened the recession, and strengthened the yen.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Why? Many believe the BoJ was just incompetent. Werner does not. For him, its refusal to help out Japan's elected government was about its "desire to promote structural change". Money creation would have given Japan a recovery but not the kind the BoJ wanted.
You may think the BoJ is right on structural reform. But why should the power to insist on social and economic change rest with a central banker? Let's not forget that by 1998, suicides in Japan were at a postwar high.
Japan's prime minister and BoJ governor are now working together to move the country on (one reason we are bullish on it). But this is a story worth bearing in mind as you look at other economies.
Would chancellor George Osborne be as celebrated as he is today for the turnaround (however temporary) in the UK economy without the tailwind money supply expansion via quantitative easing? Of course not.
And would things still be so bad in Europe (where the banks are now shrinking lending) if the European Central Bank was obliged to accept instructions from, rather than work independently from, Europe's suffering democracies?
We'll come back to this, but I think it is fair to say that the power of unelected central bankers inside democracies should be top of the list of political conversations we all need to have over the next decade.
Another thing I suspect we will be talking about for the next decade is alternative finance (born out of a mixture of the shortage of credit in our own economies, the internet and very low interest rates). It is set to be one of the most disruptive movements of our generation and that makes this week's cover story a must read.
If you are anywhere near retirement, the same goes for David C Stevenson's piece. We are all going to be responsible for creating our own pension incomes from now on. Some types of alternative finance (peer-to-peer lending, for example) will help with that. But for ideas on how to build a balanced long-term retirement portfolio, read How to build your nest egg.
-
Why CEOs deserve a pay riseOpinion The CEOs of big companies often come under fire for being grossly overpaid. But the truth, as per some economists, is the opposite. Do they merit a pay rise?
-
Europe prepares to stand alone as Trump turns on UkraineSupport for old military alliances is wavering in the US under Donald Trump. Europe’s leaders are rushing to fill the void. Simon Wilson reports
-
How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
-
The biggest change in the last 17 years – the death of the “Greenspan put”Editor's letter Since I joined MoneyWeek 17 years ago, says John Stepek, we’ve seen a global financial crisis, a eurozone sovereign debt crisis , several Chinese growth scares, a global pandemic, and a land war in Europe. But the biggest change is the death of the “Greenspan put”.
-
Things won't just return to normal – that's not how inflation worksEditor's letter You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.
-
Car hire and the strangeness of the post-pandemic economyEditor's letter A global shortage of hire cars and unusually high hotel occupancy rates sum up the post-pandemic global economy in a nutshell, says Merryn Somerset Webb, with enhanced demand meeting restricted supply.
-
Everything is getting more expensive – including moneyEditor's letter Investors are about to start feeling rather more pain, says Merryn Somerset Webb – from the rising price of money.
-
We may be heading for recession – and it will be no ordinary recessionEditor's letter Just as the downturn in 2020 was not a typical recession. the next downturn could be very different too, says Merryn Somerset Webb.
-
What companies should be prioritising this decadeEditor's letter In a world beset by uncertainty, companies should be prioritising slack over efficiency, says Merryn Somerset Webb.
-
Inflation could soon start to hurtEditor's letter Inflation is not going away. And with people's wages not keeping up, things are going to start to hurt, says Merryn Somerset Webb.
