Ludwig von Mises
UPDATE: Goldman folds on "J-Curve" - the pace of that improvement will be far more modest than in past periods of yen weakness.
Another month, another colossal miss for the "waiting-for-the-j-curve" Japanese trade balance. At 1.7tn, this month's adjusted trade balance is the 2nd largest on record, and is the 36th month in a row - the worst March deficit ever. Exports missed dramatically (+1.8% vs 6.5% expected) so, so much for devaluation driving competitiveness in a globally interdependent product development cycle - nearly the lowest YoY gain in exports since Abenomics began. Imports rose more than expected (+18.1% vs 16.2%) as the devalued JPY makes living standards more difficult to maintain. The result of this dismal data - JPY weakness which can mean only one thing - a 120 point rally in the Nikkei.
We live in a pretend economy. It is important to recognize this condition, especially if you are an investor. Current market behavior is concerning. Bonds and stocks remain volatile and near record levels. Markets ignore the continuing stagnation in the pretend economy, buoyed apparently by government liquidity injections. To justify investing today in these markets, one must anticipate one or both of the following: economic growth is about to surge; and/or market values can continue to rise from here, potentially further widening the already large gap between valuations and fundamental economics. No reading of the economic tea leaves suggests a surge in economic growth is coming. Indeed, a critical analysis of the data makes one question whether there has been a recovery at all. Certainly any recovery has to be labeled as abnormal. Playing these markets in any conventional manner is akin to writing insurance policies for suicide bombers.
The fear of deflation serves as the theoretical justification of every inflationary action taken by the Federal Reserve and central banks around the world. It is why the Federal Reserve targets a price inflation rate of 2 percent, and not 0 percent. It is in large part why the Federal Reserve has more than quadrupled the money supply since August 2008. And it is, remarkably, a great myth, for there is nothing inherently dangerous or damaging about deflation. Now unmoored from any gold standard constraints and burdened with massive government debt, in any possible scenario pitting the spectre of deflation against the ravages of inflation, the biases and phobias of central bankers will choose the latter. This choice is as inevitable as it will be devastating.
Widening income disparity has been a feature of many advanced and developing economies for the past few years and has myriad investment implications. As we noted yesterday, the USA is at levels of income disparity not seen since the roaring 20s (and by some counts worse) but how does that stack up to the rest of the world? Fed fans will be proud to say that once again USA in Number 1... in global income inequality.
When you ponder the implications of allowing a small group of powerful wealthy unaccountable men to control the currency of a nation over the last one hundred years, you understand why our public education system sucks. The average American has experienced a fourteen year recession caused by the monetary policies of the Federal Reserve. Our leaders could have learned the lesson of two Fed induced collapses in the space of eight years and voluntarily abandoned the policies of reckless credit expansion, instead embracing policies encouraging saving, capital investment and balanced budgets. They have chosen the same cure as the disease, which will lead to crisis, catastrophe and collapse.
At the young age of 22 Henry Hazlitt figured out the future involves too many factors for anyone to predict, not to mention just knowing what the relevant factors are. Jim Grant admitted it took him 40 years in the business to finally realize he couldn’t understand the future, noting, however, unfortunately the folks working at the Eccles Building have not come to this realization. The PhDs believe they can depreciate the currency at the proper rate to cause everyone gainful employment and live happily ever after. Hazlitt also has a fan in Rich Santelli who notes that if government makes loans, that private lenders won’t make, to entities that can’t pay back, economic signals get destroyed, and chaos ensues. Chaos, indeed...
On account of the clear decline in the growth momentum of the US price index, many economists have concluded that this provides scope for the Fed to maintain its aggressive monetary stance. Some economists, such as Chicago Fed head Charles Evans, even argue that the declining trend in the growth momentum of the CPI makes it possible for the Fed to further strengthen monetary pumping. This, 'they' believe, will reverse the declining trend in price inflation and will bring the US economy onto a path of healthy economic growth. We suggest that contrary to Evans miracles, a strengthening in monetary pumping will only deepen economic impoverishment by allowing the emergence of new bubble activities and exacerbate existing bubble activities.
