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Gamblernomics

Tyler Durden's picture




 

By Chris Andrew and Mustafa Zaidi at Clarmond

Gamblernomics

The concept of continuously doubling down in order to achieve financial and economic goals is now a respectable and established norm. Takahashi’s Wager of 1930s Japan shows that such a policy, while initially successful, can remove all sensible restraints

For a gambler on a losing streak the classic trap is to borrow money, trying to break even. Doubling down, time and time again, becomes routine as all caution is discarded; this does not make for sound financial planning.
 
In ‘Resurrecting Reflation’ (November 2012) we highlighted when this policy was first attempted; in 1931 Finance Minister of Japan, Takahashi Korekiyo, paid for Japan’s invasion of Manchuria whilst countering the collapse of capitalism around Japan with unorthodox measures of massive QE and deficit spending. These twin policies were heralded as a great success 70 years later by Governor Ben Bernanke and a decade after that by Prime Minister Abe.

‘Takahashi’s Wager’ led to a tripling of the Japanese stock market, a 40% currency devaluation and warfare spending that rose from 30% to 70% of the national budget. Having taken the gamble to reflate, the octogenarian established the principle that capital is costless and unlimited; doubling down had become routine.

This band-aid boom ended in a calamitous collapse years later; by then Takahashi was long gone…literally, as he had belatedly tried to slow the handout-hooked warfare train. In 1937 another ‘routine’ incident occurred at the Marco Polo Bridge, which gave Japan the excuse to invade the rest of China. This was, in effect another ‘doubling down’, but by this time Japanese economic statistics had plateaued, war casualties had hit a 100,000 and warfare spending comprised nearly the entire government budget. But the unorthodox ‘policy genie’ was out of the bottle, as Takahashi had demonstrated, one could double down again and again, as the goalposts for success were simply moved and all gambles appeared sane.   

Loaded Dice

Modern day Japan finds itself in a similar predicament, but instead of warfare the Japanese leadership is confronting the dual burdens of welfare spending and interest payments, which, at current interest rates, now account for 60% of the budget.

The Bank of Japan’s unconventional policy of massive QE, which is nearly 18% of GDP, is intended to ignite inflation and break the twenty-year deflationary cycle. This scheme, put in place by the current Prime Minister, has been dubbed ‘Abenomics’. Given zero interest rates for last 15 years, and the occasional bout of QE, ‘Abenomics’ is another ‘doubling down’ but, this time, it has staked everything on this one final throw of the financial dice. Perhaps ‘Gamblernomics’ may be a more reasonable nomenclature.

On the surface ‘Gamblernomics’, like the ‘Takahashi Wager’, appears successful - the equity market has risen substantially, the currency has fallen, and government bond yields remain low. So far, so good.
 
How is the government gauging the success of this dice roll? They are looking for two percent inflation, a positive growth number, and have committed to two years of massive QE to achieve these goals. As time passes and these targets are not met, the policy makers will double down again, by which point interest payments and welfare spending are likely to comprise most of the budget. Emergency shall have become routine and all further gambles shall appear sane.

Lessons

All gamblers are aware of their accumulated losses, in economic parlance this means their ‘sunk costs.’  Today’s adherents of ‘Gamblernomics’ are not only found in Tokyo, but also reign in all major financial capitals, each playing their own version of a similar wager. All believe that doubling down is a sober strategy given the sunk costs of lost growth.  As a new generation of gamblers sit at the table, ghosts of gamblers past whisper - “Place your bets.” 

 

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Thu, 02/06/2014 - 14:24 | 4408399 williambanzai7
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Thu, 02/06/2014 - 15:20 | 4408633 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Everyone searching for hyperinflation better stop looking at the US near term. It will be in the Land of the Sinking Sun.

Thu, 02/06/2014 - 16:02 | 4408805 Occident Mortal
Occident Mortal's picture

The correct terminology for what is described in the article is the Martingale System.

http://en.m.wikipedia.org/wiki/Martingale_(betting_system)

Martingale + Ponzi = Fiat

And whilst people still accept it, it will continue.

Thu, 02/06/2014 - 14:25 | 4408406 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Linda ... Tumblin Dice

 

Thu, 02/06/2014 - 14:33 | 4408418 robertocarlos
robertocarlos's picture

"I don't have a gambling problem..I have a financial problem".

PS. Owning Mahowny. Good Canadian movie, watched it last night.

Thu, 02/06/2014 - 14:30 | 4408420 youngman
youngman's picture

They can never admit to failure...they lose face....so they keep going on...right over the cliff..they did in WWII...they just followed orders to rush the machine guns...or to plant their plane on a ship....no problem for them...its for the emperor

Thu, 02/06/2014 - 14:34 | 4408433 NOTaREALmerican
NOTaREALmerican's picture

They can never admit to failure...they lose face....so they keep going on...right over the cliff..they did in Vietnam...they just followed the Weapons of Mass Delusion...or spreading freedum....no problem for them...its for the slow-motion eagle-n-flag.

Thu, 02/06/2014 - 14:36 | 4408439 youngman
youngman's picture

Its true of ALL Politicians

Thu, 02/06/2014 - 14:49 | 4408436 ThroxxOfVron
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Kamikazi Economics enriches Cronyakuzacapitalists !

 

"Yen-no Banzai !"

Thu, 02/06/2014 - 14:35 | 4408444 NOTaREALmerican
NOTaREALmerican's picture

Gambler = risk taker.

REAL mericans know this great-n-glorious country was built by taking risks, and with great risks come great rewards because this great-n-glorous country became great-n-glorious by taking risks, not by some pansy-ass hippy asking if it should be done but by just doing what REAL Mericas do.   That's what! 

