Federal Reserve Bank of Boston Chairman Eric S. Rosengren says he favored the Fed’s continuing QE3 policies until at least the unemployment numbers drop below 7.25%, even if those policies fail to stop another recession. Rosengren told an audience at Babson College “Beyond the U.S. situation, I would also point to Japan’s experience as instructive. As I have pointed out many times, despite having an expanded balance sheet for an extended period, the Japanese continue to struggle with a deflation problem rather than an inflation problem.”
The problem that Rosengren has is that Japan does not have a growing economy and they have not had one. They have had a stagnant economy and Ben Bernanke has admitted this. Bernanke noted:
Once at zero, the short-term interest rate could not be cut further, so our traditional policy tool for dealing with economic weakness was no longer available. Yet, with unemployment soaring, the economy and job market clearly needed more support. Central banks around the world found themselves in a similar predicament. We asked ourselves, “What do we do now?”
To answer this question, we could draw on the experience of Japan, where short-term interest rates have been near zero for many years.
In fact, there has been no significant economic growth for over two decades in Japan as a result of its model, which the Federal Reserve is currently following. Consequently it has racked up the greatest national government debt of any advanced economy, which is 230 percent of GDP and has experienced several credit rating downgrades. Sound familiar?