(What’s Left of) Our Economy: Why the Fed is Still (Really) Dovish on Economic Stimulus

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CCP Virus, coronavirus, COVID 19, Employment, Federal Reserve, global financial crisis, Great Recession, interest rates, Jerome Powell, lockdowns, monetary policy, moral hazard, QE, quantitative easing, recovery, stimulus, taper, transitory, Wuhan virus, {What's Left of) Our Economy

Yesterday, I tweeted that the Federal Reserve’s just-published statement on its policy plans looked pretty dovish – that is, signaling a continued determination to keep pouring massive amounts of stimulus into the U.S. economy. Most every other student of the economy worth heeding read exactly the opposite into the message and some related materials it issued – including Chair Jerome Powell’s statement at his subsequent press conference that the central bank could start easing off the accelerator as early as November. (One notable exception:  CNBC’s Steve Liesman.)  

Here’s why I’m right – at least in the most important senses – and why the dovishness I see isn’t great news for the American economy at all over any serious length of time.

The folks reading hawkishness into the Fed’s stance pointed to three main reasons for their conclusion, and I’d be the last person to ignore them. First, the policy statement did declare that “moderation” in the central banks’ bond-buying program, known as “quantitative easing” (QE) “may soon be warranted” if the economy’s progress “continues broadly as expected.” That’s a big change even from the July statement’s analysis:

“Last December, the [Fed] indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the [Fed] will continue to assess progress in coming meetings.”

Second, at the press conference, Powell not only hinted at a November start for the so-called “taper” of Fed bond buying.  He added that the process could conclude “around the middle of next year.” So although the change is expected to occur gradually, the Fed is indicating it won’t take forever to accomplish. 

Third, in a regularly issued graphic summary of their (anonymous) future expectations (called the “dot plot”), fully half of these policymakers made clear they anticipated that next year would also see the interest rate they control begin rising. As Powell told the press, taking this step would mean that these Fed officials had seen much more economic progress than that required for the taper of bond purchases they appear ready to begin.

I actually agree that this evidence adds up to more Fed “hawkishness.” But “more” clears only a very low bar for an institution that’s been super-dovish for the better part of the last decade and a half (since it decided to fight the Great Recession following the 2007-08 global financial crisis by opening up the stimulus spigots to an unheard of extent).

In other words, a Fed that for many more months will be continuing to spur growth and employment by purchasing tens of billions of dollars of bonds every month (only less than the current $120 billion) still looks pretty devoted to easy money to me.

At least as important, Powell in particular made clear that the Fed’s expectations for ending what are, after all, measures taken to counter the Covid-induced economic emergency are so fragile that he and his colleagues could change their minds as soon as the current recovery – which has been strong by most measures – veers off track.

It’s true that at the press conference, the Chair stated that all it would take for him to decide that employment was still improving enough to support a prompt beginning of tapering would be a “reasonably good” and “decent” official U.S. jobs report come out next month – not a “knockout, great, super strong” result. (Powell already believes that the nation’s inflation record – the Fed’s other main “taper test” has already been good enough to warrant reducing those bond purchases.)

But aside from questions about how Powell defines “reasonably good,” etc., his remarks show that he (along with his policymaking colleagues, over whom he wields considerable influence) still believes that a single poor jobs report, or similar discouraging development, would suffice to keep the economy on its exact same monumental levels of literal life support even though the patient has long exited the emergency room.

And these exacting standards for merely reducing current stimulus gradually (which, as the Chair himself noted, would still leave its asset holdings “elevated” and “accommodative”) tell me at least that, however well the economy performs, the Fed will be remaining on a super easy-money course pretty much indefinitely.

The one development that could change this picture significantly: a big, sustained takeoff of inflation.

But if Powell’s right (which I believe he is), then the current burst of higher prices results from “transitory” developments peculiar to the dramatic stop-start dynamics created by the pandemic and its policy and behavioral fall-out. Prices, therefore, should start normalizing before too long.

