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Why Japan’s Money Printing Madness Matters

Tyler Durden's picture




 

Submitted by David Stockman via Contra Corner blog,

This is getting hard to believe. The announcement that Japan has plunged into a triple dip recession should have been lights out for Abenomics. But, no, its madman prime minister has now called a snap election to enlist more public support for his campaign to destroy what remains of Japan’s economy.

And what’s worse, he’s not likely to be stopped by the electorate or even the leadership of Japan Inc, which presumably should know better. Here’s what Japan leading brokerage had to say about the “unexpected” 1.6% drop in Q3 GDP—- compared to the consensus expectation of a 2.2% gain and after the upward revised shrinkage of 7.3% in Q2.

We think that the economy is gradually improving,” said Tomo Kinoshita, an economist at Nomura Securities. “There’s no reason to be pessimistic about the economy going forward.”

Really? How in the world can an economist perched at the epicenter of Japan Inc. think that its economy is improving when Japan’s constant dollar GDP has now fallen back to pre-Abenomics levels; and, in fact, is no higher than it was in late 2007 prior to the “financial crisis”? Indeed, aside from the Q1 pull-forward of spending to beat the consumption tax increase, Japan’s economy has remained stranded on the flat-line it attained after world trade recovered from its 2008-2009 plunge.

Historical Data Chart

But that’s only the most recent iteration of the stagnation story. Japan has actually been treading water for a long-time—going all the way back to July 1989 when the monumental bubble created by the BOJ during the 1980s was cresting.

Japan’s index of total industrial production during July of that peak bubble year printed at 96.8. So here’s the real shocker: It was still printing at 96.8 in July 2014. That’s right—- after 25 years of the greatest government debt and money printing spree in recorded history, Japan’s industrial production has gone exactly nowhere.

Given that baleful history and the self-evident failure of the Keynesian elixir to cure Japan’s economic stagnation problem, it might be asked why the entire country seemingly moves in lock-step toward bankruptcy behind the sheer foolishness of Abenomics. That’s especially the case because even the short-run impacts have been self-evidently damaging to the real economy and have been utterly inconsistent with promised results.

To wit, Abenomics was supposed to send exports soaring and the trade accounts back into the black, thereby adding to GDP and household incomes. But what it has actually done has been to slash the global purchasing power of the yen by 35% since early 2013, causing Japan’s bill for imported energy, industrial materials and manufactured components and consumer goods to soar.

Accordingly, Japan’s trade accounts have remained mired in red ink, thereby defeating the fundamental “beggar-thy-neighbor” predicate of Abenomics. As shown in the second panel below, it’s trade account for the first 9 months of 2014 spewed 11 trillion yen of red ink or double its level in the year before Abenomics (2012). Annualized in dollar terms, the once and mighty export powerhouse of Japan has experienced a $200 billion swoon in its trade balance since 2010.

ABOOK Oct 2014 Japan Trade Balance

Moreover, Japan’s soaring import prices and cost of living, coupled with the utterly necessary increase in its consumption tax last April, have cause real household incomes to shrink by 6%. Thus, if Japan’s aging retirement colony could consume its way out of stagnation, which it can’t, Abenomics has clearly made matters worse on even that front line of the Keynesian cure.

ABOOK Oct 2014 Japan Madness HH Incomes

Notwithstanding this self-evident, negative short-run impact, however, Japan soldiers on toward disaster with Abenomics for one overpowering reason. It is effectively bankrupt and has therefore embraced an entirely fictional narrative about its plight in order to avoid confronting the awful truth about its fiscal and economic circumstances.

This convenient fiction is the “deflation” myth, and the argument is that Japan’s only hope for eventually corralling its huge public debt is to first decisively break-away from that albatross. Only with positive inflation and a resurrection of its historic rate of GDP gains, it is claimed, can Japan hope to grow out from under its crushing public debt ratio of nearly 230%. Indeed, mimicking some latter day version of the Reagan supply-siders’ voodoo economics, Abe’s top economic advisors argue that only by adding more debt in the short-run can the long-run debt problem be contained.

“This is a once-in-a-lifetime opportunity to get ourselves out of deflation,” Etsuro Honda, an economic adviser to the prime minister, told reporters Tuesday. “From this perspective, it is dangerous to raise the consumption tax.”

