Piling monetary injustice onto a down-and-out Japanese public

The worst earthquake in more than a lifetime has hit Japan, the tsunami has demolished considerable parts of the nation’s northern coastline, and radioactive waste is headed for nearby towns. As if this isn’t enough to deal with, the Bank of Japan will create an even bigger economic aftershock by printing up another $200 billion or so of fresh new money.

They are doing so to “preempt a deterioration in business sentiment and an increase in risk aversion in financial markets from adversely affecting economic activity.”

Well, the Nikkei 225 is down 11% today, on top of losses of 6% yesterday.  So much for preempting and avoiding a stock market crash.

Just like when a house burns down, printing new money cannot possibly rebuild it.  In the same way, the newly printed money cannot possibly avoid resources from being diverted to endeavours to repair the damage already done to the country, that will stifle economic activity in other areas of the economy.

What this can do, however, is lead to a redistribution of resources in the economy.

No amount of printed money can replace this

Picture this.  Standing outside your now hypothetically scorched home, Gill Marcus comes to you and says, “Hi there, dear sir, us monetary mandarins at the Reserve Bank know you owned a big home that housed several people.  We are sorry about your loss, and would like to see your home restored.  As a result, we will print about R10 million and give it to you, so you can rebuild your home.  We will never ask for the money back, because that would mean we would need to contract the monetary base and ultimately the money supply of the nation substantially, and this would lead to price deflation, and a certain recession, so you can plan your finances accordingly.”

You have now been given the monetary resources with which to buy a substantial amount of real resources from other people in the economy and to rebuild your home nearly free of charge.

It is a pretty sweet deal as you manage to acquire real resources and capital from a public with newly printed money.  The public doesn’t understand that you have been given free money – debased money – that they will receive in return for selling their goods and rendering their services.  You now also have the ability to outbid others who haven’t received free money, so you pay more than they can.  Prices begin to rise.  The last users of the new money only receive it once prices have increased.  This is why inflation hurts the poorest and fixed salary earners the most.  It is why the wealthy become wealthier during periods of monetary inflation.

The newly printed money can lead to a swift redistribution of resources, but it cannot create new resources.

Back to the Japan example, corporates, banks and investors will be the lucky first users of the money.

Let the economic aftershocks begin…

From the BoJ website:

New asset purchase programme from the BoJ