What The Weak Recovery In Japan Can Teach Us About Re-Igniting The U.S. Economy

Tracy Alloway (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

So Joe, we like talking about money, don't we?

Joe Weisenthal (0:21)

We do. The nature of money, the origin of money, where it comes from, how we talk about the language of money, it's, I would say, for both of us, one of our favorite topics.

Tracy Alloway (0:33)

Yeah, although I think for you, your eyes sort of light up whenever we say we're going to do a money episode, but I have good news for you. This is one of those episodes.

Joe Weisenthal (0:46)

That's great news, because you're right. My eyes do light up. And I think that, you know, it's always sort of interesting, this topic, but there are times when it can feel anthropological, where it's like, you know, oh, that's interesting, you know, okay. But I actually think that it's particularly important now because the sort of the nature of the policies that we choose or that governments choose around the world, well, I think in many cases be informed, so to speak, by very real conceptions of like what money is and what you can do with it.

Tracy Alloway (1:21)

Oh, absolutely. The way you think money actually works and is in fact created is going to inform a lot of what you do as a central bank. So, you know, for instance, right now, a lot of central banks are trying to lend to various businesses and parts of the economy to enable them to get through the coronavirus containment efforts.

And that usually entails some form of money creation. So what we're going to talk about today is exactly that. We're going to talk about where money comes from, from someone who has a very, very specific and particular theory about it. And someone who's also credited at various times with actually coining the term quantitative easing, which of course is something that we are also talking a lot about in the current environment.

Joe Weisenthal (2:12)

I can't wait. I mean, you know, quantitative easing, this idea of central banks having purchased assets, trying to strengthen the economy, loosen monetary policy.

It really sort of became a big thing last time. Now we're seeing central banks all over the world use that as just part of the playbook. So what it takes to get actual money into people's hands who need it desperately is a huge and important topic.

Tracy Alloway (2:39)

Excellent. All right, well, without further ado, and I should mention by popular request from quite a few of our listeners, we're gonna bring on Dr. Richard Werner. He is a professor in banking and finance at a whole bunch of universities and a long time professor of economics. So Richard, it's so great to have you on.

Richard Werner (3:00)

Thank you very much. It's a pleasure to be on.

Tracy Alloway (3:03)

So maybe just to begin with, I sort of shortened your title there, but you have a very long and lengthy professional history.

So maybe give us an idea of how you got interested in money creation in the first place. When did you start studying it exactly?

Richard Werner (3:22)

Well, that happened when I was in Tokyo. I was a graduate research student at the University of Tokyo, having come over from Oxford on essentially a leave while doing my doctorate in economics at Oxford University, but I was in Japan on a government scholarship at the University of Tokyo. And I had just applied to the Japan Development Bank. It's one of the big, actually now it's called Development Bank of Japan in central Tokyo, Otemachi, which is the sort of the bank, a government bank that's been helping in the post-war reconstruction.

And they had a research fellowship in their research institute. And my professors had recommended me for that one, but you had to fill in an application form with a research topic. Because when I wrote this was in 1990, actually just before, because yeah, probably in advance of the end of 89, early 1990, I wrote this. And of course these were dramatic times for Japan. You know, I was there in the summer of 89, when the Nikkei peaked at close to 40,000.

So we're still, you know, just barely half of that amount. Haven't really recovered ever from this peak. And a lot of people were talking about capital flows. So my research started with capital flows. And the story that was, in fact, our younger listeners, the big story in the second half of the 80s and a few years after that was Japanese capital flows. They were everywhere. They're on Time Magazine, on the cover, Newsweek. Japanese money was buying up foreign companies, left, right, in center, foreign land, and foreign investment, of course, bond market investment, it was just all over the place, Columbia Pictures, Pebble Beach, Golf Course, Australian, Hawaiian, real estate, you name it. So this flood of Japanese money, and I was doing my doctoral research in economics, but the funny thing was that in economics, nobody could explain these capital flows, where they, why so much? And there were a few studies, two or three, by some known professors about, well, trying to explain this, but they concluded, intriguingly, oh, this is so much money, we can't explain this. Our standard models don't work. And so that was the puzzle. And being a young researcher, and that was my first piece of research, you think, hey, that's a good challenge, I'll solve that puzzle. So the trouble was, I had now given myself the most difficult research question at the time on the globe, and the thing was that Japanese who are extremely friendly and welcoming to foreigners and treated me really well.