Thursday, January 13, 2011

Japanese Central Bank and US Central Bank Balance Sheets

This graph shows how the Fed and the Japanese central bank have expanded their balance sheets to stimulate slow growing economies. They have assumed some of the bad debt held by the banking system and they have kept interest rates near zero. There is not much else that they can do to expand their economies. Fiscal policy is the only government response available but that is not politically possible. We are dependent upon corporate investment to grow the economy but they have excess capacity today and they will not invest until they see a pick up in consumer demand. Demand, however is dependent upon growth in income and as long as businesses do not see a need to hire more workers that will not happen. We may look like Japan for the next few years with low growth and high unemployment.

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