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Japan's "Money Illusion" Will Fail, Goldman Warns
The Bank Of Japan (BOJ) says it is looking for consumer spending to stay on a recovery path, focusing on the relatively small increase in nominal wages rather than the steep slide in real wages. Goldman believes the BOJ’s view is founded on money illusion; and crucially, expect the positive effects to be clearly outweighed by the negative impact of lower real wages, and on a net basis see consumption falling. Simply put, once people wake up to the illusion of money, its impact will also fade.
Via Goldman Sachs' Naohiko Baba,
Can the BOJ rely on “Money Illusion”? (Spoiler Alert - No!)
Nominal wages have finally edged into positive territory after more than 18 months of Abenomics. However, prices have spiked on cost-push inflation driven by yen depreciation since mid-2013 and on the consumption tax hike in April 2014 (from 5% to 8%). As a result, real wages were still in negative territory (-1.4% yoy) even as of July, when the outcome of the successful spring wage negotiations should have been almost fully factored in. With the Household Survey also showing real disposable income down 5% yoy in July, we see an increased risk that the consumption tax hike will weigh on consumption over the long term, extending its effects beyond the initial surge and subsequent fallback in demand.
The BOJ says it is expecting a virtuous wage-price cycle to materialize in the near future. It is focusing on the relatively small increase in nominal wages rather than the slide in real wages and is looking for consumer spending to stay on a recovery path. We believe the BOJ’s view is founded on money illusion. In this report we use Japanese data in the period when nominal wage growth was accompanied by inflation to analyze whether money illusion was in effect, and if it was, how significantly it impacted on consumption.
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Money Illusion
Money illusion refers to people’s belief that their purchasing power has increased when their nominal wage has risen even though their wage in real terms has not changed because of inflation, encouraging them to spend more. Money illusion often occurs when it takes time for people to recognize the true value of their real income because they are insufficiently informed about inflation, or when people are irrational and base their spending behavior on the nominal income they receive.
Under conventional economics, which posits that real consumption is determined by real income, the effects of (1) a 10% increase in nominal income amid 5% inflation, or (2) a 5% increase in nominal income amid zero inflation should entail the same effect on real consumption because the growth in real income is the same at 5% in each case. Where money illusion exists, however, consumer spending rises more in case (1) owing to the higher nominal income growth. Conventional economics has generally taken a negative view of money illusion2, but recently behavioral economists in particular tend to see people’s preferences and behavior being more strongly influenced by palpable nominal values than by real values. This suggests that such bias could exert a significant macroeconomic impact from time to time.
It is important to distinguish between inflationary and deflationary phases when considering the effects of money illusion. In an inflation environment, even when nominal income growth is completely offset by inflation, such that real income remains constant, people will still focus on how their nominal income has risen and spend more than is consistent with their real income. In a deflationary environment, however, people tend to be excessively concerned about a drop in their nominal income and curb their spending by more than is necessary although their real income remains constant because prices are also falling. Given that Japan is currently experiencing inflation accompanied by nominal income growth, our analysis requires examination of historical data from similar phases.
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In conclusion:
The BOJ says it is looking for consumer spending to stay on a steady recovery path, focusing on the relatively small increase in nominal wages rather than the steep slide in real wages. We believe the BOJ’s view is founded on “money illusion”.
Money illusion refers to people’s belief that their purchasing power has increased when their nominal wage has risen even though their wage in real terms has not changed because of inflation, encouraging them to spend more. However, the implications vary depending on whether the economic environment is inflationary or deflationary. As such, we needed to test for money illusion using a sample period when both nominal income and prices were rising in Japan.
We see the following implications for Japan’s current economic climate. Wages have recently edged upward after a long hiatus, but with inflation rising at a faster pace, real wages are still in negative territory. We believe the money illusion may come into play to some extent, with consumers perhaps increasing their spending a little as they welcome a rise in their nominal wages no matter how slight. However, we expect the positive effects to be clearly outweighed by the negative impact of lower real wages over time, and on a net basis we accordingly see consumption falling.
The recent climb in nominal wages is the result of the successful spring wage negotiations - the first time in years in Japan. This is good news and we can understand why the authorities are keen to trumpet it as a success story. In making an assessment of the economy, however, we sound a note of caution about overplaying the positive effects of a small increase in nominal wages in an inflationary climate. We believe the outlook for consumption should focus on the more negative effects of declining real wages. In addition, once people wake up to the illusion of money, its impact will also fade.
