Off to Japan

Tomorrow I fly to Tokyo to present a paper to a conference of the Ricardo Society of Japan. My paper is on “Causes and Effects of Monetary Disequilibrium in Ricardo and Thornton,” probably not the most exciting paper written on monetary economics in the last year, but I hope that those interested in the monetary theory of David Ricardo will find something in it to think about. I try to use the framework of the monetary approach to the balance of payments to elucidate Ricardo’s contention that the only possible cause of the depreciation of an inconvertible currency is the creation of too many inconvertible banknotes. While in Tokyo for four days I also hope to find out a little bit more about Japan’s monetary policy. Perhaps I will blog about that at some point as I have hoped, and Benjamin Cole has urge me, to do for some time. But chances are that I will not be blogging again until next week. I just don’t know how functional I will be while I am in Tokyo.


19 Responses to “Off to Japan”

  1. 1 Mike Sproul September 12, 2011 at 9:00 am


    The coincidence here is a little too much for me to keep quiet: I have a paper that explains why Thornton and Ricardo were both wrong. It’s called “Three False Critiques of the Real Bills Doctrine”, and it’s available by clicking my name above.


  2. 2 Benjamin Cole September 12, 2011 at 11:38 am

    Good luck in Tokyo, and I look forward to what you find out about their monetary policy.

    My view is that Japan is a example of what not to do. I gather that was Milton Friedman’s view, and for a while John Taylor’s view.

    Taylor wrote a paper in 2006 on Japan, on his website, btw, positively gushing about the success of Japan’s short-lived QE efforts in the mid ’00s.


  3. 3 Lars Christensen September 12, 2011 at 12:33 pm

    My input on Japan is that I increasingly think that the monetary explanation is wrong for Japan – as is of course the cash balance story.

    Obviously, Japan as deflation because money demand growth consistently outpaces money. Thats pretty simple. That however odd not to be a problem in the long run if expectations have adjusted accordingly. The best indication that this have happened is that Japanese unemployment is relatively low. So maybe what we are seeing in Japan is actually a Thompson-Glasner style wage standard;-)

    The main reason Japan has low growth is demographics. If you adjust GDP growth for the growth (or rather the decline) in the labour force then one will see that the Japanese growth record really is not bad at all – especially taking into accord that Japan after all is a very high-income country.

    It is correct that Japanese monetary policy was overly tight after the Japanese bubble bursted in the mid-90ties, but that is primarily a story of the 90ties.

    We can learn a lot from Japan, but I think Japan is often used as an example of all kind of illnesses, but few of those people who pull the Japan-card really have study Japan. SImilar for me – I am not expert on the Japanese economy, but both the monetary and the deleveraging explanations for Japan’s low growth during the past decade (not the 90ties) I believe to be wrong.

    PS Ben I am sorry so Bernanke is not really Bernanke San;-)


  4. 4 Lars Christensen September 12, 2011 at 12:44 pm

    Daniel Gros makes the same point (ignore his initial comments on monetary policy which I believe to be wrong…):


  5. 5 Benjamin Cole September 12, 2011 at 2:37 pm



    Yes, you can parse the numbers, and correct for demographics etc (although some say the chronic deflation in equities and housing and slow growth has in part fomented depopulation).

    Still, look at Japan’s GDP growth to 1990, and then after. Look at their share of global GDP. It suddenly weakens in 1990–you can’t say demographics suddenly kicks in with a vengeance.

    How do explain 80 percent declines in property and equities values in the last 20 years, and still no bottom (in real estate anyway)?

    All the while, the yen gets stronger. They have had about a 15 percent drop in their GDP deflator since 1990.

    You may wish to read John Taylor;s paper on Japan written in 2006, on his website. Or, of course, Milton Friedman’s Hoover pub on Japan, written in 1997.

    I contend tight money and modern economies just do not mix. Deflation is death, given sticky wages and real estate lending. My guess is something like 3-4 percent inflation is ideal—bails out weak real estate loans, unfreezes wages, provides some Dutch courage to investors, is in general an economic lubricant. Money illusion is powerful.

    Ben Bernanke is indeed saluting the Rising Sun!