Here’s the problem. Japan has spent the last 35 years burying itself in debt, off-shoring its industrial economy and getting old. There is no conceivable real growth rate, therefore, that can overcome the runaway fiscal debt burden that it has accumulated since 1980. As shown below, its public leverage ratio has risen by 5X relative to its national income during that period.

Historical Data Chart

In this context, the BOJ’s 2% inflation target come hell or high water is a little more understandable, even if profoundly incendiary.  At 2% inflation forever, all of Japan’s $12 trillion mountain of public debt would have to be monetized or the carry cost—which already consumes 25% of its revenues—–would soar. That, in turn, would drive Japan into literal fiscal bankruptcy or transform its vast retirement colony into a poorhouse owing to savage tax increases and benefit cuts.

But, of course, there is not a shred of evidence that 2% inflation generates any more real output growth than 0.5%, but that’s not the point. The pro-inflation policy of Japan is about nothing other than depreciating its towering public debt. And Kuroda’s madcap 80 trillion yen per year money printing campaign is just a naked pretext for monetizing the prodigious flow of Japan’s budgetary red ink.

copy_of_figure2.gif

Stated differently, the Keynesian priesthood has invented an utterly groundless deflation ogre in order justify rampant monetary expansion in the vain hope that financial bubbles will levitate the real economy. But the latter delusion has been already disproved twice this century, and has now been validated once again by the short-lived fiasco of Abenomics. That is, in just 22 months Japan’s stock market has doubled, but its real GDP is back where it started and real household incomes have been pushed into the drink.

There is a reason this repudiation of Keynesian money printing is not just an anomalous problem relating to Japan’s unique history and economic structure. Namely, the phony “deflation” theory underlying the financial madness of Kuroda and Abe is readily portable. It has already been embraced by European policy-makers and will be arriving in the North American precincts soon.

So it is worth documenting yet again. In the entire 25 years since Japan’s financial bubble burst there has never been a semblance of meaningful consumer price deflation in Japan. Even the core CPI is well above it 1990 level:

Historical Data Chart

And on the theory that over any extended period of time, people do eat and warm themselves in winter, it is necessary to view Japan’s long-term trend for the overall CPI. What is shows is not deflation, but near perfect price stability. That is, after the considerable rise in consumer prices during the 1980s, its price index has remained more or less constant ever since its financial bubble was punctured in the early 1990s.

Historical Data Chart

There is not a shred of evidence that this wholesome price stability has caused Japan’s consumers to save too much or defer spending that they could otherwise afford. In fact, Japan’s savings rate has cratered during this period, dropping from more than 20% of household income prior to 1980 to hardly 3% today. That’s the opposite of what the deflation theory implies. What has actually deflated in Japan is its gigantic asset bubble, and that is something that even its prodigious money printing has proved incapable of reversing.

 

In short, they Keynesian apparatchiks have created a straw man that suits the purposes of their political masters on the fiscal front by rationalizing the monetization of endless amounts of public debt; and it empowers the state’s central banking branch to engage in plenary manipulation of the entire financial system on the misbegotten theory that fiat credit and bubble wealth can cause real production, incomes and wealth to rise.

Stated differently, Keynesian fiscal policies and central banking regimes have buried the public sectors of most of the world’s major economies in unsustainable debt. Now they propose to double down on more of the same because an entire generation of politicians have been house-trained in permanent fiscal profligacy and endless kicking of the fiscal can down the road.

To be sure, in putting off Japan’s day of fiscal reckoning once again, this time until  2017, Prime Minister Abe is proving himself to be a certifiable madman. In short order, however, he will have plenty of company all around the planet.

 

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Wed, 11/19/2014 - 18:07 | 5467256 CuriousPasserby
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So many words...

Wed, 11/19/2014 - 18:14 | 5467282 ZerOhead
ZerOhead's picture

... so little hope

Sayonara Sushistan

Wed, 11/19/2014 - 18:27 | 5467329 Fukushima Sam
Fukushima Sam's picture

The Japanese are masters of denial.

Wed, 11/19/2014 - 18:34 | 5467361 malek
malek's picture

Actually masters of "save face"

Wed, 11/19/2014 - 18:14 | 5467284 max2205
max2205's picture

If you were Japan Inc having a fire sale, this would be it.

