Why The Collapse Of Abenomics Is Important: It's A Large-Scale Failure Of Keynesian Stimulus In Real Time

Tyler Durden's picture

Submitted by Pater Tenebrarum via Acting-Man blog,

Abenomics Keeps Sputtering – What To Do?

We have frequently discussed the nonsensical attempt by Japanese prime minister Shinzo Abe and BoJ governor Haruhiko Kuroda to print and spend Japan back to prosperity in these pages. By now it is well known that devaluing the yen has not achieved the desired effect, but rather the opposite. Not only have exports not really received the expected boost, but Japan’s trade and current account surplus have decreased markedly, even posting negative numbers for the first time in decades. Of course, currency debasement never works: it cannot work.

 

1-Japan, current account

Japan’s current account over the past two decades.

We would like to point out though that a trade or current account surplus is not a measure of a country’s prosperity anyway. So even if the devaluation gambit had “succeeded”, its success would have been meaningless and any positive effects would have been strictly transitory. Japan’s consumers would have suffered just as they are suffering now. As Ludwig von Mises stated with regard to alleged advantages of devaluation:

“The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation’s welfare.

 

In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.”

In short, devaluation means securing a strictly temporary advantage for a small sector of the economy – export-oriented companies – while impoverishing all consumers concurrently. In the end, not even the advantages for exporters will be maintained, as domestic prices will inevitable adjust. As strategies for economic revival go, this has to be one of the most moronic ones ever devised. Not surprisingly, the EU’s coterie of economic planners is also fervently in favor of debasing the euro. Especially France’s government has been quite vocal in this respect, which is telling. The situation in the EU at present is this: the ECB has taken the advice of the biggest economic illiterates in political power in the EU.

Abenomics has lately suffered additional setbacks. It is “succeeding” only in one respect – the yen’s purchasing power has plummeted. GDP has just declined by 7.1% annualized last quarter, reversing the gains of the previous quarter and then some. Both the previous quarter’s reported growth and the subsequent decline have partly been the result of a sales tax hike, so they have to be taken with a grain of salt. It is however conspicuous that virtually every economic datum released since April has come in “worse than expected” – in many cases, much worse.

 

2-japan-gdp-growth-annualized

Japan – annualized quarterly GDP growth rate

 

 

As a side effect of the sales tax hike as well as the yen’s depreciation, Japan’s consumer price index has begun to soar. Japanese officials play this down by relying on a “core inflation index” that excludes the effect of the sales tax hike, and consequently argue that the inflation rate is still too low. This obviously matters little to the average Japanese citizen, who has seen his real income melt like a pile of snow in the Sahara. It is unfortunately not possible for Japan’s consumers to pay “seasonally adjusted prices ex the sales tax effect”. Statistical artifice cannot alter economic reality.

 

 

3-japan-inflation-cpi

Japan’s annual CPI growth rate.

Previously, Japanese consumer prices tended to mildly decline from time to time, thereby enhancing the meager incomes of Japan’s growing class of retirees and the incomes of wage earners. Abe and Kuroda have succeeded in impoverishing them. Mainstream economists all over the world are almost unanimous in their approval of this idiocy.

 

The Latest Advice

This brings us to the most recent plans and the advice dispensed by assorted bien pensants. Given the recent faltering of Japan’s economy, BoJ governor Kuroda has assured everyone that the central bank stands ready to monetize even more debt. After all, whenever the Keynesian recipe of money printing and deficit spending fails to work, it can only mean that not enough of it has been applied. The fact that it hasn’t worked in 25 years is regarded as clear proof that even more of the same is needed.

Concern has been mounting over whether the economic recovery will continue and inflation will hit the BOJ’s 2% target sometime next year.

 

“Should conditions emerge where the target becomes difficult to meet, we are ready to make without hesitation adjustments to policy, additional easing or whatever,” Mr. Kuroda told reporters after meeting Mr. Abe over lunch at the prime minister’s office. The consumer-price index, the BOJ’s policy target, has logged year-over-year rises for 14 straight months and stood at 1.3% in July, excluding the sales-tax rise.

