Tax Reform & The "Japanification" Of America

Authored by Lance Roberts via,

On Friday, Kevin Brady of the House Ways and Means Committee was on my radio program discussing the “Tax Cuts & Jobs Act” bill which was released later in the day.

Here are the details of the release he referenced in the interview.

Of course, the real question is how are you going to “pay for it?”

Even as Kevin Brady noted in our interview, when I discussed the “fiscal” side of the tax reform bill, without achieving accelerated rates of economic growth – “the debt will balloon.”

The reality, of course, is that is exactly what will happen because there is absolutely NO historical evidence that cutting taxes, without offsetting cuts to spending, leads to stronger economic growth.

Those, of course, are the long-term concerns that will lead to lower rates of returns for equity-based investors and will continue to suppress interest rates for the next decade as the “Japanification” of the U.S. continues.

Let’s Be Like Japan

“Bad debt is the root of the crisis. Fiscal stimulus may help economies for a couple of years but once the ‘painkilling’ effect wears off, U.S. and European economies will plunge back into crisis. The crisis won’t be over until the nonperforming assets are off the balance sheets of US and European banks.”Keiichiro Kobayashi, 2010

While Kobayashi will ultimately be right, what he never envisioned was the extent to which Central Banks globally would be willing to go. As my partner Michael Lebowitz pointed out last week:

“Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below. Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC).”

As he noted, the belief was that by driving asset prices higher, economic growth would follow. Unfortunately, this has yet to be the case as debt both globally and specifically in the U.S. has exploded.

“QE has forced interest rates downward and lowered interest expenses for all debtors. Simultaneously, it boosted the amount of outstanding debt. The net effect is that the global debt burden has grown on a nominal basis and as a percentage of economic growth since 2008. The debt burden has become even more burdensome.”

While Mr. Brady is very optimistic about future rates of economic growth, even Ms. Yellen in her latest policy announcement was not so sure. The Fed’s average of long-term growth expectations is currently running at just 1.9%.

The continuing mounting of debt from both the public and private sector, combined with rising health care costs, particularly for aging “baby boomers,” are among the factors behind soaring US debt. While “tax reform,” in a “vacuum”  should boost rates of consumption and, ultimately, economic growth, the economic drag of poor demographics and soaring costs, will offset any of the benefits.

The complexity of the current environment implies years of sub-par economic growth ahead as noted by the Fed last week. Of course, the US is not the only country facing such a gloomy outlook for public finances, but the current economic overlay displays compelling similarities with Japan in the 1990s.

Also, while it is believed that “tax reform” will fix the problem of lackluster wage growth, create more jobs, and boost economic prosperity, one should at least question the logic given that more expansive spending, as represented in the chart above by the surge in debt, is having no substantial impact on economic growth. As I have written previously, debt is a retardant to organic economic growth as it diverts dollars from productive investment to debt service.

Of course, one only needs to look at Japan for an understanding that QE, low-interest rate policies and expansion of debt have done little economically. Take a look at the chart below which shows the expansion of the BOJ assets versus growth of GDP and levels of interest rates.

Notice that since 1998, Japan has not achieved a 2% rate of economic growth. Even with interest rates now pushing into negative territory, economic growth remains mired below one-percent, providing little evidence to support the idea that inflating asset prices by buying assets leads to stronger economic outcomes.

But yet, the current Administration believes our outcome will be different.

The reality is that the U.S. is now caught in the same liquidity trap as Japan. With the current economic recovery already pushing the long end of the economic cycle, the risk is rising that the next economic downturn is closer than not. The danger is that the Federal Reserve is now potentially trapped with an inability to use monetary policy tools to offset the next economic decline when it occurs.

This is the same problem that Japan has wrestled with for the last 20 years. While Japan has entered into an unprecedented stimulus program (on a relative basis twice as large as the U.S. on an economy 1/3 the size) there is no guarantee that such a program will result in the desired effect of pulling the Japanese economy out of its 30-year deflationary cycle. The problems that face Japan are similar to what we are currently witnessing in the U.S.:

  • A decline in savings rates to extremely low levels which depletes productive investments
  • An aging demographic that is top heavy and drawing on social benefits at an advancing rate.
  • A heavily indebted economy with debt/GDP ratios above 100%.
  • A decline in exports due to a weak global economic environment.
  • Slowing domestic economic growth rates.
  • An underemployed younger demographic.
  • An inelastic supply-demand curve
  • Weak industrial production
  • Dependence on productivity increases to offset reduced employment

The lynchpin to Japan, and the U.S., remains demographics and interest rates. As the aging population grows becoming a net drag on “savings,” the dependency on the “social welfare net” will continue to expand. The “pension problem” is only the tip of the iceberg.

If interest rates rise sharply it is effectively “game over” as borrowing costs surge, deficits balloon, housing falls, revenues weaken and consumer demand wanes. It is the worst thing that can happen to an economy that is currently remaining on life support.

Japan, like the U.S., is caught in an on-going “liquidity trap”  where maintaining ultra-low interest rates are the key to sustaining an economic pulse. The unintended consequence of such actions, as we are witnessing in the U.S. currently, is the ongoing battle with deflationary pressures. The lower interest rates go – the less economic return that can be generated. An ultra-low interest rate environment, contrary to mainstream thought, has a negative impact on making productive investments and risk begins to outweigh the potential return.

