But in the practical world, with wage and price stickiness and institutional rigidities, a central bank can asphyxiate an economy for decades—long enough to be the “long-run” for anybody with a money-earning life of perhaps 50 years.
Case in point is Japan, wherein the Bank of Japan effectively targeted zero inflation for the 20 years after 1992, and just as effectively suffocated growth.
The BoJ’s targeting of zero inflation, or even minor deflation, never worked, and once-soaring Japan fell further behind the United States, in terms of per capita incomes. Meanwhile, Japanese property and equity markets cratered, losing 80 percent of early 1990s values, before recent recoveries. Tight money and minor deflation proved a bottomless debacle.
If a sociopath formed a money-worshipping ascetic cult and gained control of the FOMC (I mean, even worse than now), with the plan to cut the money supply by 66 percent in the next 33 years, would the impact be “neutral”?
History suggests the sadistic FOMC cult’s monetary anorexia could stifle real growth for that full 33 years and more, based on what happened in Japan.
Moreover, Japan today has a smaller economy than it would have had it tried monetary expansion. Even under Abenomics, Japan has decades of lost growth to try to recover.
In brief, money is not long-term neutral. A too-tight money supply can cripple a major, advanced economy for decades on end.
Which leads us to the always-fascinating Center for Financial Stability’s “Divisia” measure of the U.S. money supply, an indicator now sounding the klaxons— Divisia shows money growth nearly dead in the water.
Read the whole article here.