 

Appearing on TV later in the day, the governor refuted views that there was little room for further easing, given the BOJ’s already massive bond purchases. “I don’t believe that there is a limit to additional easing or that there is nothing more we can do.”

 

[...]

 

The Japanese economy contracted an annualized 7.1% in the April-June quarter, as consumers tightened their belts and companies slashed new spending following the three-percentage-point rise in the sales tax to 8%.

The BoJ’s efforts have blown Japan’s monetary base “off the charts”, but a concomitant reduction in bank credit has meant that very little of this has actually translated into money supply growth – so far, that is.

 

4-monetary base, Japan

Japan’s monetary base rockets into the blue yonder.

 

It must be kept in mind here that this massive rise in the monetary base means that an ever larger share of the fiduciary media in Japan’s banking system have been transformed into covered money substitutes. This makes a deflationary credit collapse less and less likely, and by inference means that the opposite is becoming ever more likely. It cannot be ruled out that faith in the currency one day simply evaporates and that prices will then “catch up” with the monetary inflation that has taken place up to this point.

The main reason why the public’s continued confidence in the currency cannot be taken for granted is the essential Ponzi nature of the BoJ’s debt monetization schemes. By buying ever more government debt with newly issued bank reserves, the government ends up owing more and more of its debt to “itself”. The inherent absurdity of this situation should be obvious.

 

We can deduce from Mr. Kuroda’s comments that he is not at all concerned that anything untoward could happen. After all, it has all gone swimmingly so far. This unawareness on the part of the BoJ’s planners actually heightens the dangers considerably.

 

5-Japan-M1 st
Japan’s narrow money M1 (demand deposits and currency), roughly equivalent to money TMS-1. Note that in spite of the BoJ’s massive ‘QE’ operations, annualized growth has recently declined to 4% from an interim high of 6% achieved in early 2014. All the same, the money supply is up by a factor of six since Japan’s asset bubble burst in 1990. CPI meanwhile has risen somewhat until 1995 and has essentially flat-lined since then – click to enlarge.

 

So what is the advice dispensed to Japan’s policymakers in the financial press? That’s actually a rhetorical question – they are advised to do what they plan on doing anyway. The Nikkei Asian Review has recently been pondering whether Japan’s economy can “afford” another sales tax hike in 2015. It concludes that in spite of the dangers posed by the government’s debt-berg, only more printing and deficit spending can possibly rescue the economy – and there is of course great urgency:

“Most economists probably feel timid about predicting negative growth at a time when the pros and cons of another consumption tax hike are being discussed. Ryutaro Kono, chief economist at BNP Paribas Securities (Japan), is an exception. He predicts 0.1% negative growth for fiscal 2014.

 

For many economists who belong to organizations, it seems difficult to make unique and surprising predictions. But importantly, they do not want to see the additional consumption tax hike fall through. If it becomes clear the Japanese economy will post negative growth in fiscal 2014, it will be impossible to discuss another tax increase.

 

Japan’s fiscal conditions are continuing to deteriorate due to the aging of society. Many economists feel a sense of crisis, fearing that any delay in the additional tax hike would result in the crumbling of confidence in Japan’s fiscal policy.

 

So, what should be done?

 

The government and private sector should acknowledge the harsh economic situation and then discuss what measures should be taken. It could be possible to implement a supplementary budget, and embark on additional monetary easing as well as accelerate growth strategies.

 

The government’s Council on Economic and Fiscal Policy is due to start intensive discussions about the state of the economy on Sept. 16. Unbiased discussions and quick actions are more necessary than ever before.”

(emphasis added)

To summarize: there is a “sense of crisis” due to the explosion in Japan’s fiscal debt and the danger that confidence in fiscal policy may wane. The best way to counter this is by engaging in more money printing and even more deficit spending (this is what the “implementation of a supplementary budget” means – it means more government spending). This is Keynesian logic and brilliance in all it splendor.

 

 

 

6-Japan-debt-to-GDP plus projection

Japan’s total public debt-to-GDP ratio, including an overoptimistic projection – click to enlarge.