 

Time for a going out of business sale but they can't because they make too much stuff offshore

Wed, 11/19/2014 - 18:07 | 5467257 Charles Nelson ...
Charles Nelson Reilly's picture

how do you say Kamikazee in Japanese?

Wed, 11/19/2014 - 18:13 | 5467278 kowalli
kowalli's picture

Obama

Wed, 11/19/2014 - 18:10 | 5467264 kaiserhoff
kaiserhoff's picture

They know something they are not telling us.

Probably something very bad about Fukushima.

Wed, 11/19/2014 - 18:12 | 5467273 NaiLib
NaiLib's picture

Of course. Fukujima is impossible to stop. Japan is doomed to radiation, and probably the Pacific too.

Wed, 11/19/2014 - 18:13 | 5467283 kowalli
kowalli's picture

Fukujima is impossible to stop- it was possible to stop if they do it right away and send about 10000+ men in.

Thu, 11/20/2014 - 04:18 | 5468767 JamesBond
JamesBond's picture

Fukujima??  Must be Fukushima's twin sister.  Isn't that on Austin Power's bucket list?

Wed, 11/19/2014 - 18:11 | 5467270 NaiLib
NaiLib's picture

" this time until  2017, Prime Minister Abe is proving himself to be a certifiable madman." -    Applauded and craved for by Christine Lagarde. She could hardly keep her fingers away from Abe at Davos.

Wed, 11/19/2014 - 18:20 | 5467300 lasvegaspersona
lasvegaspersona's picture

Ask Kyle Bass about the ability of the Japanese to live in deep denial.

As for the rest...I believe they all see the end is near and they know it is a hopeless situation. Printing is all they can do.If they don't then the wheels come off sooner and everyone on the planet with paper wealth (that is in any way based on the dollar) will suddenly realize that that wealth was gone long ago.

Today you can do something about it. You can get into real things like gold. The moment it becomes clear that we have been living in a central banker's illusion it will be too late.

Wed, 11/19/2014 - 18:21 | 5467306 Bighorn_100b
Bighorn_100b's picture

I agree with all of the posts so far.

Just a matter of time before Tokyo has to be evacuated.

Wed, 11/19/2014 - 18:21 | 5467308 Fiat agnostic
Fiat agnostic's picture

They can print money and buy all their debt ad infinituum so where is the problem? The debt overhang will stop inflation and confidence in debt is not an issue as the government can buy it all, so rates will stay low. What could possibly go wrong?

Well, other Asian countries will need to devalue to survive. The central bank choreographed descent of all major fiat currencies requires them all to stay in sync - 40% depreciation in a year breaks the rules. The dollar will strengthen to breaking point, oil will continue its descent and oil producers will break ranks. Dollar hegemony will falter and there will be a loss of confidence in the reserve currency.

When is the question!? The Yen is now moving in a parabolic fashion so events are gathering pace and could break at any time - literally.

Wed, 11/19/2014 - 18:32 | 5467345 Bell's 2 hearted
Bell's 2 hearted's picture

"They can print money and buy all their debt ad infinituum so where is the problem?"

 

one problem - per stockman here - is the interest burden is 25% of all revenue ... and will grow as debt accumulates ever faster (now that second phase of sales tax delayed) .... and if rates RISE?

 

until BOJ goes zimbabwe (debt foregiveness) the hampster must go even faster on the wheel

Wed, 11/19/2014 - 19:03 | 5467458 zenon
zenon's picture

one problem - per stockman here - is the interest burden is 25% of all revenue ... and will grow as debt accumulates ever faster (now that second phase of sales tax delayed) .... and if rates RISE?

The BOJ is printing more money than is required to fund the new debt. So the so-called rise in debt is mere bookeeping since it rests at the books of the BOJ. That is not to say that a Kyle Bass moment (with rising interest rates) will not happen; just that they won't happen on account of large government bond sales (as these are more than funded by freshly minted paper). They could happen though through a currency crisis as we are on the road to witnessing with collapsing Yen.

Wed, 11/19/2014 - 18:23 | 5467311 suteibu
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Stockman.  Wasn't he around during the Reagan era?  Was he responsible for the Plaza Accord, the forced agreement which caused Japan's asset bubble and ultimate collapse ostensibly to help America's failing export industry?  At the time, the Japanese, recognizing that their economy was overheating was preparing to take steps to cool it down (higher interest rates among them).  Instead, the US forced Japan to strengthen the Yen by half. 