So what’s the problem? First, if the Fed is afraid that the U.S. economy can’t prosper adequately without what are essentially massive government subsidies, that’s a pretty damning indictment of that economy’s ability to generate satisfactory levels of growth and employment and living standards improvements more or less on its own.

Even more important, even if this Fed judgment is wrong, clearly it’s going to keep the stimulus flowing at historically unheard of rates, and historically, anyway, super easy-money has undermined financial stability – and disastrously – by creating what economists call “moral hazard.” That’s the condition in which over-abundant, dirt-cheap resources produce any number of reasons for using these resources foolishly (i.e., unproductively). After all, they drive down the economic penalties for making these mistakes to rock bottom levels by all but eliminating interest costs.

And an economy that uses resources so inefficiently is bound to run into big trouble before too long and suffer punishing and lingering after-effects. If you’re skeptical, think back to that devastating financial crisis and Great Recession – which weren’t so long ago – and to the slowest U.S. recovery in decades that followed. If that’s not persuasive enough, ask yourself why even the easy-money pushers at the Fed are talking about tapering in the first place.

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(What’s Left of) Our Economy: New U.S. Figures Show Inflation is Looking More Transitory

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CCP Virus, coronavirus, COVID 19, deflation, Delta variant, Federal Reserve, inflation, interest rates, lockdowns, monetary policy, QE, quantitative easing, recession, recovery, reopening, Wuhan virus, {What's Left of) Our Economy

Normally, a 5.28 percent annual U.S. inflation rate for July reported today by the Labor Department wouldn’t be seen as good news. Ditto a comparable 4.24 increase in prices excluding food and energy (the so-called core rate, which strips out these categories supposedly because they’re so unusually volatile and don’t necessarily reflect the forces influencing prices overall).

Since these times aren’t normal, due to the CCP Virus pandemic, and since they may well not return to normal for quite a while, due to alarm over the latest, highly infectious Delta strain, times may not become normal any time soon, “We’ll take it for now” strikes me as the only reasonable reaction.

In terms of how U.S. leaders, including the Federal Reserve, should react, tentativeness is justified, too. But the new figures add to the evidence that the recent surge in U.S. inflation is likely to be a “transitory” phenomenon (as Fed-speak calls it) that doesn’t warrant any significant monetary policy moves to cool off the economy (like raising interest rates or moderating or reducing the central banks’ monthly bond purchases – the so-calle Quantitative Easing, or QE, program).

As I’ve argued previously (see, e.g. here), the year-on-year numbers actually prove little – because the virus and the recession and curbs on economic activity it prompted weakened prices to such a remarkable degree, and because the relatively quick reopening starting in late spring, 2020, and the historically explosive growth it ignited, generated such strong catch up. Think of a coiled spring getting released.

Skeptical? From February through July, 2020, overall prices in America dropped on net, and such deflation marked core prices from February through June.

That’s why I look instead at the month-to-month price increases this year. And they definitely point to a significant recent slowing inflation by both measures. Here are the sequential numbers for the overall rate reported today (known as the “Consumer Price Index for All Urban Consumers,” or CPI-U for short);

December-January: 0.26 percent

January-February:   0.35 percent

February-March:     0.62 percent

March-April:           0.77 percent

April-May:              0.64 percent

May-June:               0.90 percent

June-July:                0.47 percent

What’s at least as important as recent signs of inflation slowing is the absence of signs of inflation taking off. They matter because expectations of inflation themselves can become major inflation fuel by causing businesses to boost purchases of inputs above normal rates to avoid greater expenses down the road. The resulting spiral effect can be difficult to halt without the Fed literally slamming the brakes on the entire economy and even producing a recession.

Now here are the monthly increases for core inflation:

December-January: 0.03 percent

January-February:   0.10 percent

February-March:     0.34 percent

March-April:           0.92 percent

April-May:              0.74 percent

May-June:               0.88 percent

June-July:               0.33 percent

The pattern isn’t identical to that for overall inflation, but it’s pretty similar.