  6. 6 Lars Christensen September 12, 2011 at 3:08 pm


    Just to make it completely clear. The present crisis is 100% due to overly tight monetary policy – that goes especially for the euro zone and the US. Scott Sumner etc. are completely right on that and I clearly also think that the deep recession Japan faced in the second half of the 90ties was due to overly tight monetary policy. Friedman’s 1997 comments says it all. They are in my view 100% correct.

    However, the while the monetary story is correct in the 90ties that does not automatically go for the 00ties.

    Finally I am strong opposed to the “economic lubricant” of (permanent) 3-4% inflation. Economies can easily handle deflation, which is due to positive productivity growth as long as expectations are in sync with that. Obviously, that is not the same as to say that the US or the euro zone economies could not benefit from easier monetary conditions right now. In fact I strongly believe that US and euro zone monetary policy is far too tight. What I oppose however is PERMANENT higher inflation. I agree with Scott Sumner & Co. that the Federal Reserve should implement a NGDP path level rule to get out of the crisis and maintain it thereafter. I am however, with Bill Woolsey when it comes to the preferred growth path for NGDP. I prefer 3% as Bill to 5%.

    Anyway, my point really is that if we want to make a strong case for monetary easing in the present situation then one should do it based on the correct historical examples rather than on myth like the story about Japan’s lost decade(s).

    And finally – has the Japanese stock market really performed so badly compared to the US stock market if you correct for USD/JPY? I am not sure, but it might be worth a look before say Japan really has done so badly.


  7. 7 Benjamin Cole September 12, 2011 at 5:45 pm


    Yes, I can remember when the Nikkei Dow was at 45k and the US Dow at 7k back in 90’s. You can adjust, but the numbers are so big….after 20 years they are down 75 percent, correct to dollar maybe “only” down 38 percent.

    And Japanese real estate is down 80 percent (down 40 percent in dollars), and still falling –I just don’t see a success story in Japan. It has been horrible for investors. Wages have been falling too.

    Since the early 1990s, the USA has outperformed Japan by a wide range of metrics (of course, recently both economies have gone to toilet-town). Even while devoting 5-6 percent of GDP to defense.

    As for deflation, have you considered what happens to banks and real estate investors in prolonged bouts of deflation? Again, see Japan. Or the USA now. Why pay back mortgages when property values are falling? Why lend? You don’t see a cycle developing? Loans are made in nominal dollars….deflation is ugly time in real estate. Lenders won’t lend on real estate driving down values, meaning lenders won’t lend on depreciating assets….in Japan this has gone on for decades.

    I see no moral virtue in zero inflation or deflation, or any need to preserve the value of paper currency in monetary formaldehyde at the expense of real growth. It is not immoral to have 3-4 percent inflation–the most “moral” inflation rate, I contend, is that which promotes the highest real growth rate.

    The USA prospered mightily in the 1980s and 1990s with moderate inflation.
    I would take those two decades over and over again.

    Indeed, we hit a buzzsaw when we hit very low inflation rates in the 2000s, and deflation. I realize to exactly cause and effect–but if moderate inflation is so bad, how do you explain the 1980s and 1990s?


  8. 8 Benjamin Cole September 12, 2011 at 8:54 pm

    Wikipedia has a nice graph on the Nikkei Dow in dollars.

    Down about 50 percent, in dollar terms, since 1990. A disaster for investors.

    And here, we see on a PPI basis the average Japanese had 81 percent as much income as a USA’er in 1990, and now has only 71 percent. They are falling behind us.

    I just don’t see a case for deflation or tight money. Not based on Japan.


  9. 9 Lars Christensen September 13, 2011 at 2:58 am

    Again Ben, I do not argue in favour of tight money then you have deflationary tendencies. However, moderate deflation is fully expected shouldn’t really be a problem. I think George Selgin is making a very good case for that. However, this is not the situation we are talking about in the US or Europe right now.

    In fact as we speak we see a massive tightening of US monetary conditions as European clearly are hoarding dollars in the response to the euro crisis. The Fed naturally should act to avoid this “passive” tightening of monetary conditions otherwise we are just going to see more deflationary tendencies in both Europe and the US.

    I don’t think we really disagree here, but I also think about what happens after the Fed and the ECB hopefully one day do the right thing.