That said, one wonders how the US has influenced Japan this time around. 

Wed, 11/19/2014 - 18:37 | 5467375 Notsobadwlad
Notsobadwlad's picture

Irrelevant factoid.

My wife worked briefly for Stockman as an intern when he was a Congressman from Michigan ... prior to working for Reagan in OMB. She really liked the guy.

She even got called by the FBI when there was concern that she might have been involved in the Carter briefing notes scandal. Stockman played Reagan's opponents in mock debates. My wife had no recollection of what was on those 3 X 5 cards.

Wed, 11/19/2014 - 18:46 | 5467396 suteibu
suteibu's picture

Undue influence in Japan's economy would not seem to be irrelevant to the Japanese.  Stockman may be a complete patriot to Americans but he would not be so honored in Japan.  While everyone likes to make fun of the Japanese, the US has been pulling their strings for over a century and a half.  But, I suppose that's just the way America rolls around the world. 

Edit:  Sorry I misread your comment about irrelevance. 

Wed, 11/19/2014 - 18:28 | 5467333 dirtyfiles
dirtyfiles's picture

its just a pain killer without fixing anything

the patient is dying and everyone knows that

next....

Wed, 11/19/2014 - 18:40 | 5467335 Notsobadwlad
Notsobadwlad's picture

The obvious:

- Japan's labor rate could NEVER approach that of China or the newly developing countries of Viet Nam, Cambodia etc. They would have to devalue the Yen, not to 80% or its previous value, but to 20% of its previous value. Later, China will have the same problem.

- Like the US, that does not mean that Japan, Inc. cannot be profitable. It just means that, just like the US, Japan will have debilitating unemployment on top of its demographics nightmare.

- Japanese companies can be phenomenally profitable, just like Apple, by spending China rates on labor and charging US rates on final product (labor arbitrage).... but that does not help Japanese GDP or the Japanese consumer much, if at all.

- Nothing Abe does will help unemployment and its elder class. In fact, expanding the money supply will make the demographically disenfranchised older folks unable to support themselves and the government will have to pick up the tab or murder them Obama style.

- Most large Japanese companies have done exactly what the US and European companies have done and moved every single bit of labor intensive manufacturing to low labor rate countries.

So, one should not wonder why Abe is unsuccessful, but wonder what the real goals that he has successfully achieved are.

Maybe Abe is not stupid. Maybe we are believing what is said and not what has been done.

Wed, 11/19/2014 - 18:29 | 5467337 fibonacci's claus
fibonacci's claus's picture

when is south park going to do an episode with abe at city wok?

Wed, 11/19/2014 - 18:29 | 5467340 Amish Hacker
Amish Hacker's picture

"putting off Japan’s day of fiscal reckoning once again, this time until  2017,"

 

Politically this may be true, but I think the game will be over financially long before then.

Thu, 11/20/2014 - 04:19 | 5468769 JamesBond
JamesBond's picture

"game"...

can you be more specific?

 

 

Wed, 11/19/2014 - 18:30 | 5467342 Kantbelieveit
Kantbelieveit's picture

Is there no end to this debt hysteria? Does anyone remember the WWII era US debt? The UK just finished paying off some of its WWI debt. If you want to lower the debt irrespective of damage to the economy then get ready for a replay of 1929.

Show me a major company that operates without debt. Show me a modern economy that does not operate with debt based financing of homes and major purchases. Debt is a normal part of the modern world. The Keynesian strategy makes much more sense for Japan right now than cutting their debt.

 

Wed, 11/19/2014 - 18:53 | 5467428 Bell's 2 hearted
Bell's 2 hearted's picture

"keynesian" is nothing more than "kick the can" while transfering wealth from the "have nots" to the "haves"

 

No Way Out without pain ... a lot of it

 

Let the "haves" do some suffering ... for once

Wed, 11/19/2014 - 18:31 | 5467351 Seasmoke
Seasmoke's picture

There will come a day, in the very near future, where they finally give it up.....I fully expect their excuse will be from the play book that we had to lie to you for your own good ..... I hope they are hanged for uttering those words.

Wed, 11/19/2014 - 18:37 | 5467380 yogibear
yogibear's picture

So Bernanke handed over his helicopter to the Japanese.