The other main body of evidence arguing for abnormally high inflation turning out to be temporary has to do with some of the main engines of the recent price increases. As noted in last month’s post, the surge-y June inflation figures were led by products and services like used cars and trucks (up 10.5 percent month-to-month), vehicle rentals (up 5.2 percent), and hotel and motel rates (up 7.9 percent). These results could be traced either to the stop-start nature of the economy during the pandemic period and consequent bottlenecks and shortages, or to the arrival of the vacation season to a nation long afflicted with cabin fever and hoping that the virus was being beaten.

The July monthly price changes for these items? Used vehicle prices inched up a bare 0.2 percent, vehicle rental prices actually sank by 4.6 percent, and hotel and motel room prices cooled to 6.8 percent. Clearly the latter remain high. But airline fares, whose monthly price increases had already fallen from 10.2 percent in April to seven percent in May to 2.7 percent in June became 0.1 percent cheaper in July.

There’s no guarantee of course that the July numbers will continue the inflation-slowdown trend. But the bad news is that the main reason is anything but good. It has to do with the distinct possibility that the rapid Delta-induced increase in CCP Virus cases will keep prompting a return to business restrictions and behavior curbs that will undermine economic growth. In turn, that would greatly complicate business’ efforts to pass on whatever cost increases they’re dealing with.

If this pattern takes hold, the rising price spiral dynamic could shift into reverse, bringing the economy back to the deflationary days of 2020. And even worse – this kind of spiral can be harder to break than inflationary spirals. For in these circumstances, consumers and businesses hold off on many purchases because they believe prices will drop even further – and production and hiring therefore fall off, too.

In addition, if robust growth continues, along with inflation it views as unacceptably high, the Fed could seek to stabilize prices by slamming on those economic brakes.   

For now, though, the July inflation numbers should be seen as encouraging.  They may amount to favors that are small (and transitory themselves), but they’re still worth being grateful for. 

(What’s Left of) Our Economy: New Data Showing the Fed Really has Worsened Inequality

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asset prices, Bank of America, Ben Bernanke, bubbles, Federal Reserve, finance, housing, inequality, interest rates, Janet Yellen, QE, quantitative easing, recovery, stocks, Wall Street, zero interest rate policy, ZIRP, {What's Left of) Our Economy

Here’s a shock! A study claiming that the Federal Reserve’s historically unprecedented easy money policies have supercharged Wall Street (and the rich) and left Main Street (and the rest) in the dust! And it comes from Wall Street!

The debate over how the central bank’s zero interest rate policy (ZIRP) and quantitative easing bond-buying program (QE) has impacted inequality in America has been just as heated as the debate over how these decisions have impacted economic growth and the prospects for recreating real national prosperity.

The critics charge that easy money has greatly widened the rich-poor gap, largely by boosting incentives to buy and own stocks, and thereby fueling a long, powerful bull market that has overwhelmingly benefited the wealthy because they dominate stock ownership.

The mainstream Fed position was stated by Chair Janet Yellen at the September press conference following the decision to keep interest rates on hold:

“It is true that interest rates affect asset prices, but they have a complex effect through balance sheets, through liabilities and assets. To me, the main thing that an accommodative monetary policy does is put people back to work. And since income inequality is surely exacerbated by a high—having high unemployment and a weak job market that has the most profound negative effects on the most vulnerable individuals, to me, putting people back to work and seeing a strengthening of the labor market that has a disproportionately favorable effect on vulnerable portions of our population, that’s not something that increases income inequality.”

Her predecessor, Ben Bernanke, has made similar points, albeit with more reservations.

A new study from Bank of America, however, contains some data strongly indicating that the Fed’s critics deserve to win this clash hands down. For example, the B of A researchers examined the fate of various possible uses of $100 since the Fed began massively supporting the U.S. economy after the collapse of Lehman Brothers in the fall of 2008. The main findings? A $100 dollar investment in a standard stock and bond portfolio during this time would have more than doubled in value. But a $100 dollar wage would be worth only 14 percent more.