 

 

 

7-japan-government-budget-deficit

Japan’s government deficit as a percentage of GDP.

 

Conclusion:

We conclude that “more of the same” will remain the agenda until the whole house of cards implodes one day.

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FreeMktFisherMN's picture

No way US will get off that easy. So many people have no savings, and 30+% in collections of some kind. 

philipat's picture

CC. Mr P. Krugman.

The only "Explanation" I have heard from any of the Keynsian clowns has been that "Japan is different because it has structural problems" but in The US everything would be coming up roses if we had just printed more. Don't expect them ever to accept reality but, to misquote Ayn Rand, they won't be able to escape the consequences of reality. The fact is, The US has its own (Different) structural problems which also need reform, Demographics do NOT explain the results of the last decade because those demographic issues are only now "Kicking in".

So, to any rational impartial observer, I totally agree that Japan is a prefect living example (As opposed to the economic models favoured by the Keynsian crew) of the failure of Keynsianism. Actually, I should say "Neo-Keynsianism" because Keynes actually proposed that Governments should set aside reserves during the "Up" part of the cycle, then use those reserves to stimulate during the down part, thus "Smoothing" the curve. The Neo-Keynsians conveniently forgot the "Reserves" part of what Keynes actually proposed, which, in itself makes perfect sense. The problem, of course, being......the politicians.

FreeMktFisherMN's picture

The business cycle is not some inherent feature of free market capitalism. In a free market there is not near as much speculation because there is no statist entity juicing the market with cheap credit, which promotes the 'better dance while the music is playing' mentality that blows bubbles. The free market economy with no interventions gets some minor bubbles that are like minor fires that actually make the economy more robust afterwards, as the bad stuff gets rooted out before it becomes endemic. The government steps in though with the Fed and regulations, and gives the illusion that it can smooth everything out with backstops like QE and FDIC, but this only leads to abdication of responsibility and transfer of risk from directly vested individuals to some collectivist entity, and we get huge conflagrations that wipe out so many people, and are usually accompanied by war, as trade wars precede kinetic wars, etc. 

So while yes the recession should be allowed to run its course, instead of propping up bloated FIRE sectors, it should be pointed out that the business cycle is not some inherent feature of capitalism, so there would not be these perpetual bubbles in a true market. The Fed creates the boom/bust malinvestment. Much steadier surer growth occurs in free markets, like late 19th/early 20th century America, and even the 'panics' that occurred in late 1900s there is evidence that these were conjured by the elite bankers to scare people into falling for the idea they need a central bank, which was what the elitist inbred bankers really coveted and got in 1913. 

LetThemEatRand's picture

Reading this blog reminds me of bible study.  Here, read this Chapter.  It will explain everything.  If only it were so simple.

knukles's picture

LTER, I personally can only come to one conclusion. 

 

Fuck Paul Krugman.

 

PS  Things are so good, Goldilocks cut HK 2014 GDP foreacsst from 3.9% to 2.3%  (only a 41% cut)
'Prolly based on weather. 
Didja know that Antarctic ice is at ALL time high?

http://www.abc.net.au/news/2014-09-14/record-coverage-of-antarctic-sea-i...

LetThemEatRand's picture

Fuck Krugman and Fuck everyone who thinks the solutions to the world lie in textbooks (or fiction books written by ...).   Putting that aside, I'm sorry that science is antithethical to you pure libertarian belief system.   But sociopaths have the ability not only to fuck up our economy, but also our climate.  Of course they come up with some good shit to explain why it's the sun or whatever you want to believe that fits your belief sysem.   Fukishima was man-made.   Ask yourself if the same guys who tell you that Fukishima is no big deal also tell you that global warming is a lie, and then ask yourself why you believe one but not the other.

P.S.  I realize that you are religious, which is all the more reason why I stand in awe at your ability to disassociate your religion from your view of economics.

Not My Real Name's picture

What are you trying to say here? That you think *everybody* (or even most) who believes that climate change is one big statist lie also believes Fukishima is no big deal?

Really?

