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Japan Is Writing History As A Prime Boom And Bust Case

Tyler Durden's picture




 

Submitted by Claudio Grass via GoldSilverWorlds.com,

Recently, we wrote a paper about the dynamics behind the boom and bust cycles, based on the view of the Austrian School (the Austrian Business Cycle Theory, or ABCT). The key takeaway was that central banks don’t help in smoothing the amplitude of the cycles, but rather are the cause of cycles.

Business cycles are a direct result of excessive credit flow into the market, facilitated by an intentionally low interest rate set by the government.

The problem with ongoing monetary policies is that the excessive money supply sends the wrong signals to the market, which ultimately leads to misallocation of investments or ‘malinvestments’.

On the one hand, entrepreneurs invest more and increase the depth of the production process. On the other hand, consumers spend more as saving becomes unattractive. When the excess products created through the cheap money-induced investments reach the market, consumers are unable to buy them due to the lack of prior savings. At this point the bust occurs.

It is key to understand that by manipulating interest rates (particularly by lowering them), central banks create bubbles that end in busts.

Japan is an excellent case study depicting the scenario discussed by the Austrian Business Cycle Theory (ABCT). In this article, we will examine the course of the economic and monetary situation in Japan from the ABCT’s point of view.

The latest quarterly GDP release in Japan was a real disaster. Economists had forecast a GDP growth between 2.2% and 2.5% but the result was a contraction of 1.6% on an annualized basis (i.e., -0.5% on a quarterly basis). That comes after a quarter in which GDP had already fallen 7.3% on an annualized basis (i.e., -1.9% on a quarterly basis).

The money printing frenzy has taken gigantic proportions, and the (lack of) effectiveness of the excessive money creation is visible in the charts. The first chart below shows the annual monetary base expansion (the black line) since 1990. The GDP year-on-year growth is shown in the green line. Notice how the monetary base had exploded in 2013 but the steepness of the rise was slightly reduced in 2014. Even with this slight pull back in monetary growth, the GDP growth is truly collapsing. Chart courtesy: Nowandfutures.

bank_of_japan_monetary_base_cpi_gdp_1990_2014

 

The Japanese interest rate over the last 4 decades reflects the frenzy of the monetary policy. Japan has had 0% interest rates since the start of the new millennium; that is over a decade! In 2012, Prime Minister Shinz? Abe applied his aggressive economic reform program also known as

‘Abenomics’. It has three core elements: fiscal stimulus, structural reforms and monetary easing. Needless to say, monetary easing plays a big role and Japan has gone all the way hoping to see a 2% annual inflation rate including negative interest rates and quantitative easing. Chart courtesy: TradingEconomics.

Japan_interest_rates_1972_2014

As we said in the introduction, the manipulation of interest rates does not come without consequences. A bust is inevitable; the timing of the bust, however, is the wildcard.

Japanese policymakers are fighting tooth and tail to direct the mindset of consumers and businesses in their favor. Their rationale goes as follows: by emanating greater inflation expectations, consumers and businesses should accelerate their desired consumption and investments, gradually boosting economic activity. All these measures have come at a high price with Japanese public debt now exceeding 200% of GDP.

Accordingly, economic growth is intended to be partly based on increased inflation, which they aim to achieve by a rise in consumption.

The next chart clearly shows that this higher inflation target has yet not materialized in the Japanese experiment, and it may take a few years for it to reach the 2% target.

Japan_CPI_1972_2014

Unfortunately, a real economic recovery cannot follow a period dominated by “fear” and “skepticism” as consumers were afraid to overspend and entrepreneurs were afraid to invest. That is such a simple truth that apparently escapes the intelligence of central planners.

There is more evidence of that on a macro economic level by breaking down the GDP components. The next chart makes that point; it is based on IMF research. The stimulus effect of Abenomics on households, businesses and exports had a very short life span, and, bottom line, no real effect. The only real effect on the economy is in the segment of public spending.

Moreover, in line with the previous data, net purchasing power of households has been going down, see next chart (courtesy of Alhambra Partners). The graph shows that the gap between nominal and real wages is widening. That is probably one of the most worrisome trends: hard working people are the victims of government stimulus. Chart courtesy: Alhambrapartners.

japan_household_income_2012_2014

As a result, bank lending, a key driver for economic growth, has been rising very slowly in the last few years. Unsurprisingly, in 2014 there was no growth in Japan.

