Odd Lots What The Weak Recovery In Japan Can Teach Us About Re-Igniting The U.S. Economy
May 21, 2020
Richard Werner, an economist from Linacre College, University of Oxford, shares insights drawn from his extensive study of the Japanese economy. He discusses the vital role of money creation, challenging traditional theories and emphasizing the influence of bank lending on economic stability. Werner critiques the effectiveness of quantitative easing and highlights the significant impact of community banks in fostering growth. His analysis of Japan's recovery offers crucial lessons for re-igniting the U.S. economy amid ongoing challenges.
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Japanese Capital Flows Puzzle
- Richard Werner became interested in money creation while studying Japanese capital flows in the 1980s.
- Existing economic theories couldn't explain the massive outflow of Japanese capital despite currency losses and interest differentials.
Credit Creation, Not Intermediation
- Japanese investors used overpriced land as collateral to borrow money, creating new money through bank lending.
- This disproved the existing theory that banks merely lend out existing deposits.
Predicting Japan's Recession
- Werner's model successfully predicted the collapse of Japanese capital flows and the subsequent recession due to shrinking credit creation.
- He developed the "Quantity Theory of Disaggregated Credit" to explain how money supply affects GDP and asset transactions.