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"Econogate" and Japan

Bruce Krasting's picture




 

 

r&r

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.

 

remember

 

 

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Sun, 04/21/2013 - 11:20 | 3480118 disabledvet
disabledvet's picture

Silly me for thinking bailouts are the problem. "private profits/socialized losses" strikes me as something a little odd for any political ideologue to support. Yet clearly both sides of the aisle love it, live it, want it, see virtue in it. So I say "why don't we focus on who is BUYING said debt." leaving aside the Fed that would China, China, China, China, China. You trying to tell me two economists are responsible for that? Really? I saw STRAW man...and woman.

Sun, 04/21/2013 - 11:17 | 3480107 Stuck on Zero
Stuck on Zero's picture

Bruce Krasting, you really are a fool making a statement like this:

Japan’s problem is population decline. An economy has no natural growth engine when population is in decline.

There are just too many ways this is wrong.  Should Japan import a billion starving Africans?  What do you mean by economy?  Most people like to equate economy with standard of living.  A declining population increases the standard of living.  The passport to wealth for a nation has always been getting the population under control.  Look at China.  Perhaps you should adopt 41 kids and see your personal economy improve.

 

Sun, 04/21/2013 - 22:12 | 3482290 Milestones
Milestones's picture

Why not do an analysis of the USA using the criteria you used. just asking!         Milestones

Sun, 04/21/2013 - 17:51 | 3481406 Bruce Krasting
Bruce Krasting's picture

I stand by it. Growth is very difficult, if not impossible to achieve when population is declining. More debt does not solve the problem. It makes the debt load on the smaller population larger.

You do not see this as unsustainable?

Sun, 04/21/2013 - 21:44 | 3482175 Poor Grogman
Poor Grogman's picture

Bruce you have made an error that all "Trained" economists seem to make.

Just take Japan and all it's real wealth and then divide that by a small population, and then a large population, the numbers are unimportant, because the principle is universally understood.

Crowding more people into a country once it is already fully developed only dilutes or transfers the real wealth.

More debt is not the same as wealth, and neither is an increasing amount of electronic bits if it has no chance of being converted into actual goods and or services.

Sun, 04/21/2013 - 21:05 | 3482020 John_Coltrane
John_Coltrane's picture

Its not population that matters for an economy-its productivity and effiiency.  Such processes lead to price deflation-the natural state of things.  This is the method by which a single individual leverages the only finite quantity in a human's life-time.  Before I automated my lab in the 1980s I needed to 3 technicians to carry out experiments.  After automation I was able to run more experiments with just one tech-and have more time to think and plan new experiments.  And so it goes, from supermarket scanners, to digital photography, ATMs, to automated gene sequencing and medical testing.   One farmer can now do the "work" of 100 in the prior century.   The only sustainable economy is one in steady-state.  All exponential growth processes must end and we've long ago reached the carrying capacity of the planet (about 2.5B people max).  We need a signficant population decrease in every country and policies should encourage this.

The only issue is how to distribute the much greater modern wealth with so many  incompetent humans whose skills are of limited utility but whose desire for consumption is unlimited.  This is likely the reason for the modern welfare state.  Unfortunately, incentives are such that the mean of the bell shaped IQ is moving to the left (i.e. devolution) and we need to change this and restore the natural evolutionary selection processes.  

Mon, 04/22/2013 - 01:30 | 3482680 StychoKiller
StychoKiller's picture

From "The Bill of No RIghts:"

 

ARTICLE III -- You do not have the right to be free from harm.

If you stick a screwdriver in your eye, learn to be more careful. Do not expect the tool manufacturer to make you and all your relatives independently wealthy.

Let's start with tort-reform.

Sun, 04/21/2013 - 21:48 | 3482202 ronaldawg
ronaldawg's picture

You didn't build that.

Sun, 04/21/2013 - 18:01 | 3481439 akak
akak's picture

Why is "growth" necessary to the long-term health of a society?

You seem to take it as a given.

Might it actually be not only detrimental, but impossible?

I think far too many assume that "growth" is automatically good, but I make no such assumption myself.

Sun, 04/21/2013 - 22:01 | 3482249 Tompooz
Tompooz's picture

  

 

 

" Why is "growth" necessary to the long-term health of a society? "

Good question. Growth is considered the only way to get out of debt, but there are other ways.

Collectively, the Japanese population is asset-rich and a declining polulation will make them asset-richer.  If their are no heirs, the State will be the heir.  Inheritance taxes will take care of the debt.

Japan with over 100 million people on two islands the size of New Zealand, manages a pleasant society. A Japan with 50 million inhabitants all sharing the assets of their grandparents can be a paradise.

Sun, 04/21/2013 - 23:59 | 3482571 css1971
css1971's picture

Growth is considered the only way to get out of debt

Really? How has that worked out for people?

Simple truth is you can't get out of debt through growth. The system is designed such that once you are in there is no way out.

You have 2 options with debt

  1. Pay it all back and accept multi decades long deflation it takes down to the M0.
  2. Default.
    1. Devalue. Which is just another kind of default.

The "growth" option is simply expanding the leverage. Taking out more debt to pay off yesterday's debt. Doesn't get you out of debt, all it does is delay the day of reckonning and allow the banking class to skim off the cream of the economy.