  10. 10 W. Peden September 13, 2011 at 6:08 am

    David Glasner,

    I read your article on Keynes from 1988. It was very interesting. I have a few questions-

    1. You mention Keynes’s review of the Road to Serfdom in a footnote and say that he failed to understand it. What do you think of Brad Delong’s interpretation of that letter, which is that Keynes was just being patronising?

    2. Do you think that Keynes just used investment and expenditure to create an undercover quantity theory?

    3. With price level targeting, isn’t there a danger of adverse responses to supply shocks? So a productivity boom, like the 1920s in America, is met by procyclical stimulus and a supply-shock is met with tight monetary policy that deepens the recession?


  11. 11 Benjamin Cole September 13, 2011 at 9:21 am


    I enjoy your commentary. Right now, we all have to speak loudly for a very aggressive Fed and ECB. Fighting inflation needs to shoved into the back seat, and maybe the trunk of the car.


  12. 12 Lars Christensen September 13, 2011 at 11:20 am

    Thank Ben. I hope you also read my Working Paper on “Market Monetarism”


  13. 13 Lars Christensen September 13, 2011 at 11:45 am

    …and Ben, I of course hope you will endorse the term “Market Monetarism”!


  14. 14 Jce September 13, 2011 at 3:41 pm

    David, could you share your paper too please?


  15. 15 Benjamin Cole September 13, 2011 at 4:35 pm

    Lars—-Hooray for “Market Monetarism.” Maybe even “Free Market Monetarism.”

    Anything to suggest free markets and no Swedish-style intervention.


  16. 16 Benjamin Cole September 14, 2011 at 5:11 pm

    The above is actually a “pro-Japan” report, but if you read it one becomes more and more depressed about the island nation’s outlook and the too-tight Bank of Japan.


  17. 17 David Glasner September 17, 2011 at 9:07 pm

    Mike, It is a coincidence, I haven’t had a chance to look at yours. When I do, I will get back to you. My paper is available here.

    Joe, See the link above.

    Ben, My visit turned out to be short and physically uncomfortable (for reasons I won’t go into) so I wasn’t able to find out too much about what economists in Japan think of the monetary policy of the Bank of Japan. What little I could find out was consistent with our view that the Bank of Japan is extremely averse to inflation. Thanks for the reference to Taylor’s website.

    Lars and Ben, Interesting exchange. My inclination is more toward Lars’s position that we don’t need to have positive inflation under all circumstances, but it may be that we want to avoid the risk of too low inflation or deflation when the economy would react adversely to very low inflation or to deflation. In my way of looking at it, the key is whether the real rate of interest, apart from any liquidity premium resulting from a tight monetary policy, is higher than the rate of deflation by at least 1.5 or 2%. Thus, if you have a 4% real rate of interest, an economy could tolerate as much as 2% deflation, but in an economy like ours with a real rate of interest that is negative, say -1% you need negative deflation, i.e., inflation, of at least 3%. I am just using the numbers for illustrative purposes, not because I have confidence that they are reliable estimates, but I don’t think that they are wildly off the mark.

    W. Peden, I think that Keynes could be patronizing to almost anyone. But I don’t think that he was being especially patronizing in the letter to Hayek. But I have no real basis for that belief. I haven’t seen Delong’s assertion, so I don’t know what his basis for the assertion is.

    I am sorry, about investment and the quantity theory, you need to spell out your question a little more explicitly for me.

    I agree with your assessment of price level targeting and I wrote about that in this post on price-level targeting last month.


  18. 18 W. Peden September 18, 2011 at 11:08 am

    David Glasner,

    Thanks for your answers. I hope you had a good time in Japan.

    In the paper, I seem to remember that you referred to a criticism that the Treatise (which I haven’t read yet) is just the quantity theory, with “investment” and “expenditure” replacing “money” and “velocity”.


  19. 19 David Glasner September 22, 2011 at 12:35 pm

    W. Peden, Let’s just say the trip had its ups and downs.

    I may have said something like that. I think that the identification of a gap between saving and investment with a change in the quantity of money is a fairly standard interpretation of a Wicksellian model, which is what Keynes was working with in the Treatise. Does that help?


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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