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"Econogate" and Japan
How about Reinhart-Rogoff? A couple of Bozos. These two Harvard economists have set back the debate on debt/deficits and the relationship to economic performance by years.
In 2009 there was “Climategate”, where scientists who wanted to see action on reducing greenhouse gases fudged data to “prove” their point. That blew up in a spectacular way, and gave those who appose efforts to curb CO2 the smoking gun they thought was needed to debunk all of the evidence on global warming. A few scientists derailed the debate on climate. We will have to wait 20 years to find out how much damage will result.
The R&R horror story is no different. As far as I’m concerned they deliberately fudged their conclusion that high levels of debt hurt economies. They have stated that they made an Excel mistake, but that is just a bullshit excuse. Harvard economists (and their staff) don’t make Excel mistakes – this stuff isn't so hard. I don’t accept the excuse they have offered. They fell down on the job, they look stupid today, and no one is going to accept the argument about dangerous debt levels for many years to come. We won’t have to wait 20 years to see the damage they have caused – this massive blunder will come home to roost in less than five years.
Liberal economists, led by Paul Krugman have been taking maximum advantage of the R&R induced "Econogate". Krugman has no less than 8 articles out since the revelation of the R&R "error". Any talk about debt levels in the USA are now a moot issue. R&R have dealt folks like Krugman all the cards they need to push their agenda of “More Debt is Better”.
For what it’s worth, I always thought the R&R study was flawed (debt>90% is a drag on growth). To include data from the 1950s from New Zealand was not relevant. R&R did not need to fudge the data, they just needed to focus on the industrial countries in the modern economy to look for evidence of the toxic affects of excess and rapidly growing debt.
Japan is all that the economists need to look for the evidence of the failure of More Debt is Better. For 20 years, Japan has been piling on debt with no evidence of success. Japan now has a debt load of 220% of GDP, an insanely high level.
Can more debt help Japan dig out of its hole? Not a chance. The efforts being undertaken in Japan today may buy a period of time of phony improvement, but it will backfire. Because Japan is now going super-nova with its monetary policies, I think the country is in for a very big fall. The question for Japan, and many of the other industrial countries, is whether growth through debt creation can offset structural issues. I say that monetary policy can only mask the structural issues.
Japan’s problem is population decline. An economy has no natural growth engine when population is in decline. There is no amount of money printing that can offset a low birth rate. Some data points from The Japanese National Institute of Population (Link):
Japan has been experiencing a natural population decrease since 2007.
In 2011, the total fertility rate — the average number of babies a woman gives birth to during her life — was 1.39. A total fertility rate of 2.07 is required to maintain population levels.
In 2010, there were no prefectures where the percentage of people aged 65 or older exceeded 30 percent, but in 2040 all prefectures will be like that.
In Hokkaido and 39 other prefectures, people aged 75 or older will account for more than 20 percent of the population.
In 2040, the populations in 1,603 municipalities or 95.2 percent of the total, will be less than in 2010.
Those are some of the data points about Japan’s population, some thoughts on what the numbers mean:
The population decrease means that the nation’s total tax revenues will decline.
Cases in which road bridges have been closed to traffic because of a lack of funds for maintenance and a drop in the number of users are increasing.
Forests exist whose owners are now unknown. The number of vacant houses are increasing.
As the population grays more and more elderly people will be unable to drive, making it difficult for them to buy food and other essentials or to receive medical care.
It’s the older population that produces the food Japan consumes. As the society ages, there will be less farmers to produce that food.
It will also become necessary for local governments to reactivate local industries such as agriculture, fisheries and tourism.
Japan is aware that it has a population disaster in the making. But in classic Japanese style they believe that the problem can be overcome if only the “right” choices are made. The conclusion in the report on population tells it all:
To overcome the difficulties caused by a graying and shrinking population, it will be vital to cultivate people who can come up with creative ideas
Japan Inc. believes that it can “cultivate” the people who will provide the leadership to lead the country out of the box. It still believes that “creative ideas” are all that is necessary to right a sinking ship. We are witnessing an example of those creative ideas in real time. The scope of the QE policies now being implemented have no precedent. There is zero consideration being given to the risks that Japan is creating for itself. Japan is making an "All In" bet. Japan has crossed over to Uber money printing. This "creative solution" imposes huge risks.
