For nearly twenty years, Japan has been trying to counter stagnation with near zero interest rates and enormous government expenditures using large additions to Japan’s national debt. The Abe administration’s plan of government expenditures combined with the Bank of Japan’s additional quantitative easing is more of the same, just on a larger scale. 

Despite observing the twenty years of failure of Japanese stimuli, the Obama administration and Bernanke’s Federal Reserve followed in Japan’s footsteps. The more than seven trillion dollars added to the national debt of the U.S. generated miniature job growth relative to the magnitude of the associated expenditures. 


The Fed’s near zero interest rate programs robbed savers of much more than a trillion dollars and the crime continues without inspiring large scale productive capital investments. 

With almost no returns on savings accounts and with very limited growth in capital projects, both in Japan and in the US, there were and are few alternatives for investors to putting money into the stock market. Hence the inflation in stock prices in both countries. 

Now that the Europeans see what does not work in Japan and what does not work in the U.S., Europe is replicating the Japan/US failure program.  But since we did see big rises in stock prices in both Japan and the US, partially as a result of dysfunctional government and Central Bank programs, perhaps this may still be a good time to invest in European corporate equities. 

Too large a role is being played by central banks in the enormous task of creating recovery from the great recession, in all three areas of what was often referred to as the Triad, the interconnected economies of Japan, the U.S. and Western Europe.  The leaders of central banks are among the most qualified economists in the world. They understand that recovery stimuli come from combinations of monetary and fiscal measures but ultimately growth results from the investments and enlarged operations of the producing sectors of the economy. 

Having found that governments either did not choose the right policies or their programs did not achieve needed results, Central banks took and are taking on a large part of the task of encouraging investments. They do this by various versions of printing money, that is, by lowering the cost of borrowing to extremely low levels. 

Though this policy does lead to some desired results, especially through the refinancing of existing debts by individuals, corporations and even governments, it underestimates the importance of the principal reason for making investments in new projects and in expanding existing operations. 

Borrowing for new projects does not take place principally because interest rates are low but rather because of the expectations of borrowers that the products and services they will create using new capital expenditures will be sellable at high enough prices and in sufficient quantities to generate net incomes and capital gains. 

Investments are likely to be several times more demand elastic than interest rate elastic.  Low interest rates do stimulate investments including long term capital investment projects such as construction.  But expectations of substantial increases in short and intermediate term demand stimulate investments much more than just the availability of low interest rates. 

Having found that governments were and continue to fall short in bringing about needed rates of economic growth, central banks pursued the use of one of the principal monetary tools available to them, lowering interest to near zero. Just as in China, where central bankers and regulators keep down interest rates payable on savings deposits, thereby denying savers interest incomes of an estimated equivalent of over two percent of GDP, for the U.S. the confiscation of interest income from savers is estimated to be about $430 billion annually. This then leads to reductions in consumer expenditures by people who rely on past savings to pay for their expenditures and by many more persons who need to build up their savings accounts for future expenditures and retirement. 

On the one hand, central bank policies did stimulate investments. On the other hand they served as significant discouragement to consumer spending. Furthermore, the repeated announcements by the Fed that interest rates are to be kept low for years potentially intimidate, because they indicate that the Federal Reserve and its great experts on the economy expect slow,  if not quite bad business conditions to continue. 

Whether in Japan, the U.S. or Europe monetary and fiscal policy makers pursue programs that had limited success in the past. Monetary measures have been harmful to many while they led to much smaller benefits than expected. 

The very limited economic benefits from the trillions of dollars borrowed and spent by administrations indicate the difficulty of enlarging a nation’s economy through expenditures by governments rather than expenditures by corporations and private individuals. 

Vambery is a professor at Pace University’s Lubin School of Business in New York City and a former managing editor and editor at large of the Journal of International Business Studies, the referenced journal of the Academy of International Business.