Thursday, 8 November 2012

Zombie Cost of Easy Money

The Boom Bust blog in Norway yesterday referred to an article titled Japan counts ‘zombie’ cost of easy money by John Plender in the Financial Times. Although Plender incorrectly explains that "The debate about the effectiveness of unconventional monetary policy measures such as quantitative easing remains perennially inconclusive" (look no further than the U.S. and European economies), he's on track in the case of Japan. He explains,
Yet the experience of Japan suggests there is one clear negative outcome from ultra loose monetary policy: it does structural damage to the economy.
The problem starts with an excessively low cost of capital. Average interest rates on new corporate loans, both short and long term, are down to an unprecedented level in Japan of almost 1 per cent, while the average interest rate paid on overall corporate lending is just under 1.5 per cent. At these levels too many inefficient businesses are being kept alive, says Jesper Koll, head of equity research at JPMorgan in Tokyo.
 Some of his other major points in the article are as follows,
  • This monetary ease tends to freeze the existing industrial structure. He further refers to the Austrian perspective of "malinvestments" which foster economic distortions.
  • Low funding costs in Japan have impeded the process that Schumpeter dubbed creative destruction because zombie companies have been kept afloat at high cost to the competitiveness of others
Is the mainstream media finally waking up to the distortions of easy money and what the Austrian School has to say on the subject? I look forward to reading a similar story about the U.S. and Europe by Plender from the Austrian perspective soon.

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