The dangers of excessive money creation

Japan’s economic performance has always aroused a great deal of interest in China. The economist Li Xunlei, faced with Chinese monetary creation, takes the example of Japan’s neighbour to encourage caution in the excessive use of monetary creation. The pandemic has prompted many states to relax the rules of money creation. Japan has a long experience in this area, and it is useful to observe the effects of this monetary policy.

Very low inflation and wage decline

After the bursting of the real estate bubble in the 1990s, to avoid recession and deflation, Japan applied rate cuts to zero, quantitative easing, and purchases of risky goods. According to monetary theory, this policy should have led to high inflation. However, over the last 20 years, inflation has totaled …2%. Wages over the same period show an average decline of 11.3%. The general population is not the beneficiary.
Graph on the evolution of wages in Japan since 1970 :

wage decline in Japan

What happened to the creation of money? Certainly, it did not go to products and production.

Banks and financial markets

Indeed, part of it remained in the bank reserves. The Central Bank requires a level of 0.79%, but total reserves reach 27.2%. The circulation of this currency stops in the financial system and does not leave it. Companies have retained part of their profits, equivalent to 27.9% of company assets being put into savings. They have also placed their surplus on the stock market, the Nikkei has risen by 145% in less than ten years, while the country’s annual average growth is 1%. Why is this money creation not going to products?

Wealth and poverty

The main reason is the separation between wealth and poverty. Let’s take ten citizens with two rich and eight poor. The poor will proportionally have a higher consumption of basic needs, and the prices of food and clothing will rise. Whereas for the rich, these areas represent a small part of their expenditure. The lowest income earners use 78.6% of their income for basic consumption while the highest income earners use 36.6%. The money will take over the direction of goods. The bipolar effect has therefore increased, and the income data shows this trend. Indeed, the highest incomes have an ever higher proportion of total income. The concentration of wealth continues. A study by Kitao & Yamada shows that between 1994 and 2013, the “wealth” of the richest 10% increased by 26.1% and that that of the poorest 20% decreased by 47.2%. Money calls for money; the wealthiest have more ease in obtaining loans to invest.

The economist warns of the unproductive effects of monetary “super-creation.” It benefits the richest more and contributes to increasing inequality and the distribution of wealth. He addresses China, but his article is global in scope because we are all facing “helicopter money.”

Source : Article by Li Xunlei

25 June 2020

Posted on Categories Finance

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