The monetary stimulus illusion: the record in China, Japan, and even the United States is one of disappointment if not failure.

• Author: Nakamae, Tadashi

Perhaps economic policymakers, including Federal Reserve Chair Janet Yellen and the Bank for International Settlements, should take a closer look at Japan, China, and yes, the United States, when debating the limits of monetary stimulus and the dangerous nature of financial bubbles. The discussion is happening too late to be anything more than an intellectual exercise.

Since its inception in 2008, easy monetary policy has created very few positive effects for the real economy--and has created considerable (and in some cases unforeseen) negative effects as well. The BIS warns of financial bubbles. Quantitative easing has already created asset price bubbles in the United States and elsewhere, and an investment bubble (this includes capital expenditure and real estate) in China and other emerging markets.

Meanwhile, this policy has failed to have a positive impact on the real economy partly because central banks have adopted very aggressive monetary easing at a macro level while restricting banks from increasing the size of their balance sheets at a micro level (macro-prudential policy). As a result, easy money has flowed into asset markets through shadow banks and overseas through carry trades.

China has been the main recipient of this bounty. Yet unlike global asset market bubbles, China's expanding bubble is less well understood. China's economy has grown at a rapid clip this century. Industrial production, based on the value of the dollar in 2005, increased five-fold from $800 billion in 2000 to $4 trillion in 2013. China averaged an annual growth rate of 33 percent during this period while global production grew 3.1 percent and the United States barely grew at all (averaging 0.5 percent). Not surprisingly, China's share of global production increased from 4.5 percent to 22 percent between 2000 and 2013.

Take cement production. In 2013, China produced 2.4 billion metric tonnes of cement, 60 percent of the 4 billion metric tonnes produced globally that year. The scale of China's cement production is astonishing. Over the past two years, it has produced more than 4.2 billion metric tonnes of cement, more than the United States produced in the twentieth century. China matched a century's worth of infrastructure (plus capital expenditure) in just two years. But China cannot continue to produce cement at this pace. It will probably take several decades of adjustment for this to reach a rate that is sustainable, creating deflationary...