Japan_bank_lending_2001_2014

Given the absence of real GDP growth (first and third chart above) and inflation (second chart above), total GDP growth remains subdued. The gigantic monetary expansion has no constructive power. Given the extent of the monetary efforts and the consequent lack of creating an impact on the real economy, it is clear that monetary policy is only delaying and aggravating the inevitable bust.

To make things worse, the Japanese government imposed a sales tax in April of this year. The Q2 GDP figures, which were released thereafter, were a true disaster! A tax increase in a healthy economy does not have the potential to torpedo economic growth the way it did in Japan in Q2 and Q3.

Take the automobile industry in Japan, for example. Chairman of the Japan Automobile Manufacturers Association (JAMA), Fumihiko Ike, recently confessed that Abenomics, which was designed to end years of deflation, had failed to encourage spending on big-ticket items like cars. He said that “Abenomics is not having clear traction across the country and even though as an industry we benefit from the weaker yen, we feel a sense of crisis about the fact that cars are actually not selling”.

Were Japan to live in some sort of hypothetical vacuum, their actions could have been slightly more effective. But in a globally interconnected world, complexity and dependency have grown tremendously. However, no academic model has been able to capture and quantify those dimensions. In the context of Japan, as an example, the currency devaluation of the Yen is indeed having a positive effect on the exports but, simultaneously, it is having a destructive effect on imports, as a weaker Yen makes imported products and services more expensive. It should not come as a surprise that policy makers are not taking these effects into consideration as their models seem to be archaic.

As Austrian economist Ludwig von Mises indicated a long time ago, “there is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

It is fair to say that the dynamics in the Austrian Business Cycle Theory are at play in Japan. There are striking similarities with the case analyzed in the micro-documentary released by Global Gold earlier this year which illustrated the Great Depression, the recession of 1990, the Dot Com crash, and the financial crash of 2008.

Given the data points discussed in this article, it is fair to say that Japan is on track for a devastating bust at some point in the future. The unknown factor is timing. When the inevitable will take place is anyone’s guess. What we know from history is that frenzies can go on for much longer than most of us believe. Also, inevitable does not equal imminent.

The fate of countries like Japan is really in the hands of central bankers. However, central planners are not able to manipulate markets infinitely. At a certain point, something has to give. That is when the markets will give up and disbelief will replace trust.

Readers should remember that in such a bust scenario, people flee down the Golden Pyramid of asset classes to their safe haven, being gold (source: John Exter). When the bust does occur, holding physical gold and storing it outside the banking system is the ideal counter-balance to other asset classes. Gold is a scarce asset that has absolutely no counterparty risk and instead offers the optimal “hedge” against a crisis! Gold presents its holders with the safety net when the monetary and financial systems break down.

It is our fundamental belief that it is better to be prepared 3 years too early than 3 days too late.

 

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Tue, 12/30/2014 - 22:45 | 5607804 Soul Glow
Soul Glow's picture

The BoJ will kill itself before it admits a mistake.

Tue, 12/30/2014 - 23:31 | 5607921 Greenskeeper_Carl
Greenskeeper_Carl's picture

"people flee to the ultimate safe haven, gold"

 

No, people are stupid, and will flee to "safer" currencies. For some reason, people seem to thing the 'cleanest dirty shirt' is the safe place to be. Me, personally, Id rather just wear the clean one(gold), but as I said, people are stupid. This will lead to a massive worldwide scramble for dollars. You think the fed would need to monetize any T-bonds in such a scenario?

Wed, 12/31/2014 - 00:34 | 5608048 Latitude25
Latitude25's picture

The sad reality is that you are right and way too many people think of the dollar like it is as good as gold.  It will take an exceptionally stupid or corrupt central bank to break that confidence.

Wed, 12/31/2014 - 06:47 | 5608375 r3phl0x
r3phl0x's picture

The Fed is exceptionally corrupt & has been in full-on bubble-blowing mode for 15+ years but sadly most people are still totally asleep. Junior can't get a job, will never pay off his college loans or buy a house, but, at least the US military remains globally dominant, AAPL will return 30-50%/yr forevers due to leveraged buybacks, the electricity's still on, gas is cheap and readily available, and there's plenty of drugs and lowest-common-denominator sports and entertainment and lots of cheap chinese slave labor consumer bullshit to buy in the stores. As long as this all continues, most people will gladly stay plugged into the matrix, even though the dollar is a total sham.

Wed, 12/31/2014 - 08:49 | 5608458 oudinot
oudinot's picture

"...the US military remains globally dominant..."?

Really?