From a strictly empirical perspective, the Keynesian theory is a disaster. Positivism wise, it’s a smoldering train wreck. You would be hard-pressed to comb through historical data and find great instances where government intervention succeeded in lowering employment without creating the conditions for another downturn further down the line. No matter how you spin it, Keynesianism is nothing but snake oil sold to susceptible political figures. Its practitioners feign using the scientific method. But they are driven just as much by logical theory as those haughty Austrian school economists who deduce truth from self-evident axioms. The only difference is that one theory is correct. And if the Keynesians want to keep pulling up data to make their case, they are standing on awfully flimsy ground.
"Higher equity prices will boost consumer wealth and help increase confidence, which can spur spending" - Ben Bernanke, 2010 But history suggests the opposite: it is higher savings rates which lead to economic prosperity. Examine any economic success story such as modern China, nineteenth century America, or post-World War II Japan and South Korea: did their economic rise derive from unbridled consumption, or strict frugality? The answer is self-evident: it is the savings from the curtailment of consumption, combined with minimal government involvement in economic affairs, which generates economic growth.
"It's the weather" That's all Abe has left to pretend that 'recovery' is right around the corner. Japan just printed its worst current account deficit on record and its worst GDP growth since Abenomics was unveiled - both missing by the proverbial garden mile and both confirming that all is not well in Asia. As for the perpetual hope of a J-curve (or miracle hockey-stick reversal)? There won't be one! As Patrick Barron noted, "monetary debasement does not result in an economic recovery, because no nation can force another to pay for its recovery."And the latest joke from Asian trading floors: "when asked what he thought of the recovery, Shinzo Abe responded "Depends!""
President Barack Obama has recently released his budget in which he calls for an “end of austerity.” This is an amazing statement from a president whose government has spent the highest percentage of GDP in history and added more to the national debt than all past presidents combined. What must he mean by austerity? The president’s rejection of austerity represents the Keynesian view which completely rejects austerity in favor of the “borrow and spend” — increase aggregate demand — approach to recession. What he really is rejecting is the infinitesimal cutbacks in the rate of spending increases and the political roadblocks to new spending programs. President Obama and Congress should get busy doing what is best for the economy and the American public instead of enriching themselves and those who feed at the public trough.
"Hello there citizen! I hope you are enjoying your day. I also hope you are enjoying your freedom from oppression that our kind, benevolent government provides. As a former lead bureaucrat in the Obama Administration, let me assure you, Washington is working around the clock to protect you and add fulfillment to your life..."
Mainstream media discussion of the macro economic picture goes something like this: “When there is a recession, the Fed should stimulate. We know from history the recovery comes about 12-18 months after stimulus. We stimulated, we printed a lot of money, we waited 18 months. So the economy ipso facto has recovered. Or it’s just about to recover, any time now.” But to quote the comedian Richard Pryor, “Who ya gonna believe? Me or your lying eyes?” However, as Hayek said, the more the state centrally plans, the more difficult it becomes for the individual to plan. Economic growth is not something that just happens. It requires saving. It requires investment and capital accumulation. And it requires the real market process. It is not a delicate flower but it requires some degree of legal stability and property rights. And when you get in the way of these things, the capital accumulation stops and the economy stagnates.
Keynesian stimulus always has been presented as a government action that improved general or overall economic conditions, as opposed to being a political wealth-transfer scheme. In reality, the government-based stimulus is based upon bad economics or, to be more specific, one of bad economic logic. To a Keynesian, an economy is a homogeneous mass into which the government stirs new batches of currency. The more currency thrown into the mix, the better the economy operates. Austrian economists, on the other hand, recognize the relationships within the economy, including relationships of factors of production to one another, and how those factors can be directed to their highest-valued uses, according to consumer choices. The U.S. economy remains mired in the mix of low output and high unemployment not because governments are failing to spend enough money but rather because governments are blocking the free flow of both consumers’ and producers’ goods and preventing the real economic relationships to take place and trying to force artificial relationships, instead.
The plague of our time is Keynesian economics. It has destroyed the economics profession and enabled the political class to obtain powers never intended. Keynesian economics provided the intellectual cover for the criminal class we politely call “government” to plunder its citizenry.