(P.S.  the major driver of climate IS the sun ... )

armageddon addahere's picture

If you want to know if global warming is a lie, stick your head out the window. None of the predictions made by Al Gore, James Lovelock et al have come true. World temps are basically flat for the last 20 - 25 years in spite of climbing CO2 levels. This last summer was one of the coolest, wettest I can remember.

Of course if you refuse to let facts get in the way of a good theory, there is nothing I can say to change your mind.

philipat's picture

Meanwhile, Gore is now a Multi-Millionaire, having sold his media Company to the Arabs. And still flys around the world in his Private Jet, presumably a non-polluting type. What a typical scumbag product of the US "Elites"..

Fudomyo's picture

Abenomics isn't about reviving the Japanese economy. It's about pensions.

The government has to pay a fixed dollar figure to pensioners. If the currency is devalued by 1/2, then thats half the burden on the books. The relative loss in import export prices is passed along to the consumer who are also saddled with a 5% increase in consumption tax that goes into the government coffers. That's arrow one.

By changing the rules governing how the GPIF is invested, and moving that money out of JGBs into offshore assets, the pension money isn't devalued at the same rate as the Yen. That's arrow two.

By changing argricultural and corporate policies the government has begun the process of corporate takeovers of private small farms, which will generate larger tax revenues and lower the government farm subsidy costs (the government has been supporting small rice farmers for decades, the majority of which are heading into retirement age). That's arrow three.

The Blank Stare's picture

How true! My mother-in-law, retired and in her sixties, used to pay 10% of her total medical bills. Last year that went up to 20% until she reaches 70.

Arrow 3 will mean taking on JA. If they can benefit, say advantages over international agri. Corps, then they will go along. If not, JA will fight the TPP.

The good in all this bad is not having to worry about marauding gangs attacking my chicken hatch.

philipat's picture

Does that mean we finally get a second runway at NRT?

Incidentally, when I first visted Tokyo in 1980, I was getting over 200 Yen to the USD. So I assume we still have a long way to run?

NoPension's picture

That's funny. My shit is worth more than your shit.

For me, I just stand in awe of how it all stays together.

The ONLY explanation my pea brain can fathom; The world must be composed mostly of people like my wife ( who I love) who have no fucking clue, and don't wish to. Blissfully ignorant. And a lot of these people, relative to history, go right on with their merry little lives, and die never knowing different.
How sweet it must be, in 2014, to be a .gov retiree. I know personally of .gov retirees who have collected longer than they worked. Sweet, if you luck out and hit the "sweet spot"
And yes, I'm envious and pissed.
I have produced my whole life, and these retarded fucks take up space and get rewarded with money til death, on the public dime.

armageddon addahere's picture

They don't sound so dumb. You might want to rethink who is the dumb one.

Redneck Hippy's picture

I don't really care for Keynes, but he is being maligned here.   Keynes was all about fiscal policy, not monetary policy.  Raising tax rates in the current situation in Japan is the last thing that Keynes would have recommended.  Japan is going to hell but you should blame it on Abe and Kuroda, not Keynes.

Raoul_Luke's picture

When fiscal policy "stimulus" fails so badly for so long (and debt explodes), the only tool the Keynesians have left is currency devaluation (monetary "stimulus").  And then when that doesn't work and every nation is competitively devauing, all that is left for the Keynesians is the "mother of all broken window fallacies" - war.

Raoul_Luke's picture

When fiscal policy "stimulus" fails so badly for so long (and debt explodes), the only tool the Keynesians have left is currency devaluation (monetary "stimulus").  And then when that doesn't work and every nation is competitively devauing, all that is left for the Keynesians is the "mother of all broken window fallacies" - war.

Midstyles's picture

my co-worker's step-aunt makes $76 /hour on the laptop . She has been fired from work for nine months but last month her payment was $16491 just working on the laptop for a few hours. Get More Information... www.payvalt.com

Caveman93's picture

TIMMMMMMMMMMBBBBBBBBEERRRRRRRRRRRR!

himaroid's picture

We won't have much time when the shi tzu nami comes rolling across the globe.

Better be ready. 