In what I consider to be a very important development, this weekend the G-20 fully endorsed the Japanese policies to endlessly print. Japan now has a global Green Light to QE itself into oblivion. Any suggestion that Japan’s effort to blow itself up will have no consequences to other areas of the world is just silly. The Japanese Finance ministers are saying that that their domestic monetary policies are not driven to weaken the Yen. That's a lie.
The USDJPN is going to cruise through 100 in the next few days. It's on the way to 110, and as I’ve maintained, there is a risk that things get out of control, and a move to 120 is now realistic possibility. There is nothing to stop further Yen weakness at this point. We are now in a full-fledged currency war that has been sanctioned by the G-20. The currency war will morph into a trade war before the end of the year.
Who believes that China and Korea are going to sit back and let Japan devalue themselves to short-term prosperity? Germany is not going to let Japan wreck its automobile export base. It will not be long before Detroit starts screaming foul. The US will be at economic odds with a strategic ally. It was just one week ago that Treasury Secretary Lew said that Japan should:
refrain from competitive devaluation and targeting its exchange rate for competitive purposes.
What the hell happened in the last week to cause this turn around?
Is there a connection between the R&R screw-up and the conclusion by the industrial countries to applaud Japan's jump into the deep end of the pool with its monetary policy? I think so. At a minimum, the voices that would normally criticize such extreme measures have been silenced. Consider Paul Krugman's opinion on this from today:

My vague, unquantifiable sense is that the (R&R) debacle is changing the conversation quite a lot, even among the guys in suits.The point is that the next time Olli Rehn, or George Osborne, or Paul Ryan declares, sententiously, that we must have austerity because serious economists tell us that debt is a terrible thing, people in the audience will snicker.
R&R's failure functionally legitimizes debt levels that are measured in multiples of GDP. I think they should be stripped of their credentials. Talk about a legacy.
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The term "xenophobic" is a pejorative term used by foreigners and does not reflect the feeling of the Japanese public for the most part. And, quite frankly, their opinions are the only ones that matter on the issue. Your six years there do not qualify you to be the judge of their culture which, by the way, is likely to be their salvation in the end if it is not destroyed by their own government beforehand.
More importantly, who's going to create the jobs for these women? It's not like there's an excess of jobs otherwise incomes would be rising. Adding more women to the workforce by dictate will only be achieved by removing someone else - a man - from their job. Someone isn't thinking this thing through.
Simple. Give them jobs at human reproduction. Hire young Japanese women to produce a baby per year during their entire 20 year reproductive years, and then give them a pension.
The debate is focused on the wrong premise (too much debt: good or bad). No amount of debt can hurt the economy if it does not need to be repaid and the interest is zero or very low, as is the case with today's US and Japanese economies. I am willing to issue to any buyer any amount of zero-coupon perpetual bonds (the so-called "Dan Quayle" bonds: no interest and no maturity), please contact me for details -- I have AAA credit rating.
So what could go wrong? When a government issues the aforementioned "too much debt", one or two things will inevitably happen. Either (1) the government's creditworthiness will suffer and the buyers of its obligations will demand a higher return to compensate for the increased credit risk, or (2) it decides to finance the purchase of its obligations with freshly minted fiat money which will cause prices to rise (same amount of goods, more money = higher prices), causing inflation. Buyers of government paper will demand higher returns to offset the diminishing purchasing power or store of value of the currency. In either case, interest rates (and thus the government's borrowing costs) will rise.
Thus, the low- or no-interest rate condition that promoted the unbridled debt issuance will no longer be true but the government will still be burdened with "too much debt" which either cannot be rolled over (no buyers) or will be too expensive. Can you spell Zimbabwe, or if not, Weimar Germany?
don't refer to it as credit which doesn't need to be repaid, that defies even wall street logic, call it phantom collateral. if someone puts a million dollars in a trust for me, which i can't spend, but i can borrow against, that is phantom collateral. [individuals are allowed phantom collateral as well, just take out a life insurance policy at your bank, and borrow against it. the loan is paid back upon your death. evidently there is enough of spread in there to make it profitable for the insurance company]
the danger of phantom collateral is that is will lose value, which is impossible if you consider it. the Fed puts X million into their charter bank accounts, by typing on a keyboard. If the value of that becomes X/2 million, type in some more. the problem is what happens to real collateral, and it gets monkey hammered. when than happens you get more DEFLATION, and your phantom collateral is X/2 or more. real life example home equity loans. if you borrow a million on your house, and you keep that money in a lockbox, and the value of your house drops in half, you have outgamed the system.
in the end its not that the debt comes due, its that individuals take money out of the system requiring more phantom collateral. godl and land are two forms of collateral they can't really tought. you beat the system by buying gold and living on a farm. great country isn't it, when the only viable economic option is to go off the grid.