Mon, 04/22/2013 - 03:51 | 3482848 yourfather
yourfather's picture

The mainstream economists only know that growth is the answer because the opposite is destabilizing. There is a reason why they are called developed economies, because they already fucking developed. Perpetually compounding growth is unsustainable and if every debt was paid back, where are you going to store value, or find the additional money that needs to be created so that you can pay back interest. Its a fraud. Fiat is a fraud, thats what the game monopoly teaches you. Its a way to enslave other players into your control.

 

Thats what this life is. Debt is slavery and interest is the handmaiden. Growth just makes this shit scenario soightly more tolerable

Sun, 04/21/2013 - 11:42 | 3480204 sangell
sangell's picture

The way it works is not having to support a bunch of children but a declining number of workers having to support a growing number of elderly. These younger workers will also 'inherit' the debt the older generation ran up. It is also the case that older people just do not need as much stuff. Beyond medical services they pretty much have bought what they need and are more concerned about conserving what money they have as they do not know how long it must sustain them.

Sun, 04/21/2013 - 12:04 | 3480289 southerncomfort
southerncomfort's picture

"It is also the case that older people just do not need as much stuff."  This propaganda is bullshit.  While an older person may not spend $500 on some Apple gizmo or baby toys that same old person will spend into perpetuity on Depends, old age medications, more hired home help, funeral plans, etc.  Old people spending gets truly redirected to other things not counted as spending by msm but is exactly the same dynamic as food and fuel not being counted in inflation numbers. Whoever's getting rich on not counting these things loves this racket and owns the media.

You either pay more and more to stay alive when you're old or you die.  It's that simple.  Those curious cases are the ones where folk w/ all the dough in the world die - like Jobs - and one more penny didn't save 'em.  Or some fun octogenarian lives in a cave on bugs, and lives to 100+.  Man genetics: ya gotta love the great unequalizer...

Sun, 04/21/2013 - 14:14 | 3480766 sangell
sangell's picture

I think I mentioned medical services but then maybe you don't read so good. Better get your eyes checked may have glaucoma.

 

Sun, 04/21/2013 - 14:54 | 3480885 Doctor of Reality
Doctor of Reality's picture

Nah, that's just presbyopia! lol

Sun, 04/21/2013 - 11:13 | 3480089 the grateful un...
the grateful unemployed's picture

not sure what your'e saying, that R&R discredited the legitimate considerations on debt to GDP, just as climate scientists undermined legitimate concerns about climate change?  back in the 80's baseless economic attacks were made against proforma earnings. (the practise of using one time writeoffs to neutralize operating losses) experts were saying that S&P was probably 20% overstated. so what? after that we had Enron, which made their argument in the first place seem tiny by comparison, just as those who told us the PPT was running the stock market, were laughed off the stage, in 2008 when the government took over the whole damn show. the point is this ALWAYS, Bruce, conspiracy theorists, and alarmists never go FAR ENOUGH...

Sun, 04/21/2013 - 11:08 | 3480072 patb
patb's picture

I saw the problem in japan in several ways.

 

1) their policial system is heavily gerrymandered to give massive weight to rural prefectures.  That put political weight to the sparsely populated north and west.

 

2) Much of the money for campaigns came from civil construction firms.

 

3) A total failure to shut down insolvent banks and apply bankruptcy to underwater mortgage holders.

 

From there, they followed a Zero interest rate policy while pursuing fiscal stimulus in rural counties. Instead of freeing debtors out of bad mortgages, they wrecked the savings of Mrs Watanabe.

 

Many of the bridges they built never had users, so they are falling apart now for lack of maintenance funds.

 

instead of modernizing tokyo and osaka, they buried a generation under mortgage debt, and now the country is spiraling down.  They need to encourage people to have kids.

Mon, 04/22/2013 - 01:23 | 3482676 StychoKiller
StychoKiller's picture

Just like the USA, the chronologically-challenged(/gifted) are voting themselves moar munny; why does this surprise you?

Feeling the train wreck that is to come, why would anyone of child-bearing age want to have moar children?

I'm in favor of a voting test to be administered every election, proving you at least have a grasp of the issues, or failing that, a grasp of what each politician is "promising."

Sun, 04/21/2013 - 11:04 | 3480068 DeadFred
DeadFred's picture

"They have stated that they made an Excel mistake, but that is just a bullshit excuse."

Rule #2 When someone is lying to you, and you know that they know they are lying, grab your wallet. Someone is trying to steal from you. 

Sun, 04/21/2013 - 11:04 | 3480067 sangell
sangell's picture

Isn't debt servicing costs the important number anyway? Adding more debt doesn't lower debt servicing costs though ZIRP may conceal the problem for awhile but, at the end of the day the debt is still there even if ZIRP isn't.

Sun, 04/21/2013 - 11:14 | 3480097 max2205
max2205's picture

Latinos and islamists will flock to japan to 'help' their ecomony.    That should end well.....

Sun, 04/21/2013 - 18:45 | 3481553 logicalman
logicalman's picture

Japan would be better off with both, than with a large influx of biggotted assholes such as yourself.

 

Sun, 04/21/2013 - 19:02 | 3481603 Boris Alatovkrap
Boris Alatovkrap's picture

Japan is grow old and tired.

Sun, 04/21/2013 - 21:29 | 3482108 jeff montanye
jeff montanye's picture

there are forests now whose owners are unknown?  this seems like good news.  the idea of ever increasing debt levels, profits and populations is well past its benign phase.

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