The US has lost every major military conflict post WW2 (Korea, Vietnam, Afghanistann and Iraq wars) with the sole exception (which proves the rule) of the First Gulf War in 90-91.

Wed, 12/31/2014 - 23:14 | 5611261 r3phl0x
r3phl0x's picture

Those were all clusterfucks for sure, but, we didn't "lose" any of them due a lack of military power. The US military can incinerate some or all of the planet, many times over, should its leaders decide to do so.

Wed, 12/31/2014 - 04:41 | 5608282 ZH Snob
ZH Snob's picture

it's the need for instant liquidity that keeps this beast upright, though lurching like a punch drunk boxer.  we are seeing an animalistic drive for immediate survival on all fronts.  forget about safe havens.  that's for the wise individual, not the corporations that must make payroll, show a higher stock value, etc. nor is it for the foolish who never knew the value of savings anyway. 

money management is very similar to household management, and it's plain to see that those with a poor financial acumen usually live in a run-down, dirty house.

 

Wed, 12/31/2014 - 01:14 | 5608107 tplink
tplink's picture

my roomate's half-sister makes $65 /hr on the computer . She has been without work for 7 months but last month her pay check was $14940 just working on the computer for a few hours. you could try this out... www.works3.com

Wed, 12/31/2014 - 02:26 | 5608215 balolalo
balolalo's picture

banzai!!!!!!!!!!!

Tue, 12/30/2014 - 22:45 | 5607812 q99x2
q99x2's picture

Ah don't worry about it and BTFD.

Tue, 12/30/2014 - 22:51 | 5607823 kchrisc
kchrisc's picture

The "boom" is when they are stealing the most from you.

The "bust" is when you learn how much they have stolen from you.

The banksters need to repay us.

 

Is it improper etiquette to maintain a BBQ near an operating guillotine?

Tue, 12/30/2014 - 22:52 | 5607828 Caviar Emptor
Caviar Emptor's picture

Now thry're handing out vouchers to consumers to simulate err stimulate demand

Wed, 12/31/2014 - 01:59 | 5608172 Peter Pan
Peter Pan's picture

The Japanese government can also hand out Viagra but that won't fix their demographic problem either.

Tue, 12/30/2014 - 22:52 | 5607829 Silver Bullet
Silver Bullet's picture

Ha!

People have been calling this shit for twenty years now.

Tue, 12/30/2014 - 23:51 | 5607966 Greenskeeper_Carl
Greenskeeper_Carl's picture

don't know why you got the downvote, you are correct. there is a huge difference between an event being inevitable and an event being immenent

Wed, 12/31/2014 - 02:04 | 5608176 Peter Pan
Peter Pan's picture

You both have to admit though that the downward slide has been happening for quite some time and just getting worse as time goes on.

When you have fallen out of a plane at 30000 feet you don't rejoice because you are still alive at 20,000 feet. So to point out that this prophecy has been going on for 30 years is a moot point.

Wed, 12/31/2014 - 14:36 | 5609632 moneybots
moneybots's picture

"there is a huge difference between an event being inevitable and an event being immenent"

 

When one goes "all in" as Japan is now, imminent is getting pretty close.

Tue, 12/30/2014 - 22:54 | 5607836 KnuckleDragger-X
KnuckleDragger-X's picture

100 years from now Japan will be THE textbook case for the fallacy of Keynesian economics.

Tue, 12/30/2014 - 23:07 | 5607860 MarketAnarchist
MarketAnarchist's picture

100 years from now a superintelligent networked army of robots and automatons controlled by a single superconciousness will have extinguished all life on the planet and begun encircling the sun with energy harvesting machines to run its ever more complex calculation requirements.

 

But hey, you know. Shit happens.

Wed, 12/31/2014 - 00:46 | 5608068 yogibear
yogibear's picture

100 years from now Japan as we know it won't exist. It seems to be doing an excellent job of destroying itself. Once the west conrolled Japan it's culture  was doomed. 

The west unlocked China, the sleeping giant.

Wed, 12/31/2014 - 02:05 | 5608179 Peter Pan
Peter Pan's picture

What makes you think that there will be any economic textbooks 100 years from now?

Tue, 12/30/2014 - 23:00 | 5607846 pocomotion
pocomotion's picture

I think, from an investment perspective, now is the time to invest in Japanese body bag companies.

Tue, 12/30/2014 - 22:59 | 5607847 kchrisc
kchrisc's picture

For those so inclined to want to learn more, the Austrian school's home base, so to speak, is at, Mises.org.

