As for evidence of the partial survival of the statutory reserves in other countries, The Wall Street Journal (23/05, "Japan Inches Toward Tighter Money" by Martin Fackler) informs us: "TOKYO – Confident that the banking crisis plaguing Japan for more than a decade is almost over, the nation’s central bank took its first tiny step toward what analysts say could be an eventual ending of a super-loose monetary policy imposed four years ago to avert financial meltdown.

"The Bank of Japan since March 2001 has been flooding lenders with emergency funds, and Friday essentially recognized a new phase in the recovery: that the new healthier banks need fewer backup funds. At the monthly meeting Friday, the bank’s governing Policy Board kept unchanged its current requirement that commercial banks maintain 30 trillion yen to 35 trillion yen, or about $277 billion to $324 billion, in reserves at the central bank. But in a small but symbolically important change in policy, the governors voted to allow the reserves to fall temporarily below 30 trillion yen if the banks’ demand for the funds was ‘exceptionally weak,’ according to a statement issued by the central bank.

"Setting targets for reserve levels has been the cornerstone of so-called ‘quantitative easing,’ the Bank of Japan’s unprecedented policy of flooding Japan’s once sick banks with cash, to enable them to write off bad loans because effectively, the greater the reserves, the more cash is available to the banks to write off bad loans. The policy also involved pushing short-term interest rates down near zero to nudge the world’s second largest national economy out of stagnation."

Otherwise put, the more money spent into circulation by the government, the more deposits will be made in the banks, and of this increase a portion will have to be backed with additional statutory redeposits with the central bank. That in turn gives both the government a source of near interest-free financing at the central bank and more money to be spent in paying off the bad bank debts that have immobilized many of the banks. Since many of the features of Japan’s debt depression are apparent in the US, including potentially the overblown real estate and credit-card booms, Japan’s way of dealing with such problems could hardly be more timely. But even the concept of using the statutory reserves that banks used to put up at the central reserve and provided an alternative policy tool is alien and unknown to analysts today. That is notable in the round-about language used in the WSJ piece just quoted. But applying the sole remaining alternative left in the tool box – higher interest rates – on an economy bowed down with mortgages and massive credit-card debt, could have particularly disastrous effect in North America as well as Asia and Europe. Talk of hidden weapons of mass destruction!

Note the final paragraphs of the article: "Speculation that the central bank might adjust its reserve target had been rife since early this year, when the Bank first found the recovering commercial banks didn’t need the emergency cash it was offering them. Central bank officials stressed that tweaking reserve levels in and of itself isn’t a full retreat from using quantitative easing as a monetary tool.

"Central bank officials say their main fear is that the shift could trigger a spike in interest rates that could undermine Japan’s still shaky recovery by raising borrowing costs."

Ignoring the Japanese experience could cost the West an incredible price. The "one blunt tool" remaining to the Fed to rein in what it mistakes for "inflation," was vastly discredited by the Mexican meltdown of 1994, and the Eastern Asian encore of the same in 1998, that leaves further military adventures as the sole remaining secret weapon for "stabilizing" the economy. These forecasts virtually spell themselves out like the legendary doomsday writing appearing on the wall... As in ancient time man blames the consequences of his own blind greed on the gods and calls it fate.

-- from Economic Reform, July 2005

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