The same methodology also reveals that the financial system is channeling much more credit to the wealthy than to the rest. Thus for every $100 they raised at the start of 2010, venture capital and private equity funds are now raising $275. But for every $100 of mortgage credit extended in America since then, just $61 is being loaned and accepted today. And prime real estate in the nation has appreciated in value more than ten times as much as all U.S. residential real estate.

These results (and others in the study) hardly end the debate over the Fed and inequality. Bernanke and Yellen still make powerful “counterfactual”-based arguments – i.e., claiming that as bad as the situation is now, it would be even worse had the central bank not acted so decisively. And B of A’s possible motives need to be noted. Generally speaking, the financial sector has been campaigning strongly for a Fed rate hike because rock bottom interest rates have greatly reduced the profitability of lending.  (In that respect, this report may not be such a shock.)

But the B of A study should greatly increase the burden on the Fed to demonstrate that its monetary policies haven’t been little more than a boondoggle for the nation’s upper classes – not to mention a flop in and possibly an obstacle to restoring genuine economic health.

(What’s Left of) Our Economy: Why China’s Devaluation is a Huge, and Very Dangerous, Deal

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2016 elections, Bernie Sanders, bubbles, China, Congress, currency, currency manipulation, debt, Democrats, devaluation, Donald Trump, exchange rates, export-led growth, exports, Federal Reserve, Financial Crisis, Global Imbalances, Hillary Clinton, Janet Yellen, Obama, protectionism, QE, quantitative easing, Republicans, TPP, Trade, Trans-Pacific Partnership, yuan, ZIRP, {What's Left of) Our Economy

China’s de facto currency devaluation last night has sent a vitally important message to the President Obama and his trade policy advisers, to a Congress that has just endorsed his strategy for handling currency issues in the proposed Pacific Rim trade deal, and to presidential contenders in both major parties. Their reactions will go far toward determining whether China’s renewed exchange-rate protectionism will further slow the already sluggish American and global economic recoveries, or worse, generate more central bank stimulus that further addicts the nation and world to unhealthy, credit-fueled growth. Indeed, downplaying and coddling a weaker yuan – which could well be cheapened further – may further widen the kinds of international economic and financial imbalances that set the stage for the last global financial crisis.

Constructively dealing with Beijing’s gambit will require correctly understanding its origins and likely effects. This latest example of currency manipulation is not mainly a Chinese attempt to regain competitiveness following the yuan’s rising exchange rate versus export-oriented Asian rivals. Taiwan, Korea, Japan, and others are also seeing their exports fall due to weakening growth in their major final-consumption markets – which are outside Asia. Indeed, China’s trade surplus year-to-date is up more than 200 percent over 2014’s absolute record level. And China’s move into higher value manufacturing – including production of previously imported components of advanced consumer electronics products it once mainly assembled – is proceeding apace.

Instead, China’s decision greatly to widen the yuan’s trading band reflects a determination to boost its economy by increasing its market share even in a world where growth has stagnated or shifted into reverse. As such it’s a quintessential example of beggar-thy-neighbor trade predation. China’s intentions should also be obvious from the devaluation’s timing – two days after the release of trade figures showing a much worse-than-expected year-on-year drop in July exports. And if Beijing really considered the global economy a win-win proposition, it would have sought to juice its own expansion by stimulating domestic demand yet again, which could have helped both foreign-based producers as well as China-based producers. Devaluation, by contrast, bolsters the latter at the former’s expense.