Bossman1967's picture

with Fukashima how can they even still be there occupying the island. wtf is America gonna do after 20 yrs of the Japanese model of bush and obamanomics guess we let Clinton back in and we really can blame the 3 that should have it today. how everyone can wish we still had Clinton is beyond my peabrain thinking but it's comming.
now a good question if the price of gold didn't skyrocket because of everyone debasing thier money why will it when the dollar is again devaued. the math in it all dosnt add up

kowalli's picture

it's not about a math, it's about instinct to buy something and find a place to stay like a shelter

TeethVillage88s's picture

Sorry to interrupt... Perhaps the Japanese Elite hope to reduce the population by as much as 40% (which is more than they can hope for, but still will draw support from TedTurner and his peers).

buzzsaw99's picture

devaluation is always naked theft by the maggots. the oft proclaimed beneficent goals are a ruse. the only growth they care about is in their own bonus.

CheapBastard's picture

"Devaluation" is a method of slow pain like the ancient Fu Man Chu's "Chinese water torture," of slowly driving a person mad by dripping water on his head one small drop at a time.

FreeMktFisherMN's picture

So far a lot of this inflation is stowed in Wall Street, whether the bond or stock markets. But wait until people start looking to actually redeem those 'paper gains' as they feel the 'wealth effect' and go try to buy real stuff. The malinvestment will be exposed and quality supply down as SMEs are getting hosed so less robust an economy, and so it won't matter if nominally everyone is 'made whole' because redeeming all these promises with actual goods and services won't happen. The underlying economy and gold are the referendum on all this. Right now it all is about the illusion of 'high quality collateral' which they need sovereign debt to be counted as, and hence ZIRP and/or NIRP so the denominator has no discounting factor and discounted cash flows are hardly discounted at all so PV stays up, and thus repo/carry trade are allowed to continue. This is what all these derivatives are contingent on. 

I would be wary of shorting stocks outright. Vastly more important to get into real resources. Commodities from grains to softs to metals are way beaten down, and this is the real wealth that ultimately will be sought as people look to cash in their winnings from the markets. 

Vint Slugs's picture

Fishermn (I like your moniker) --

In general, your remarks are correct.  However, when you say, "Commodities...is the real wealth that ultimately will be sought as people look to cash in their winnings from the markets", you are just a bit of the mark.  A more likely scenario, as A.E. Fekete has observed, is this: "When the [gold] basis finally goes negative as it must, the game is up. All offers to sell gold [will be] simultaneously withdrawn all over the world. Gold [will] no longer [be] for sale at any price. If you want to get it, you [will need to] have recourse to barter. You [will need to] give up silver, oil, wheat, and what have you, to get gold in exchange.

 

 

 

FreeMktFisherMN's picture

That is what I meant, that either you have tangible items of value to trade, or you will not get anything of value in return. 

Contrary to popular wisdom even among gold enthusiasts, gold need not be this thing that only does well when everything goes to heck in a handbasket. In a sound money free market economy gold and silver are used and they strengthen as productivity goes up. But given how overleveraged and malinvested and numbed from economic reality everything is, when this does unwind, it won't be that those with gold see living standards go up, per se. It will be that they can at least barter with gold and other goods of value, and transport the wealth abroad where maybe there is reverence for liberty and free markets. Gold is the one way to not get wiped out, although obviously needs to be accompanied with lead, food, water source, etc. 

LetThemEatRand's picture

"In a sound money free market economy..."

Yeah, because the guys who own most of the world's wealth (and nukes, planes, drones, etc) are going to let that happen when TSHTF.

FreeMktFisherMN's picture

I'm not 'betting' that the kind of setup I advocate will be allowed to be tried. That doesn't mean I morally relativize with an intellectually, morally, and financially bankrupt system.

Debugas's picture

as productivity goes up gold and silver will concentrate in the hands of the fewer and fewer rich people

ultimately in order to sell any product to the rest of the population you will have to lend them money if not gold then at least fiat currency...

GoldenTool's picture

This has been happening since 1880.  Slavery is the end result as this is will be the only way the lender/owner can be compensated.  Welcome to 2030...

nmewn's picture

Everyone realizes this shit is taught at Haaahvaaawd & Princeton right?

edwardo1's picture

Pater wrote:

"The situation in the EU at present is this: the ECB has taken the advice of the biggest economic illiterates in political power in the EU."