The US Federal Reserve is getting a twin rotor massive one to dump many times more billions.  

Wed, 11/19/2014 - 18:45 | 5467391 Son of Captain Nemo
Son of Captain Nemo's picture

The announcement that Japan has plunged into a triple dip recession should have been lights out for Abenomics. But, no, its madman prime minister has now called a snap election to enlist more public support for his campaign to destroy what remains of Japan’s economy.

Put it into perspective...

Abe was the chosen replacement following Yoshihiko Noda after the Samson Option happened probably for their attempts to work with other banks in the East and offering to provide assistance with Iran's commercial nuclear facilities development. 

If we all lived long enough without Israel and Saudi Arabia getting us to the next great war the truth of what Noda tried to prevent may very well come to light one of these days!

Wed, 11/19/2014 - 18:46 | 5467404 Wilcox1
Wilcox1's picture

This has got to be the best example of a nation's ethnocentrism leading to groupthink. They are so convinced of their ethnic cleanliness and superiority that they cannot conceive they are making a mistake. Reminds me of that lady friend of Ben F in France who found that the only one she could agree with was herself.

The world needs to get off the Keynesian dope. The planet is finite. The growth model is done for. There is some tough medicine to take in the form of a little more work and a little less game. If we are going to live in a hopeful world again we have to stop acting like monkeys hitting the coke lever until we die.

This is one Japanese export we don't need.

Wed, 11/19/2014 - 18:48 | 5467413 Surging Chaos
Surging Chaos's picture

It's funny how Greece, a country with an economy roughly the size of Vermont has gotten FAR more coverage over its economic woes the past few years than Japan, the 3rd-largest economy in the world and a debt to GDP that completely dwarfs what Greece has.

Wed, 11/19/2014 - 19:00 | 5467425 Yen Cross
Yen Cross's picture

 

 

 That was a really good comment...  You missed your calling for proctor of the " Ministry of Truth". ;-)

Wed, 11/19/2014 - 19:51 | 5467609 Son of Captain Nemo
Son of Captain Nemo's picture

It's funny how Greece, a country with an economy roughly the size of Vermont has gotten FAR more coverage over its economic woes the past few years than Japan, the 3rd-largest economy in the world and a debt to GDP that completely dwarfs what Greece has.

YC said it best.

But there is a reason why they won't talk about Fukushima just like the record(s) being broken for debt to GDP in that 3rd-largest economy... And oh by the way?... The two subjects are indeed related!

Wed, 11/19/2014 - 18:49 | 5467420 Joebloinvestor
Joebloinvestor's picture

HAHAHAHA

They even stage a phony baloney election to legitimize the demise.

Fukushima will be safe before the Japan economy recovers.

Wed, 11/19/2014 - 19:31 | 5467545 AdvancingTime
AdvancingTime's picture

Some currency has to be the first to crash and like many people I predict it will be the yen, The moment the Japaneses stock market fails to rise enough to offset the value of the falling yen a tsunami of wealth will flee Japan.

This will 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

Wed, 11/19/2014 - 19:41 | 5467586 wendigo
wendigo's picture

First domino. 

Thu, 11/20/2014 - 10:15 | 5469338 traderjoe100
traderjoe100's picture

duplicate

Thu, 11/20/2014 - 10:17 | 5469339 traderjoe100
traderjoe100's picture

When this world economic crash has run its course, the textbooks may read: "The powers-that-be tried to save their system by every tactic they had available - but they failed, resulting in a painful economic restructuring."

So, looking ahead, which countries will do OK after the economic reset? Japan may be one of them. Even though Japan has a demographic disadvantage (many old people), it also has:
- an educated, hard working population,
- technology, and good infrastructure,
- land on which to grow food, and
- a history of recovery from difficulty (post-WWII).

And Japan does not have the disadvantages that will tear many countries apart, during an economic reset, for example:
- no religious factions that hate each other,
- no ethnic divisions that violently oppose each other,
- no lawless, unproductive, uneducated underclass,
- no huge portion of their population used to dependence on government support

Their work ethic and ability to work together (instead of against each other), is a huge asset and will be a huge advantage.

Instead of turning on each other and cannibalizing their country, they will all be pulling together in the same direction. They will not be blaming each other, but will be moving together toward recovery, while many other countries will descend into the chaos of failed states - genocide, starvation, tyranny.

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