Thursday, July 08, 2004

Follow the money

"Don't get too excited about the Japanese economy just yet."

Who said that?

Was it you? A billionaire investor? The government??

None of the above.

It was... the money supply (the red line).

"What's that??"

Who said that? Was that you? I thought so...


The money supply is the blood pumping through the veins; the lifeblood of the economy. Without good blood circulation the body withers and dies.

Japan's economy has been suffering from bad circulation for a while now. Money isn't working it's way through the system as it's supposed to. Much of this is down to structural problems; banks have been so heavily indebted that paying off their dues has distracted them from getting on with what they do best: making money.

How does a bank make money?

Easy. It creates loans or 'promises.' The more that people promise to pay back the bank in the future the more money that is being spent today. That's how money is created, literally out of thin air.


The trouble with Japan has been a lack of confidence. People don't have the confidence to go up to the bank and say "gimme as much as I can carry and I will be back this time next year with that and more, much more." Instead, they shy away from the risk, choosing to hide what they have under the pillow.

This won't do.

The Bank of Japan can only do so much to help. Much like a drip being applied to a patient, it's not enough to get the body on it's feet again. It requires not just other methods of treatment but also belief on the part of the patient that a recovery is truly on the way.

I'm optimistic but not yet convinced.

Look at the growth of the money supply again. When it takes off you'll know the patient will have found it's feet again.

** Afterthought **

If you were to compare with a chart for the United States you will see an example of a much healthier economy. This patient is well on the road to recovery. All of the cheap money the Fed has been supplying the U.S. economy is finally being used for the purpose it was originally intended: the creation and circulation of more money. Long may this blood lust last!

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