Japanese Negative Rates: What Does it Mean?
The Bank of Japan, in early February 2016, lowered interest rates to negative territory. The rates were lowered to a negative .1% on cash balances.
The negative interest rate policies espoused by the Bank of Japan, as with the European Central Bank, are to thwart the massive risk of deflation.
The true impact of deflation is that it has the effect of making existing debt significantly more expensive to repay. Existing debt, in essence, uses more expensive dollars to repay the loan because of the general decline in prices and wages such as declines in real disposable income.
Concurrent with the negative interest rates, the Japanese reinforced their plans to increase the national sales tax from 8% to 10%. Increasing taxes is wherein lies the problem!
Increasing taxes during a period of concern about deflation more than offsets any monetary policy benefits of the negative interest rates to begin with.
Governments fail to understand that taxation, government spending, and increasing uncertainty are the culprits behind this historic battle with a deflationary spiral. Governments consistently solve the wrong problem setting the stage for the next financial crisis.
The dangers of deflation are real and will result in the destruction of a national economy. With price decreases, generally come wage reductions and creates a downward spiraling effect on an economy which is almost impossible to stop and reverse.
During my tenure in the Marine Corps, and as an expert in economic warfare, I have seen firsthand the destructive forces of a deflationary spiral particularly in Bulgaria and Romania.
With debt levels worldwide at record levels, of over $58 trillion, and unfunded liabilities in virtually every developed nation, a deflationary spiral would collapse world economies.
The two primary culprits of the current financial crisis include government fiscal policies (taxation and spending) and the massive failures of monetary policy starting with quantitative easing and historic increases in the money supply.
Fiscal policy, while potentially beneficial at certain levels, is a drag on an economy beyond some limited amount. When government spending and taxation reach 30% or higher of Gross Domestic Product as we see in the United States today, fiscal policy, becomes an overhead to our economy, which, in turn, causes a substantial negative influence on economic growth.
In short, such fiscal policies exacerbate economic recovery possibilities rather than facilitate the recovery because the overhead aspect of government spending and its drain on economic stimulus efforts within the private sector.
The basic failure of fiscal policy is the misguided perception that government spending is "productive". Government expenditures create spending only and not jobs. All government spending is, in reality, is a transfer payment with the funds coming either form taxation (draining other productive spending) or by adding to debt levels putting a drain on economic growth at some point in the future.
Government spending does not create jobs and does not create economic growth!
Government can create the rule of law which facilitates commerce but it is private investment and risk taking that creates jobs.
The keys to the deflation problem are to reduce taxes and government spending! Deflation is being caused by a deficiency of demand by consumers and businesses such that even ridiculously low interest rates are not stimulating demand. The overhang on economic recovery of excessive government taxation and spending is such that the economy is being dragged down because government does not understand the concepts of elasticity of demand, transfer spending and payments, and determinants of demand.
When the Bank of Japan reduced interest rates to below zero, the Bank of Japan intended to stimulate spending by the private sector but at the same time the Government of Japan planned on increasing the sales tax rates 10% from 8% which dampens spending. The two policies more than offset one another with the result that a deflationary spiral is even more likely.
The Bank of Japan’s monetary policy will not work and Japan will go into a deflationary spiral unless the tax increases are eliminated. Such risks of a spiral will not go away until Japan reduces the "fiscal drag" on the economy of higher government spending and a high tax rate.
Current monetary and fiscal policy of the industrialized world will NOT work either. The way to restore economic growth is to reduce government spending, reduce taxes and reduce the regulatory drag on the economy.
Failure to solve the big three problems above will result in greater failed efforts at fiscal and monetary policies to be followed by a massive worldwide deflationary spiral! The tools used to combat the last depression will cause the next one!
Col. Frank Ryan, CPA, USMCR (Ret) and served in Iraq and briefly in Afghanistan and specializes in corporate restructuring and lectures on ethics for the state CPA societies. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at [email protected] and twitter at @fryan1951.