I agree that bogus collateral diminishes the value of real collateral. My point was that neither Japan nor the US has any plans nor the capacity to pay off the national debt. It just keeps getting rolled. It will never be repaid. Exponentially (or logarithmically) growing debt is either repudiated or defaulted (as a result of war, act of God, etc.)
and i think Bruces point is that Japan will never be able to create enough inflation to offset their debt as long as their population keeps shrinking. why they keep fighting deflation puzzles me. they should give in, let prices find a level where economic activity resumes, and accept that (even if some phantom collateral gets written off, and some rich bankers go broke, but giving up the keys to debt, or bogus capital also undermines th e growth in the size and power of government.)
[quote]...but giving up the keys to debt, or bogus capital also undermines th e growth in the size and power of government.) [/quote]
BINGO! Tell the (wo)man what (s)he's won, Vanna!
Of course, grateful un, but you are rational (about letting prices find their own level) and governments are not. Bruce is mistaken, the BOJ can create inflation at will, they are just too polite to do it blatantly. If they fire up their helicopters and start tossing 10,000 yen notes out over the major cities, they will have inflation.
Sure...maybe the government should stop trying to help.
http://blog.lib.umn.edu/cspg/electionacademy/images/Please.Stop.Helping.jpg
" These two Harvard economists have set back the debate on debt/deficits and the relationship to economic performance by years."
Exactly wrong. They've advanced popular understanding of the lies told by deficit terrorists in their campaign against the vast majority of the nation. It wasn't by their lying handwaving goal-seeking put up job Congresscritters could cite while they created and inflated poverty in the nation. It's by getting caught out lying, showing how shallow and cheap the debt fraud is and how it's just a word wall against the real consequences of austerity.
They, like most professionals, think they're going to be on the winning side of this campaign. Silly professors.
Bruce,
Really?
It is an inconvenient truth, that at some point the entire world is going to have to learn to live with stable or declining population.
How we go about doing this is going to help define our collective future.
To say Japan is screwed because their population is declining is a gross oversimplification IMHO.
They have made a lot of mistakes that have lead them to the unenviable point they are at.
Unfortunately the rest of the world including the good old USA isn't far behind.
http://online.wsj.com/public/resources/documents/JEP0413.pdf#page=15
Conclusion
We identififi ed 26 episodes since 1800 of public debt overhang in advanced
economies: that is, cases where the ratio of gross public debt to GDP exceeded
90 percent ...This paper should not be interpreted as a manifesto for rapid public debt deleveraging
exclusively via fiscal austerity in an environment of high unemployment.
(odds are R&R knew in 2012 that they fucked up in 2010 thus the caveat in the conclusion of their 2012 redux)
What the whole debate is missing is "what was the debt used for?". You can argue that borrowing for bridges interstate highways ports airports and factories is a net Plus. In recent years the borrowing has been to fund consumption, interest payments, mark-to-fantasy bank bailouts, and social welfare, a huge net Minus. Oh, and perpetual war, which in my view is at best a wash.
Socail welfare is huge minus?
On what economic planet consumption is a bad thing? Social welfare spending is high velocity spending. This is where all Public spending should go. All the other types of public spending are a net minus because it ends up in the pockets of the few where money velocity is ZERO.
Don't be silly they didn't fuck up. They made the data say what they wanted it to say. It's rife in academic circles. Most dangerously in medicine and pharmacology. It's how you break science (not that economics is a credible science) but it's how scientists advance politically.
And thus the 'conspiracy' becomes not aborted.
Bruce, you should try to apply Occam Razor in both directions, not just in the one that fits your case:
If this was a "deliberate" mistake by R&R, then why would they ever had handed out the spreadsheet in the first place?
