Why cannot Japan just print money

Okay, so, here’s what you need to understand: when the government prints money, they are tricking everyone into spending more money. People aren’t truly richer, because there isn’t more stuff. There’s just more worthless pieces of paper.

The second thing you need to understand is that when the government prints money, the main people they are trying to trick isn’t people like your mommy and daddy. They’re trying to trick companies. Here’s how it works: the government prints money and give it to your mommy and daddy. They spend some of it, but they also put some of it in their bank accounts. All the other mommies and daddies put some of the money in their bank accounts too. So after the government prints money and gives it to people, the bank ends up with a whole lot of money.

Now, let’s say that you’re thinking of opening your own lemonade stand, but you can’t afford $100 for a nice big neon sign, which would attract more business. One thing you might decide to do is go to the bank and ask them to borrow $100, and then you promise to pay them back later, plus a little extra for their trouble. That extra is calledinterest.

Before the government printed all the money and gave it to your mommy and daddy, the bank might have said, “well, we don’t have very much in our accounts right now, so we’ll have to charge you an extra $30 interest”. And you might have decided that $30 was too much, and decided not to buy the sign. But after the government prints the money and gives it to your mommy and daddy who then put it in the bank, the bank might say “well we just got a whole bunch of extra money in our accounts last week, so we’ll only need to charge you an extra $5 interest”. And that, you might think, is a great deal, so you take it and buy the sign.

Most businesses buy all their signs by borrowing money from the bank, and the less interest the bank charges, the more signs that businesses will buy [stepping outside of 5 years old here. Signs are a metaphor for all investment spending: building houses and buildings, factories, machinery, expensive computer systems, etc]. And since the government can control how much interest the bank charges by printing money, they can get businesses to buy more signs by printing money. If more people can afford more signs, then they’ll start more lemonade stands and other kinds of businesses, and more people will be able to get jobs at those new lemonade stands.

But, say you do some research in your neighbourhood and you find out that people aren’t feeling very good about how rich they are, and they don’t want to spend extra money on things like lemonade. Whenever the government prints money and gives it to them, they decide to put more of it in the bank instead of using it to buy lemonade. Maybe a lot of them don’t have jobs too. You realize that your lemonade stand probably isn’t going to be very successful, and so you decide not to borrow the $100, even though the bank only wants to charge you $5. In fact, you wouldn’t even want to buy the sign if the bank was only going to charge you $0. You decide it’s better just not to open a lemonade stand at all, no matter how little the bank will charge you to borrow money.

In that situation, the government is trapped. If the government lowers the interest that the bank charges by printing more money, then businesses might want to buy more stuff. But if businesses are so worried that they won’t even borrow money for zero interest, then the government can’t do anything by printing more money. In that situation, printing more money is kind of like spinning the tires on a car when it’s stuck in a ditch. It just digs the car in deeper.

And that’s the kind of situation that Japan is in.