As a result, contrary to many optimistic interpretations, the sluggish global macro picture does not limit the devaluation’s potential to inflict damage on the United States or the rest of the world. In fact, China’s devaluation decision – which is by no means sure to stop with this initial step – arguably could destabilize global finances more dangerously than during the bubble decade. Then, the lopsided financial flows resulting from China’s massive trade surpluses with the United States provided the critical mass of cheap credit that supercharged the intertwined American housing and consumer sectors – and eventually pushed the entire world to the brink. But then, too, U.S. and global growth were stronger. And the Fed and other central banks hadn’t yet created previously undreamed of floods of credit to stave off disaster.

Yet containing the effect of China’s mercantilism this time, without yet more massive – and even reckless – U.S. debt creation, will require the kind of push-back emphatically rejected so far by President Obama and by most Congressional Republicans. Clearly influenced by multinational company interests whose China production benefits from an artificially cheap yuan and other Chinese export subsidies, America’s Democratic and Republican leaders have opposed both sanctioning currency manipulation either unilaterally or through Mr. Obama’s proposed Trans-Pacific Partnership trade agreement (TPP). But they’ve also received cover from no less than Federal Reserve Chair Janet Yellen. She has endorsed the claim that combating currency manipulation could expose the United States to international retaliation because central bank easing – like the Fed’s quantitative easing (QE) and zero interest rate (ZIRP) policies – puts downward pressure on currencies.

The aforementioned timing of China’s action, however, makes this case much harder to make. So does the now greater likelihood that an American failure to respond on either front could well flash a bright devaluation green light before other trading powers – including present and future TPP countries – thinking of continuing (as in the case of Japan) or embarking on this course. Consequently, expect greater pressure on Congress to reject any TPP emerging from ongoing negotiations that lacks strong, enforceable currency manipulation curbs.

One almost certain source of this pressure – this year’s crop of presidential candidates.

As a long-time trade policy critic, Vermont Senator Bernie Sanders seems sure to weigh in quickly on China’s decision and the TPP, and will find a receptive audience among his Capitol Hill Democratic colleagues. He and other Democrats are also bound to turn up the heat on rival White House hopeful Hillary Clinton, whose trade policy and TPP positions have been more ambiguous. After weeks of refusing to comment on the TPP – whose development she must have shaped as President Obama’s first Secretary of State – Clinton declared that a final deal must “address” currency manipulation “either directly or indirectly.” But although this statement left the presumptive Democratic nominee with lots of wiggle room, it also left this flank highly exposed.

At the same time, Congressional Democrats need to remember that currency manipulation is hardly the only protectionist policy pursued by China at the expense of domestic U.S. businesses and their employees, and that even tough currency measures in the TPP text hardly ensures solving the problem. After all, many current and prospective members (like Japan and China, respectively) have vital interests in ensuring that this option remains available. As a result, whatever the merits, they’ll be highly likely to block American currency actions in the treaty’s dispute resolution mechanism. Legislative currency sanctions supporters on both sides of the aisle, therefore, will need to press just as hard for unilateral U.S. currency responses, too.

The politics on the Republican side are clearer. Front-runner Donald Trump has blasted U.S. trade policy with China as a disaster, and has just gotten a huge supply of fresh ammunition. His GOP White House rivals have all supported these China policies with varying degrees of enthusiasm. Will they start backing off? Will they continuing ignoring the subject, even though China’s trade predation inflicts nearly all of its damage on a private sector they claim to prize? Much will depend on whether conservative talk radio and Fox News decide to give this issue any coverage – and of course on whether Trump can keep focused on this subject and stay out of personal feuds.  If he can, he could display more seriousness on critical China issues than most of the rest of the American political establishment – low bar though that is.   

(What’s Left of) Our Economy: The Real Economics of Currency Manipulation

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central banks, currency manipulation, currency wars, devaluation, exchange rates, fast track, Federal Reserve, Financial Times, Great Depression, John Plender, Obama, protectionism, QE, Robert Aliber, TPA, TPP, Trade, Trade Promotion Authority, Trans-Pacific Partnership, University of Chicago, {What's Left of) Our Economy

Since Congress is finished with its fight over fast track negotiating authority for President Obama, and the next big trade deal in the offing – the Trans-Pacific Partnership (TPP) – is still being negotiated, issues like foreign currency manipulation have virtually disappeared from the media.