They have many eBooks to download.

If you become overwhelmed, start here, What Has Government Done to Our Money?

The banksters need to repay us.

Tue, 12/30/2014 - 23:00 | 5607851 alexmark2013
Tue, 12/30/2014 - 23:19 | 5607887 Hylandr
Hylandr's picture

Time for Seppuku!!

Tue, 12/30/2014 - 23:39 | 5607940 skbull44
skbull44's picture

As Kyle Bass has said of Japan, "A bug, looking for a windshield."

http://olduvai.ca

Wed, 12/31/2014 - 00:55 | 5608060 Latitude25
Latitude25's picture

The gold/oil ratio just hit a new 70 month high

http://inflation.us/the-goldoil-ratio-just-hit-a-new-70-month-high/

How will this readjust?  Will it keep going higher or will oil go up or will gold go down?  

I measure golds buying power using oil, not dollars because most tangible things are somehow related to the price of oil so even though the gold price in dollars has been pretty flat recently, the gold value of tangible goods has been going up.  Gold has been a good investment in addition to being good insurance.  Dollars however, are in a speculative bubble right now.  Lots of downside risk.

Wed, 12/31/2014 - 00:43 | 5608062 TulsaTime
TulsaTime's picture

Nothing that is not happening here as well. Fake recoveries after 2001 and 2008 that were mere window dressing for transfer of funds to the oligarchs.

Wed, 12/31/2014 - 01:42 | 5608152 MrButtoMcFarty
MrButtoMcFarty's picture

Dead nation walking...

Wed, 12/31/2014 - 02:26 | 5608213 julian_n
julian_n's picture

They need Gordon Brown.

He abolished Boom and Bust . . he said . . and he was half right . . we still got the bust.

Wed, 12/31/2014 - 05:26 | 5608313 gwar5
gwar5's picture

I understand Japan is broke but what did the government historically spend it's money on in prior decades to create the current spasms? 

 

It's not like they have been slackers who on welfare, they don't spend on a military to speak of since WWII, and I thought the 70% oldie demographic bunch had been stoic, prudent savers who had only recently begun to dip into the mattress.

So, how did the Japanese government break it's budget before the interest rate monster took over the pie chart? 

 

Wed, 12/31/2014 - 07:05 | 5608391 panicearly
panicearly's picture

http://princesoftheyen.com

This film will give you some clues as to how Japan, Boj got to this point.

Well worth the time.

 

 

 

 

Wed, 12/31/2014 - 05:45 | 5608323 patb
patb's picture

"People will flee to their ultimate safe haven: Gold"

 

No, Wrong.!

 

The ultimate safe haven is canned tuna, Shotgun shells and seeds.  Grow your own, and if you have shotgun shells,

you'll have gold.

 

 

Wed, 12/31/2014 - 07:02 | 5608388 Latitude25
Latitude25's picture

How are your long distance swimming skills with a shotgun?

Wed, 12/31/2014 - 07:47 | 5608419 Batman11
Batman11's picture

Why don't markets work?

Central banks are a factor but there are many others ......

1) The next big thing factor where everyone loses all sight of fundamentals

First recorded instance, 1600s Holland and the new Tulips leading to Tulip Mania

More recently:

The new internet leading to the dot.com boom

The new social media companies

 

2) Distorted reward structures

Game theory on which market analysis is based has people winning and losing their own money like a game of poker. 

This makes people careful to avoid losses and markets reach stable equilibria (except when in new thing mania phase - see 1)

But the markets are set up with dangerous, highly distorted rewards structures:

i) bonuses for profits, with no penalty for losses

ii) bonuses large enough to allow participants to set themselves up for life on one long cycle time boom (as typically seen in housing)

iii) payment purely on trading volumes

iv) TBTF banks - heads we win, tails you lose

 

..........

 

We have markets that are designed to fail.

 

Wed, 12/31/2014 - 14:13 | 5609559 moneybots
moneybots's picture

"Japanese policymakers are fighting tooth and tail to direct the mindset of consumers and businesses in their favor."

 

The mindset of consumers and businesses is not the problem.  The laws of math are the problem.  1+1 always = 2.  Japanese policy makers cannot get around that fact.

Wed, 12/31/2014 - 14:23 | 5609593 moneybots
moneybots's picture

" ‘Abenomics’. It has three core elements: fiscal stimulus, structural reforms and monetary easing. "

 

And on some future day, Paul Krugman will proclaim that Abe didn't do it big enough.

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