I'm not saying this line of thought proves anything either, just to be careful jumping to conclusions.
You're right. I should have this this differently.
The R&R gaff was so stupid, and was so avoidable, that it appears to me as as if it were deliberate.
Has anybody been to Japan over last twenty years,? If their economy is struggling, I'd love to "struggle" like their middle class has. Maybe things that FIRE industry people care about, stock prices and land values have gone down, but things working people care about wages amd cost of education, healthcare , housing have been favorable for Japanese middle class. Ever notice the difference between the carnage after Katrina and the carnage after tsunami/earhtquakes in Japan? In LA there were poor people without cars. In shacks of houses, in messed up neighborhoods with bad roads. in Japan all those cars floating around we're new and shiny, the houses shaking were all well-built, well-kept, the people well dressed.Did you see poor people living in slums? And that's in an area of mostly old people, not even the economic engine where young people are working.
Read about Japan's supposed lost decade(s)..., maybe lost decades to FIRE industry but not to working people's lifestyle.
You are describing the Disney-fied version of Japan. You either haven't seen or choose to ignore the 16% poverty rate for children, the 40% of the workforce either unemployed or working part time, no benefit jobs, the homeless who are herded into tent cities around the major cities to keep them out of the public eye, and the rise in single-parent households and divorces coupled with a fall in marriage and birth rates. Add to this declining (stagnant at best) incomes of which about 50% is extracted by taxes and numerous inane fees.
The middle and lower classes are being stressed to maintain that lifestyle which has been propped up for the past two decades by government spending and debt. The youth are facing a future with double that stress which bodes ill for the society. An entire generation has grown into adulthood having never experienced a growth economy.
You want to credit government economic and fiscal manipulation for the efforts of a structured and respectful society which has maintained civility in the face of growing hardship. You do the people a disservice.
Excuse my heresy but yes R & R's book is a tough read, endless boring irrelevant statistics with very little explanatory narrative.
Basically it's unreadable and people seem to conclude therefore it must be very good.
MUCH better book on this topic is "The Volatility Machine" by Michael Pettis. Don't worry about the title, it's about how emerging market financial crises develop. Primarily they develop because of a financial panic in the lendng countries which suddenly pull the rug up from under their debtors.
Enjoy!
Define emerging country. US in 1867 is a developed country?
How about new emerging country formerly developed? i.e. Greece.
China had 33% of world GDP in 1820 and then fell to almost nothing in 1976.
There is no status as developed or ermerging set in stone.
In 1950 the GDP of Argentina per capita was higher than Canada.
South Korea was definitely "emerging", or less developed country.
This division emerging/developed does not work across time so it can be trashed.
This division is actually a western progressist illusion. The wealth gap between the Westerners and Asians peaked in 1970s and is now shrinking continuously. At some point it might reverse go to far and reverse. Not there yet....
Well how are the debtors are who are creditors? Asians are creditors and US is the debtor.
We will gladly pay you Tuesday for a salad shooter today.
@ Zero: Thanks for posting the link,
http://books.google.com/books?id=VbJCWXS6s3MC&printsec=frontcover&dq=%22...
I have a creative idea for them. Fuck more.
Without the pills and rubbers
OR read ZH more. I keep getting offers of a lovely Latina bride. Maybe the Japanese can import some Latinas/Latinos to help them with whatever problems they are having...
They are economists. They get paid by banksters. Priests used to live in the tallest buildings. Then they were arrested for bing pedophiles and thrown into prisons. Same thing is going to happen to banksters.
Proof that the whole economic system is a giant Ponzi.
Japan’s problem is population decline. An economy has no natural growth engine when population is in decline. There is no amount of money printing that can offset a low birth rate.
So the world's economic problems can only be held at bay by increasing the popoulation????!!!!!
Anyone notice the earth getting bigger, or more land popping up from nowhere.
THINK!
I know few people are equipped for that, but those who are should spot this flaw with little trouble.
Hell yeah, Bubba. That's what that Chinese earthquake was about yesterday. Making more land for more people.
What a waste of a post.
That's why we do it here.
Too many people?
Not.
Not even close.
Poor 'management'?