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But don't worry because - according to Japanese media - despite a total collapse in wages, Abe's approval rating spiked 13 points to 64%!!
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Honest Abe clearly deserves the Nobel Peace Prize, Economics version.
Goldman's "Money Illusion" Will Fail, BOJ Warns
Goldman Sachs has been increasing its derivatives volumes since the crisis, and it had a portfolio of about $48 trillion at the end of 2013. Bloomberg Businessweek recently reported that as part of its growth strategy, Goldman plans to sell more derivatives to the Muppets.
But 'Merica's is gonna go gangbusters, 'cause we're exceptional
We also warned them about nuclear power. Damn Japanese never learn.
First, in August 1945
Abe has sold out his own people and country for massive financial bribes by the US. Funnily enough the bribes are priced in Yen and the tunnel he leads his country down will mean that the 1 trillion Yen bribe he has accepted for doing the wests bidding will result in the same value of a kleenex role.
Stupid Dumbfuck.....
Japan: A Nation Consigned To Nuclear Armageddon
I think the only thing that can save us now is better drugs. Even with mental illness you cannot maintain an illusion forever...you need drugs for that, and damn good ones. And don't tell me to pick up some of the medicinal herb either. That shit kills my throat and tastes like shit. I talking high grade pharma. All this Obamacare money going to the big pharma people should at the very least provide us what we NEED, if the illusion is to persist. Its for the good of everybody.
Just sayin
As Fukushima Goes, So Goes Japan
Wait until the bill for radiation disease starts to come due. Then it won't matter about anything else. Down goes Japan. For good.
A again the pot calls the other pot a disparaging name.
One give me a home where the the Buffaloe roam.......
and I'll show you a field full of shit...
And it's gone.
Ultimately, in the long run, only Money that is based on (anchored to, indexed to) PRECIOUS ASSETS is sustainable and meets Universal criteria of Money. Since E = mc2 in the entire Universe...
Precious Assets = Precious Energy + Precious Materials
Where...
Precious Energy = Hydrocarbons (Gas, Oil)
Precious Materials = Precious Metals + Strategic Metals + Precious Minerals
All else is either Credit (for Money owned but not available) or Debt (promises of Labor). The further away in the process one gets away from Real Money the more the opportunities open up for Derived (imaginary) Financial Instruments -- and with it, more opportunities for Efficiency Losses due to a host of factors (fees, services and fraud) and players.
p.s. 9/6, 11:27... Just fixed a spelling mistake on the original posting of 9/5 21:27.
Goldman: "once the people figure out that we are raping them, they will invest in anti-rape devices. Did we mention we own Anti-Rape Device Corp, Ltd.?"
How is KY jelly stock doing these days. That should be the indicator for something...
The US Federal Reserve's print-to-infinity experiment in Japan will fail.
People in the US get to see how their Federal Reserve ponzi print-to-infinity will end. A huge implosion.
The Squid gives us a new term to add to our vernacular: Money Illusion.
Should become more well known as the years roll by.
Money illusion refers to people’s belief that their purchasing power has increased when their nominal wage has risen even though their wage in real terms has not changed because of inflation
Maybe Goldman should be paying attention to inflation in the US and the money illusion here :
John Williams (www.shadowstats.com) provides inflation estimates based on previous official methodology when the Consumer Price Index still represented the cost of a constant standard of living. The 1.26% inflation measure used to deflate first quarter nominal GDP is unrealistic, as Americans who make purchases are aware.
A reasonable correction to the understated deflator gives a much higher first quarter contraction. The two main causes of inflation’s understatement are the substitution principle introduced during the Clinton regime and the hedonic adjustments ongoing since the 1980s that redefine price rises as quality improvements. Correcting for excessive hedonic adjustments gives a first quarter real GDP contraction of 5%. Correcting for hedonic and substitution adjustments gives a first quarter real GDP contraction of 8.5%.
http://www.paulcraigroberts.org/2014/07/08/deteriorating-economic-outloo...