If you think that the ECB is acting on the desires of the political class of the EU then you are either misinformed or disingenuous.

FreeMktFisherMN's picture

They are trying to do everything short of going Abenomics QE via things like 'whatever it takes', as they know at least in Germany they have a finance minstry against inflation. 

Cognitive Dissonance's picture

We conclude that “more of the same” will remain the agenda until the whole house of cards implodes one day."

But NOT today or tomorrow. And this is precisely why they kick the can down the road. No stomach for pain today when it can be put off until tomorrow. Besides....there is lots of looting left to be done.

disabledvet's picture

So Keynes was "the main man" economics wise during World War II...and since the Fukushima cataclysm has been compared to that it makes sense that they would try it. No article on the problems in Japan is complete without starting off with the problem of have a "real problem."

I think the failure to deal with Fukushima is what is crushing the yen...and part of that failure is of the economic kind. So far it's not a financial Fukushima...Japan still has the lowest interest rates in the world...but that can change in a hurry.

Hate to yet again sound like the perennial flag waver here...but the USA is very good a decommissioning nuclear reactors. Problem being "you need to pay for that...and...in...dollars."

I think that super cheap yen is playing havoc with China and South Korea right now. Sony stock has really moved higher here. Japan has huge shipyards. In theory Japan has some of the cheapest energy in the world. (Geo-thermal.)

China and Japan have been paying top dollar to buy dollar denominated US based businesses. These things will be run flat out to generate as much "economy" in the USA as possible...not least reason being to create more American consumers to buy Japanese and Chinese goods.

Fuku Ben's picture

Give us credit we like to lead by example

Even if it is a kamikaze dive into the radioactive ocean

Spungo's picture

The economy looks great if you rotate the chart 90 degrees counter-clockwise.

Budd Fox's picture

What makes me laugh is reading a bunch of morons that have never, evidently, read a line of the General Theory, discuss of Keynes.

All the financial alchemics have fuck nothing to do with Keynes and the General Theory.

None of the jokes of buying financial instruments from money created from nothing puts a penny more in the pockets of Joe sixpack unemployed, put him back to work in a well paid job with benefits and does not solve the fucking mess.....a demand crisis.

There is no money...there is NO demand. People on food stamps do not consume, do not try to upgrade a home they lost, do not even drive their '93 truck...because fuel costs too much...

you can buy all the fake paper of the world with all the fake money of the world....if you increase the poors and enrich the 1%ers....you sink. 

No other bullshit...full stop

 

Raoul_Luke's picture

There is no shortage of demand.  Demand is, for all intents and purposes, infinite.  What there is a shortage of is belief that things are getting better, which curtails investment (and ultimately GDP, which reduces consumption).  Taking money from me (either through taxes or borrowing [deferred taxes] or money printing [currency devaluation tax]) to fund someone else's consumption doesn't, you know, actually increase consumption (let alone national wealth).  It just creates perverse economic incentives that further impede investment and economic growth.

What makes me laugh is reading someone say the current economic regime has nothing to do with Keynes when, in fact, if he'd never suggested a role for the government in managing "demand," we'd not have so many politicians trying to do exactly that in the name of "fixing the economy."

JoJoJo's picture

"Womenomics" is Abe's newest tact to improve the economy through "promoting women in business."  Swedens Green and Feminist Parties will be dominating the government. If there is a War on Women the women are winning. The NFL is conceding that it must appear to be more woman friendly in order to grab more female demographic revenues/interest in football. 

Before the San Fran game tonight I had to watch an NBC infobabe yak about some San Fran player who had an argument with his fiance. Why not just skip the National Anthem pre game and get right to reporting all the domestic abuse charges and what players are switching their kids. JUST LIMIT the game to 3 quarters so that Rosie Odonnell  can report what she thinks about men for 15 minutes?

 

 

 

Debugas's picture

abenomics can only work in resources rich economy namely when it can replace imports with domestic production which does not rely on imports