Oh yeah.
http://flowingdata.com/2011/07/27/if-the-world-lived-in-a-single-city/
Even if there are not too many people now - and I would agree that with good management maybe 10 bill would be doable, but one day shit will run out, simple as that, if growth continues forever.
A second quesetion arises.
Would you want to live on such a planet.
Just because it's possible doesn't mean it's desirable.
We've only just begun, LM:
http://www.kurzweilai.net/the-law-of-accelerating-returns
Well said, AO, couldn't agree more.
It can't happen, however, as long as the state remains "the management."
The WHO low range population forecast for 2150 is 4.5 billion, or about 65% of current population. The decadal growth rate peaked in the 60s and has declined since. In the second half of this century, growth will reverse and by 2150 population will probably approximate that of 1980.
Technology will be vastly changed as man's mimicry of nature's bulk technology continues on its path towards mimicking nature's molecular technology. Technology will assemble and disassemble much like nature does.
Government is the trend that I fear in mankind's future.
Exactly, LM, as the distinction to be made is that between economic growth and economic development, the former having its roots in the debt-fueled Ponzinomics of the welfare state, while the latter merely requires a savings-based (hard money) free market under a rule of law limited to the protection of life, liberty, and property.
And not only is a state not needed to provide said law; no such state is possible, as the state, by its very nature, is an intrument of aggression, and cancerously so, as Hoppe has made so abundantly clear:
http://mises.org/daily/2874
good documentary regarding this I saw a while back called "surviving progress"
"They need to encourage people to have kids."
The birthrate has been falling since the mid-70s and there have been numerous attempts by government to "fix" the problem. Urbanization and the destruction of the nuclear family have taken its toll on the society. But no one wants to talk about that. The discussion is always about how government can intervene in life itself to produce a safe, secure, and prosperous society.
Former PM Kan noted "The role of politics is to create a society that minimizes factors that make people unhappy at home and around the world" and "In light of this, I seek to create a society in which all people have a place where they belong and a role to play." Get it? The powers will give you a role to play.
This is the type of thinking that has led Japan - and the rest of the developed world - to our current situation. Still, the powers press on in attempts to create Utopia leaving destruction in their wake.
It is time to stop treating civilization as a national and global version of "Go" which, by the way, is part of the mindset of the Japanese elite who believe that the ancient game is practice for social development and manipulation. Any discussion, as in this piece, which does not go to the heart of the problem is simply an example of people playing their "role" whether it is Krugman or Koo or Bruce Krasting. Good job, Bruce.
Uniquely in Europe, France has kept their fertitlity rate nearly up to replacement, which demographers put at 2.1 children per woman. They did this in part by heavy subsidies for childbearing and childrearing costs which increase dramatically at the third child. What they don't crow about is the content of this centrally planned non baby bust. Their north African immigrant subculture is disproportionally represented in this natality rate. Ethnically French young couples are choosing to have fewer kids later, or not at all, much as the rest of Europeans do. I guess that the government taking away young people's resources, stacking them up in tiny overpriced apartments, taxing the crap out of even the small cars and the fuel to run them, cramps their style. And of course there is simple hedonism run amok, and irreligiosity...among franco-French French citizens. The north African immigrants maintain their culturally and religiously mandated semi slavery and surveillance of their females, regardless whether they follow the tenets of Islam. Brothers fathers and uncles surveille and enforce the behaviors of the females in their families, as do unemployed males of all ages in the shitty socialist projects where they are concentrated. France is disappearing before our eyes. The physical place is still there, but the people on the ground there are morphing into something unfrench.
1. IF a nation can "print" its own fiat (like the US)
and
2. IF that nation (the US) can compel other nations to accept that fiat as payment
(by military and other enforcement of the Petrodollar)
then
3. Accruing that debt (which can be repudiated or inflated away) works essentially as a means to collect tribute from the rest of the world.
Eventually, I think, it will not be the debt itself that destroys the empire.
Rather, it will be the economic distortion caused by exorbitant militarism, attendant corruption, secrecy, and concentrated power, and the corrosion of the social fabric from ill-gotten tribute, neglect of the physical and social infrastructure, and the substitution of military/police enforcement for public support.
What a well thought-out reply. If one thinks about abusing the privilege of printing money for about 5 minutes, he will come to a similar conclusion. Unfortunately, most people don't see to have that 5 minutes of luxury.