Thu, 02/06/2014 - 15:03 | 4408570 AurorusBorealus
AurorusBorealus's picture

"Gambler = risk taker"

   That is correct.  Now let me tell you what happens to most gamblers who go on "heater," defy the odds for a time and win big without any significant losses.  They lose perspective.. they forget the risks... they develop a sense of invincibility... and they blow huge sums of their winnings on pleasure: sports cars, drugs or booze, high living, fancy meals, limos, and above all, women.  Then the "heater" ends, the odds come back to reality, and they begin a losing streak.. they panic... change their game... stop making rational decisions.  I have seen it happen to nearly everyone who gambles at one time or another... EVERYONE... it is part of the psychology of gambling... which one must master to become a true gambler... I don´t see much mastery of these impulses among the investment class.

Thu, 02/06/2014 - 15:13 | 4408610 PhilofOz
PhilofOz's picture

Not true. I've been beating the bookies betting on Aussie (and before that, British) horse racing for 30 years, some fantastic years, some barely above even, but all winning years The only thing hard about it is keeping accounts open from gutless bookmakers like Bet365 that close you down when they see you beating their percentages. Now if I could do the same with trading equities, I'd have a lot more in my pockets.

Thu, 02/06/2014 - 15:27 | 4408656 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

PO, the market makers are experts at screwing the Muppets. Good Luck!

Thu, 02/06/2014 - 14:41 | 4408467 Oh regional Indian
Oh regional Indian's picture

Japan is a dead nation walking.....barely....metaphorically, physically.

The most sexually confused society in the world, mad-making tv, macdonardo everywhere, old age homes at every corner, angry, lost youth.....the money madness i sof course legendary....

ori

http://aadivaahan.wordpress.com/2010/09/03/the-curse-of-free-energy/

Thu, 02/06/2014 - 15:21 | 4408643 The man with po...
The man with pointy horns's picture

Japan is where the US and Europe will be heading towards in twenty years time if hyperinflation doesn't rear its ugly head

Thu, 02/06/2014 - 18:34 | 4409447 AvoidingTaxation
AvoidingTaxation's picture

Europe is very very old my red friend. And Europeans tend to take problems to the core if no other solution is possible (kick the can is clearly the favorite). Core means from a mitological and philosophycal point of view. My take is that someday a new -ism will emerge in Europe. After Christianism, Socialism, Capitalism, Idealism, Marxism, Imperialism, Communism, Fascism, Nazism, Liberalism, Individualism, Collectivism, Ecologism and Nihilism... What is funny from a European perspective, is that when it happens, others will still be wrestling with the old paradigms... Good Luck. I mean the last two are still spreading, and damaging other culture hard. Ideas cannot be killed.

Thu, 02/06/2014 - 14:41 | 4408468 homiegot
homiegot's picture

No thanks. I'll skip the lifetime radiation dose.

Thu, 02/06/2014 - 14:45 | 4408494 Steroid
Steroid's picture

What Makeshita does Takeshita gets!

Thu, 02/06/2014 - 14:45 | 4408497 MeelionDollerBogus
MeelionDollerBogus's picture

poppycock & balderdash!
... PUT IT ALL ON RED!!

Thu, 02/06/2014 - 15:04 | 4408578 PhilofOz
PhilofOz's picture

Oh yeah, the old Martingale system used on the roulette wheel in all its forms works well...not!!  Keep doubling down until you inevitably lose everything. Casinos the world over love you if you try those tactics.

Thu, 02/06/2014 - 16:01 | 4408822 Dr Benway
Dr Benway's picture

The Martingale system actually does work, assuming you have an infinite amount of money (but then, why would you need to gamble for more?).

This goes to the heart of why the doubledown strategy is so prevalent among the central banksters; they believe they can create infinite amounts of money without repercussions.

Thu, 02/06/2014 - 18:16 | 4409358 bluskyes
bluskyes's picture

It's only the limits that prevent this system from working.

Thu, 02/06/2014 - 15:08 | 4408598 esum
esum's picture

isnt this what the ussa is doing... 

Thu, 02/06/2014 - 15:23 | 4408646 buttmint
buttmint's picture

...Havenstein, the German Treasury Secretary who presided over the Weimar hyperinflation. Nice touch WB.

One of my fave re-reads last summer was William Shrirer's "Inside the Third Reich." A must read. Scary parallels between Obama's Policies and Germany 1920-1939.

Thu, 02/06/2014 - 16:06 | 4408835 graneros
graneros's picture

I think you meant "The Rise and Fall of The Third Reich" by William Shirer.  "Inside the Third Reich" was written by Albert Speer, Adolf Hitler's chief architect and minister for armaments and war production.  While a good read, not quite the same balliwick. That being said and if in fact you meant "The Rise and Fall of The Third Reich" yes you are correct.  A terrific read written by an extremely talented newsman and journalist.  All of Shirer's books are good reads and well worth one's time.


Thu, 02/06/2014 - 17:59 | 4409278 suteibu
suteibu's picture

And how did it work out for Takahashi? 

He was assassinated in 1936 for suggesting that military spending should be cut.

Thu, 02/06/2014 - 19:20 | 4409632 TMLutas
TMLutas's picture

I don't think that you can realistically talk about Japan during those years without addressing the invasion of Manchuria. The addition to Japan's territory was greater than 50%. Japan had a rapidly growing population, an overvalued currency, and poof, suddenly got a lot bigger with, in effect, a wild west not under normal rule. How could anyone do reasonable economic analysis of Japan while ignoring that? 

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