Japan is finished
I bet they are busy secretly building deadly nuclear weapons smaller and more mobile than their power plants while desperately trying to figure out a way to get China and India involved in America's War Between Europe and Russia so they can seize control of the planet after it's been reduced to the nuclear wasteland they have been recently training for
The Japanese can be cunning like that
The Japanese pioneered the miniturization of electronics so is it unreasonable to think they will soon come out with a nine transistor nuclear device?
Come in Tokyo....
Come in Tokyo???
Ever since Israel triggered Fukushima we've included the whole middle east in our plans as well
After Jerusalem & Mecca are turned to glass we will build New Jerusalem on top of them and rule the world
Meiji has no clothes
But the U.S. money illusion is good. baaaaaaaaaaaaaahahahahahahahah Fuck tards
But our enemies, the ruling class, will successfully use the same tactics.
they left out the part where goldman itself has been telling japan to do all this shit for the past thirty years
A gang of criminals who settle their crimes by using more fake money and placing the onus of the debt on American civilians.
Those who bank with them or are dependent on them need to have their heads checked. Unless of course they are in cahoots or being blackmailed by them.
I dont have to mention the name, do I ?
"Goldman warns"... comedy gold.
This sures reads as if GS is 'priming the pump' of hyperinflation for Japan.
same as it everwas...
im getting rid of FRN as fast as i can for commodities.
They (Japan, the fed) can't escape their nightmare: biflation. Print too much and buying power vaporizes. Tap on the brakes and the deflationary vortex under the economy resumes it's marrow sucking power on the demand side. Try and thread the needle with a Goldilox not too this or that ? You end up with BOTH forces adding together to grind the consumer and business down. Ahh the sheer existential angst of it!!
kitler +100
God's work speaks in goodwill of Japan. Fuck you Lloyd. Clean up your own backyard.
Arrest Loyd Blankfein.
Here is the latest from my favorite man: Craig Hulet on A fabricated ISIS myth.
kirkncc1701+125
after they killed jfk they raped us in 1965.
no more silver.
dont forget to sort out pre 1982 pennies.
we will need copper.
Is Buffet still invested in Japanese stocks?
Warren Buffett Says Buy Japanese Stocks, But Not Applehttp://www.thewire.com/business/2011/03/warren-buffett-seems-sanguine-ab...
Isn't the presentation suppose to be "Nuclear Waste: AN OPPORTUNITY!"
Oh how the mighty have fallen since 2008.
Bwhahahahahahahaha. Lehman Brothers...
Since when Goldman has a valued opinion?
Enough about the future... I'm ready for it now. Bring on the crash.
That's what will happen when the US dollar money illusion fails!
How is it Japan's money illusion? It is a global money illusion, which for one, Goldman participates in.
"Money illusion refers to people’s belief that their purchasing power has increased when their nominal wage has risen even though their wage in real terms has not changed because of inflation, encouraging them to spend more."
Why would people believe that? Prices are rising before wages are. People know they are falling behind, despite what the illusion makers want people to believe. That wealth effect illusion didn't work out either. After two crashes, people know that money can disappear again. The wealth effect only worked out for the C's, who borrowed money to buy back stock, then cashed out options to the tune of tens of millions. They are the only ones who have extra cash in their pockets to spend.
Even without a money illusion on the part of the consumers, they might spend more just because they know that their savings are being reduced, and they want to spend before they lose more.
On the other hand, when they see their savings shrink, they might save more to counter that.
Most people know to calculate inflation into their considerations. But, their anticipation may be wrong.
It would be so easy, if we could just trust the money to abid by the law of economics, that is to have sound money.
Japan continues to slide towards an economic abyss with each passing day. The writing is on the wall. Japan is facing a wall of debt that can only be addressed by printing more money and debasing their currency. This means paying off their debt with worthless yen where possible and in many cases defaulting on promises made. Japan's public debt, which stands at around 230% of its GDP and is the highest in the industrialized world.
The moment the Japaneses stock market fails to rise enough to offset inflation this will turn into a tsunami of money fleeing Japan and constitute the end of the line for those left holding both JGBs and the yen. This has been a long time coming and I contend the cross-border flow of money leaving Japan is why some stock markets have remained so resilient . When Japan crumbles it will be felt across the world. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/05/japan-sliding-towards-abyss.html