That’s more than a shame, since the effects of China’s longstanding exchange-rate protectionism – which gives Chinese-made goods artificial price advantages in all global markets – still weigh on American manufacturing production and employment.  And let’s not forget that Mr. Obama and Congress’ Republican leadership successfully beat back efforts to include strong disciplines on manipulation in the TPP – even though prospective TPP member Japan looks like another huge manipulator.

Here’s hoping, though, that when these subjects return to the spotlight, decision-makers will read John Plender’s excellent post in yesterday’s Financial Times explaining why this predatory practice needs to be abolished – and not just for America’s sake.

Plender makes two main contributions to the heated currency manipulation debate. First, he explains that the main argument against curbing manipulation is a straw man. It doesn’t much matter whether national currencies weaken because the governments in question are explicitly seeking trade advantages or not. It’s true, as manipulation soft-liners note ad nauseam, that the recent spate of central bank monetary easing policies pursued all around the world generally has been bound to weaken their countries’ currencies. It’s also true that America’s own Federal Reserve has eased massively itself – though the dollar has remained strong over the long run partly because of its unique status as the world’s predominant currency, and partly because the U.S. economy has outperformed that of most other major powers lately.

But as Plender notes, the distortions to trade flows take place all the same. He could have added, as opposed to only suggesting, a point I keep making: Monetary easing by a trade- and export-led economy (like China’s or Japan’s) is much likelier to stem from trade-related concerns than easing by a consumption-led economy like the United States. (Other considerations let America off the hook, too.)

His second contribution: observing that the universally condemned currency devaluations that helped deepen the Great Depression were by no means all made to beggar trade partners. Yet as trade policy critics are constantly reminded, trade flows suffered anyway. In fact, Plender cites this stunning claim from University of Chicago economist Robert Aliber: measured in terms of the worldwide trade imbalances that have resulted, “today’s currency wars are more severe than those of the 1930s.”

Indeed, this is a great opportunity to revive another point I’ve made in the context of of the fast track/TPP currency manipulation debate: The devaluations of the 1930s and the economic and military calamities they brought closer taught the American and other architects of the post-World War II global economic order a seminal lesson: that such currency movements needed to be controlled in order to create and maintain a viable international trade system. Unless Mr. Obama and his fellow globalization cheerleaders now believe that this conviction was wrong, they need to make sure that U.S. policy helps end or severely punish manipulation, and finally treat genuinely free trade like a priority, not a talking point.

(What’s Left of) Our Economy: Japan Goes All In

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asset prices, Bank of Japan, bubbles, currency, currency manipulation, dollar, Fed, Financial Crisis, free markets, Global Imbalances, investing, Japan, QE, stimulus, Trade, Trans-Pacific Partnership, yen, {What's Left of) Our Economy

I was already having a hard enough time trying to figure out whether to focus this morning on three big data releases or on some of the other economic and non-economic developments crowding the headlines – and then the Japanese government rocked the economic world with two mega-announcements.

So the Labor Department’s Employment Cost Index, the Commerce Department’s survey of personal incomes and saving, and the Chicago purchasing managers‘ new monthly sounding all will have to take a back seat to the Japanese central bank’s unveiling of a massive new stimulus program, and the Japanese government pension fund’s announcement that it’s going to start investing considerably more in stocks both in Japan and around the world.

There’s no need to review the most obvious implications of this news. Just Google “Bank of Japan” and “GPIF” (Government Pension Investment Fund). You’ll quickly see that the former’s decision to buy many more Japanese government bonds, along with stocks and other financial assets, is expected to boost the prices of the such assets all around the world, further weaken Japan’s yen, and fend off another bout of deflation — with all the damage that would do to the Japanese and global economies. Financial assets will also get a major lift – all else equal of course! – from the Japanese government employee pension fund (the world’s biggest public sector investor) shifting its strategy to buying more stocks in Japan and abroad.

