Japan's Economy Shows Limits of Keynesian Policies

In 1997, the SE Asian Tigers all faced severe economic stresses, partially triggered by a primarily foreign capital-funded massive real estate bubble in Thailand. Today the EXACT same thing is happening as untempered foreign investment into Thailand’s real estate market has created not a “soaring” real estate market as economists always incorrectly explain them, but massive real estate market distortions better known as a bubble.

By Peter Boone and Simon Johnson Bubbles are back as a topic of serious discussion, as they were before the financial crisis.  The questions are: (1) can you spot bubbles, (2) can policymakers do anything to deflate them gently, and (3) can anyone make money when bubbles get out of control?

Daryl Montgomery submits: In what is being billed as a surprise move, the Bank of Japan lowered interest rates back to zero and is planning on more quantitative easing. Along with an unending number of stimulus programs in the last twenty years, Japan has done it all before. If these economic policies actually worked, it wouldn't have to be doing them again. U.S. policy makers are following Japan's lead.

I would like readers to consider carefully the fundamental difference between a “real economy” and a “financial economy.” In a real economy, the debt and equity markets as a percentage of GDP are small and are principally designed to channel savings into investments.

Patrick Chovanec is an associate professor at Tsinghua University’s School of Economics and Management in Beijing, China. Prior to that, he worked for several private equity funds focused on China, and continues to serve as a fund adviser. He's also got a blog. This is part one of a two-part interview I did with him on China's economy.

There are two broad views on our newly resurgent global bubbles – the increase in asset prices in emerging markets, fuelled by capital inflows, with all the associated bells and whistles (including dollar depreciation).  These run-ups in stock market values and real estate prices are either benign or the beginnings of a major new malignancy.