Abenomics
Held to ‘Teach Us Something’
By Pater
Tenebrarum
After Japan has been
berated by Western economists for more than 20 years, the mad-cap flight
forward by the Abe administration is suddenly held to be able to 'teach us
something' about what should be done with regard to economic stagnation. It is
amazing what a little rally in the stock market and a few highly suspect GDP releases can
accomplish.
As the LA Times writes in a
recently published article entitled “Japan's economy is bouncing back,
offering a possible model for U.S.”, 'Abenomics' (i.e., the same hoary
inflationism that has been tried over and over again since John Law) is where
it's at. The article is interesting mainly because it is a fount of economic
fallacies on a par with Shinzo Abe's policies. An excerpt:
“After two decades of economic stagnation, once-mighty Japan is beginning to revive — under policies that some experts say could offer lessons to the still-struggling economies of the United States and Europe.
While the Eurozone tries to break out of recession and the U.S. economic recovery remains anemic, Japan has begun to grow at an encouraging rate.
The shock-therapy policies of Prime Minister Shinzo Abe have helped Japan's economy expand for three straight quarters at a pace faster than that of the United States.
Its stock market has surged more than 50% in less than a year. Leading automakers and even long-struggling electronics firms such as Sony Corp., beaten down by Apple Inc. and Samsung Electronics Co., are reporting a jump in profits.
The combination of government and financial measures popularly know as Abenomics may finally be snapping Japan out of the doldrums, and that is drawing increasing attention from economists in the West.
Japan's struggles with deflation and a rapidly aging society are in many ways unique, but some of the problems that have long trapped Japan, including sagging incomes and structural weaknesses, are similar to those dogging the U.S. and Europe.
"It may have quite a lot to teach us," Joseph Stiglitz, the Nobel laureate economist, wrote recently. "If Abenomics is even half as successful as its advocates hope, it will have still more to teach us."
Japan's central bank has begun to pump more cash into its economy, lifting the nation's exports by reducing the price of Japanese products in the global marketplace.
In addition to adopting strong monetary policy, Abe has boosted government spending to put more money into the pockets of Japan's citizens. The U.S. and Europe, by contrast, have largely emphasized cutbacks, an approach economic studies suggest have slowed job creation and overall growth.”
(emphasis added)
Heaven help us if
'Western experts' think we should imitate this nonsense, especially if one of
those experts is arch-Keynesian Joseph Stieglitz. Frankly, it is actually hard
to see in what way Japan's policies differ from those practiced in the West;
the main difference is that it is closer to its ultimate debt catastrophe.
Anyway, Japan
cannot 'teach us' anything, but the above quoted LA Times article can.
The Errors
Enumerated
The stock market
has surged, it is true. That can easily happen when the central bank embarks,
or threatens to embark, on a hugely inflationary policy and the
currency's value plunges. Of course said market remains 65% below its bubble
peak attained almost 24 years ago, so it may be a bit early to celebrate its
revival. In the bigger scheme of things the recent rally is but a blip on the
chart, although it certainly looks promising from a technical perspective (that
may actually be a very bad sign for the yen):
It is easy to
throw a party when the central bank inflates like crazy, but that doesn't mean
the policy is economically sensible. We recently talked briefly about Germany's hyperinflation: in mid 1922,
unemployment had fallen well below 1% (!). Surely the inflation policy was
'working'? Alas, by late 1923 the unemployment rate was at 29%. More than two
decades of major economic and political upheaval followed – in the end, Germany
was a pile of rubble.
There was never a
'struggle with deflation' in Japan. The Japanese money supply has grown slowly
over the past two decades, but it has at no point deflated. Prices fell ever so
mildly, a great boon for the citizenry. Why everybody seems to think that
Japan's citizens are better off when everything becomes more expensive for them
remains a great mystery. Given Japan's demographic backdrop, a policy of
inflation does not even make superficial sense. The old
Keynesian trick of trying to betray wage earners by lowering their real incomes
via inflation in order to temporarily raise employment has never been more
misguided than in Japan with its sub 4% unemployment rate and shrinking
population.
The BoJ has not
merely made 'Japan's products cheaper' – it has contributed to crashing the
exchange value of the yen. So what are we supposed to do now,
if it is true that this policy has something to 'teach us'? Not everyone can
devalue their currency against all other currencies at the same time after all.
Besides, the alleged gains that come from currency devaluation are 100%
ephemeral. There is no lasting benefit to be had. All it means is that Japan's
citizens are now forced produce far more than previously if they want to obtain
the same amount of goods and services from abroad as before. The accounting
profits of the fairly small coterie of exporters are temporarily rising, but eventually
domestic prices will adjust to the situation and then the seeming advantage
will be gone entirely. Note by the way that Japan has a trade deficit these
days.
In fact, Japan's
policy makers should probably be concerned about the possibility that a currency
crisis may engulf Japan sooner or later unless they step back from their
schemes. This is one reason why the bullish looking Nikkei chart is actually
slightly worrisome – in a currency crisis, the stock market would probably soar
in nominal terms (although it would likely become quite worthless in real terms
if history is any guide).
Finally, the
assertion that “Abe has boosted government spending to put more money
into the pockets of Japan's citizens.” is utterly ludicrous. Every
single yen Japan's government is 'putting into the pockets of its citizens' it
must first take out of their pockets, whether by taxation, borrowing or
inflation.
The government
possesses no secret stash of resources it can distribute when needed. Every yen
by which government spending increases is a yen Japan's citizens can no longer
spend. The difference is only that the spending decisions are made by
bureaucrats now instead of by private citizens. Since bureaucrats have no
possibility to conceive of the categories profit and loss and cannot ascertain
the opportunity costs associated with their spending, most of it will turn out
to be wasteful (Japan already has countless 'bridges to nowhere' that are
testament to this fact).
It certainly is a
great way to hasten the consumption of capital, but that is all there is to it.
The fact that government spending counts as a positive factor in the
calculation of GDP does not make Japan one iota richer. On the contrary, it
will help to mask its coming impoverishment.
Furthermore, with
the government's debt about to surge to 240% of GDP this year and debt service
costs alone devouring 25% of tax revenues, a sovereign debt crisis is highly
likely to erupt at some point. At this stage, JGB yields remain at a very low
78 basis points, as market participants do not yet believe the inflationary
policy will 'succeed' (they are so far correct, as Japan's money supply has
actually continued to grow very slowly – the yen has crashed on perception
alone, and because some of the euro area crisis related 'risk premium' was
priced out of it). Should they change their mind, the enormous JGB market could
easily collapse in a panic. This would not only render the government
insolvent, but also the country's banks.
A daily chart of
the ten year JGB yield – it continues to look bullish to us. Stay away from
JGBs.
Conclusion:
Abenomics has
nothing to 'teach us', in spite of the fact that it is currently politically
popular. All the lessons that could possibly be learned from it have been
taught on numerous past occasions already.
Neither
mercantilism nor inflationism are economic policies worth emulating. Sound
economic theory has exposed the fallacies of these policies long ago. The fact
that a number of Western economists endorse them is not a reason to believe
that such policies have magically become better since they were last tried. On
the contrary, endorsement by Western mainstream economists is actually a grave
warning sign. It is of course quite likely that an educationally valuable moment
will happen down the road, namely in the form of a major currency and debt
crisis. It is deplorable that all the lessons we should have learned ages ago
apparently have to be retaught over and over again.
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