To me, the less obvious implications matter more, especially these two:

First, one of the biggest long run dangers of the unprecedented central bank stimulus programs adopted to contain the financial crisis is that investment capital around the world will be spent badly. The idea is that if investors know that the Federal Reserve and the European Central Bank or the Bank of Japan will ride to their rescue with yet more credit if they make mistakes in allocating funds, the discipline that’s supposed to be one of the main virtues of free markets and capitalism will be badly eroded and possibly destroyed.

The crisis itself clearly was fueled in the first place by the glut of credit provided by the Fed in particular during the bubble decade. Super-easy money encouraged both Wall Street and homeowners to bid up the price of fundamentally unproductive assets like houses wildly beyond sensible levels. Government housing subsidies and implicit guarantees didn’t hurt, either.

The Fed doesn’t buy stocks but its Japanese counterpart has invested in exchange-traded funds and real estate investment trusts. Now the Bank of Japan will triple those purchases, along with boosting its bond buys. Is it remotely possible that this step will increase the efficiency of capital allocation in Japan, the United States, or anywhere?

In addition, the $1 trillion-plus Japan government pension fund, the world’s largest public investor, will more than double its holdings of Japanese and foreign stocks to 25 percent each. Of course, public pension funds have long been major players in financial markets. But U.S. funds hire private sector investment professionals to manage their portfolios. That hardly makes them perfect, but at least they have a history of responding in standard ways to market (and more recently, government and central bank) signals.

The GPIF’s portfolio, by contrast, is run by government bureaucrats. Moreover, they’re bureaucrats from the Japanese government, whose devotion to free markets has been historically difficult to spot. I’m someone who actually thinks that Tokyo has a good record of intervening in the economy, especially in manufacturing. But that doesn’t mean I have much confidence in it as a stock- or sector-picker – which of course is a different animal altogether from identifying approaches to nurture the long-term development of industries. Moreover, why would anyone hewing to the conventional wisdom about Japan’s allegedly disastrous penchant for “picking losers” believe that its leaders will now suddenly start making decisions that improve the efficiency of their own economy, let alone economies anywhere else?

The second less-than-obvious set of implications of Japan’s new policies concerns trade flows and trade policy. As widely recognized, the extra BOJ bond-buying has already brought the yen to roughly seven-year lows versus the U.S. dollar. The question Washington needs to ask is why it’s still pursuing a Trans-Pacific Partnership trade deal when the biggest economy involved in the talks so far outside the United States, which already has a strong record of protectionism, has just moved to cheapen the price of its exports and raise the price of its imports – and all for reasons having nothing to do with market forces?

Further, this latest instance of Japanese currency manipulation will likely affect trade flows more than Fed easing ever could – even if ZIRP and QE haven’t been accompanied by a stronger, not weaker dollar. For as defenders of this Japanese exchange-protectionism keep ignoring, the BOJ isn’t simply mimicking the Fed because monetary easing policies in a mercantile, production and export-led economy like Japan’s will always have fundamentally different – and inevitably more protectionist – effects than easing policies in a consumption- and import-focused economy like America’s.

Finally, even though Washington reportedly is more determined than ever to ignore foreign currency devaluations in the mistaken belief that its leading, and slow-growing, trade partners deserve such help, the much weaker yen is likeliest to spur similar moves – or the introduction of other beggar-thy-neighbor measures – in other mercantile, export-led economies in Asia, notably Korea and China.

Without a meaningful U.S. response – meaning a sharp turnabout in import- and deficit-friendly American trade policies – the inevitable results will be an even bigger U.S. trade shortfall, a consequently weaker American recovery, and reflation of the global imbalances that played such a prominent role in triggering the financial crisis to begin with. Unless, finally, this time, for reasons no one has yet identified, it really is different?