The 20th anniversary of the zaniest moment in economics shows us just how far we haven’t come.
This month marks the 20th anniversary of one of the strangest events in economic history.
Maybe you never heard of it. It was 1999. The internet was still getting of the ground. Facebook was still just a pimple on Mark Zuckerberg’s teenage mind.
But one small pacific nation decided to do something ‘radical’. They’d be having a bit of a rough trot, and the economy was in the doldrums.
So their wacky leaders came up with something zany – FREE MONEY.
Yep, they just made money free. They were giving it away.
Not only that, when people weren’t taking it off their hands fast enough, they started buying stuff off people, to put even more money in their pockets.
It was crazy-town. La-la-ville. Why-don’t-you-have-your-pants-on-palace.
Every economist in the world was predicting fire and brimstone.
And what happened?
Wel… not all that much, actually.
Nothing really happened. Inflation never materialised, growth never happened, and the economy barely changed stride.
And that’s when we entered the twilight zone. It rewrote the economic rule book.
And what this little pacific nation did became a template for America in the GFC, Europe in the 2010 EuroFunk Contest, and Australia in 2020.
(Did he just say that? Oh no he didn’t.)
This radical and crazy policy became the economic orthodoxy. It became the new normal.
I’m guessing you’ve already tweaked that this ‘small pacific nation’ is actually Japan – still one of the most powerful economies in the world, though less so than in 1999.
And what I’m talking about is ZIRP – the zero interest rate policy, and quantitative easing – buying financial assets off the financial sector.
Ok, so it’s not exactly dropping money out of helicopters on ordinary people – the money still had to be funnelled through the financial system.
But if the interest rate is the price of money, then ZIRP really is just free money if you are close enough to ground zero – like if you happen to own an international bank or something. (Those guys need a break.)
But whatever the case, it certainly was radical. Minutes show that board member Yasuo Gotoh told his fellow board members that it felt as if they were “stepping into a fairy tale like Alice in Wonderland.”
They didn’t know how things would turn out. But they didn’t feel like that had a choice.
So they swallowed the pill and jumped.
And this is one of the key lessons for me. Policy makers don’t really know what they’re doing. They pretend that they do, but ask most economists how the economy really works, and they’ll tell you it’s more voodoo than physics.
And again, today, we stand on a bold frontier, where no one really has any idea how the economy works or how we should manage it.
Truth is, there is no ‘managing’ an economy, no more than there is managing a cyclone. We can tinker at the edges, but by and large it is out of our control.
The other point is that our policy-makers’ go-to solution is any crisis is always to “throw money at it.” That’s what Japan did. It’s what the US and Europe did. And it’s what we’ll do too, when our time comes… and it will.
There’s a lot of money to be made if you can get in the way of it.
… I mean, like I did. All that money after the GFC had to wash up somewhere, and a good chunk of it washed up in Australian real estate.
But yeah, 20 years on and nothing has changed. We don’t know how the economy works. We only have a few tools at our disposal, and most of them involve throwing money at the problem.
I know I’m asking you to take a red pill here. I’m asking you to leave behind the comfortable illusion that someone somewhere knows what the hell is going on.
But bite it.
Once you wake up to this reality, you start to see opportunities everywhere.