While the R&R study may be flawed, it brings up 2 points:
1. Maybe it means that 90% debt to GDP is too high.
2. Maybe it means that another barometer , other than GDP, should be used to measure appropriate amounts of debt. I disagree with Bruce that the concept of debt itself has been destroyed.
Don Levit
Sadly, you are correct; and the harder times get, the more force they will apply to the screw!
I agree RnR or somebody around them did this purposefully, this was no complex, counter-intuitive miss of causation of typo in complicated algorithm, these were super simple "mistakes" that we're only uncovered by chance by a persistent grad student with nothing to lose who was frustrated that he couldn't independently verify their results with public data. Also telling, there were several simple mistakes, the NZ beginning the mst consequential, that all conveniently caused false reinforcement to claims
Debt matters, I think we can all agree on that. But if that is the case, why doesn't any mainstream economists like RnR look at private debt, which, according to Steve Keen, rebel Aussie economist, absolutely swamps govt debt. How 'bout looking how a country's economy performs when its population is swimming in private debt. As a lowly worker in construction industry, I could see housing bubble that economists didn't see or like RnR team, mistakenly missed, which was created largely by leverage/private debt, simply because contractors told me about janitors getting No Doc loans, and I read even in tame middle of road state of MN had, towards the end over 25 percent of mortgage loans were interest only loans, all private banks lending to private people, backed by assets about to crash in price. Because economists ignore private debt, apparently on purpose, they didn't see crash coming. Why focus on govt debt to the exclusion of private debt something that huge impact on personal spending, lack of savings etc?
Finally the RnR mistake is only analogous to climate gate in its effect on popukar opinion, not in the equvalence of actual bad science. Fox News and others made climate gate seem way worse than it was, they had no mistakes,fudges remotely as bad RnRs. Even people proudly skeptical of temperature data have concluded there is warming. Never rely on journalism of the day, read the in-depth analysis done months, years later if you want actual facts, whether it's war, scandal, or crime news (the most recent popular example Central Park Five) read what thorough analysis of "climate gate" yielded compared to how RnR holds up, and we will see.
Excellent points about the amount of private debt. Not only is the amount important, but one's ability to repay is crucial. Whatever one may think about public debt, ability to repay private debt is crucial. These no doc loans and interest only loans (sound familiar to public debt?) is a bad omen when it comes to Obamacare. Just like people who didn't qualify, got home loans, people who do not qualify, will get not loans, but subsidies (loans to the government of course, through the use of additional debt to pay for the subsidies).
Don Levit
I saw irrational exuberance first hand a few weeks ago, when an old patient/neighbor brought his teenage daughter in for an eye exam. His history is brief:
He lost his well paid Ford accounting in the 2001 purge, and went hardcore into real estate. He had a newsletter, worked very hard and was always trying to get me into the game. He leveraged everything and lost all his and other people's money. I saw him in 2009 in tattered shoes, as he was now a "painter". After gaining employment in the "booming" auto industry again late last year, he's "back"! He bought a house BIGGER than mine, yet had to wait until next paycheck to pay for the glasses. I could see the disconnect from reality in his eyes, as he told me... with the very same conviction he'd had in 2005-7 ... that this time is different. "The government is backing us now. If I could only snap up some distressed properties, I could rent them to Section 8 applicants and use that to buy more properties". I looked at his wife, who was only happy because she had a giant house again, but she was asleep... but his daughter's blank STARE told the real story. She KNOWS the game is up as do many more teenagers than you could possibly fathom! I talk to them and they know this is a system doomed to fail. They just have no clue what hell awaits them when, as the lies being hoisted as truth begin to materialize.
I don't care that some bought & paid for "nobel prize" winning economist says debt is irrelevanant. The ONLY way they are proven correct is for society to be COMPLETELY controlled. This is the ultimate battle between communism and fascism. Both sides have behaved like retro viruses and we're the host! They have all the power, but they lack one thing... our hearts and minds. They try to win us over but no amount of cake and debauchery will change thousands of years of TRUTH! Remain steadfast in your honor, tell the truth and work hard... this will win the day. Give in to lies and you may buy an extra day, but the cost in terms of ones SOUL is immeasurable.
Hit that shit out of the park bro !!!!