More importantly, while there are many calling for an end of the “Great Bond Bull Market,” this is unlikely the case. As shown in the chart below, interest rates are relative globally. Rates can’t rise in one country while a majority of economies are pushing negative rates. As has been the case over the last 30-years, so goes Japan, so goes the U.S.

Unfortunately, for the Administration, the reality is that cutting taxes, and MORE debt, is unlikely to change the outcome in the U.S. The reason is that monetary interventions and government spending don’t create organic, and sustainable, economic growth. Simply pulling forward future consumption through monetary policy continues to leave an ever-growing void in the future that must be filled. Eventually, the void will be too great to fill.

But hey, let’s just keep doing the same thing over and over again, which hasn’t worked for anyone as of yet, hoping for a different result. 

What’s the worst that could happen? 


NoDebt khnum Mon, 12/18/2017 - 14:45 Permalink

I've been talking about the entire developed world turning into Japan since I got to ZH God knows how many years ago.  Nobody pays me for my commentary here (a nice Christmas card would be appreciated, though, Tyler).  I wonder how much they paid this guy for that article. 

In reply to by khnum

khnum NoDebt Mon, 12/18/2017 - 14:51 Permalink

Who knows he may of been inspired by something you wrote I often drop serious hints about things that should be investigated I know Max Keiser,Celente and others visit this site with much bigger platforms than you or I have- sometimes I do believe they run with posters ideas.

In reply to by NoDebt

GreatUncle NoDebt Mon, 12/18/2017 - 19:59 Permalink

Yep you and quite a few others No Debt ... a fundamental issue with the current economic system that many on here recognise but economists deny.Pulled this out of the article though for shits and giggles "that the next economic downturn is closer than not" and chuckled like fuck. If there is even a twinkling of an economic downturn the author does not seem to realise they cannot ever allow an economic downturn. These economists need to realise once it starts it would rapidly escalate away from them with a debt contagion collapse and that is why they have the PPT to prevent it.Now after years on ZH I realise the numbers quoted as absolutes are no such thing they a relative measure and for me the biggest eye opener is the Keynesian policy of deflating debt away is actually "future being fucking NIRP'ed".The future is already NIRP it is just they do not know how to implement it in the present without people walking away so we have ZIRP for now. It will require a totalitarian police state to implement NIRP in the present and they are working on that too.Japan is full on NIRP'ing the future away, but is Japan actually NIRP'ing the the economic futures of other nations from any future economic pot? Like he goes first tends to get paid until everybody else tries it.

In reply to by NoDebt

Endgame Napoleon ejmoosa Mon, 12/18/2017 - 19:04 Permalink

Japan has a much bigger middle class than the USA and no open borders. In fact, they do not have mass immigration at all and are not called racist for it. Now, they might not have as many billionaires, paying Social Security tax only up to the $127,200 cap as the United States.

Politicians want open borders, whether or not it puts the last nails in the coffin of the middle class and, in turn, of the Republic itself.

Politicians want open borders and a welfare state that pays immigrants to have sex and reproduce, in addition to paying many citizens for the same thing, to the point where their combo of part-time work that keeps them below the income limit for free food, free rent, monthly cash assistance and $6,444 child tax credits far exceeds the financial reward for working full time with no pay-per-birth welfare and tax welfare.

Politicians want socialism for some in the most frivolous forms, including $6,444 checks at tax time to citizen and immigrant parents who do not pay income tax on top of their welfare, while decrying the programs that most Americans have to pay into on every dime earned, either at 7.65% or 15.3% of their income. These politicians are going to find out who bothers to vote; it is often not the people they cater to.

In reply to by ejmoosa

khnum Mon, 12/18/2017 - 14:36 Permalink

A tax cut without any other incentives to reinvest does not cut it in todays world.You are up against nations that have accelerated depreciation allowances,corporate tax free periods,credits for local labor content,sales tax exemptions on capital equipment and much less complex tax codes and to these nations the money will go in a global economy Its not just simply cutting rates.

Don Sunset Mon, 12/18/2017 - 14:38 Permalink

Since Japan cannot be fixed without a reset and Japan can take down the rest of us when it fails, we might as well join Japan until the end.  I have thought about this for a long time and it seemed inevitable that the USA and others get on board.

wmbz Mon, 12/18/2017 - 14:39 Permalink

Charts and graphs are nice to look at but don't mean much, when the people that pull the levers and control the show, don't give a tinkers damn about them.We have been traveling the one way road for a long,long,long time, not about to change direction.

brewing_it Mon, 12/18/2017 - 14:42 Permalink

Gotta pay for the welfare/warfare state. Both political parties are scared to face reality. And with interest rates creeping up, the shit will hit the fan.

Batman11 Mon, 12/18/2017 - 14:44 Permalink

Have a silly real estate boom and when it crashes you turn into Japan.It's easy.The West’s “new normal” is Japan’s “old normal”.Richard Koo has had decades to study the after affects of a “Minsky Moment” as the West experienced in 2008 and Japan experienced in the late 1980s.He’s got it all worked out. all looks fairly straight forward to me. 

Batman11 Batman11 Mon, 12/18/2017 - 14:52 Permalink

To understand Richard Koo you need to understand how money is created and destroyed in the system.The money supply = public debt + private debtAs loans are taken out it creates money and as they are repaid it destroys money.The money supply = the debt in the system (public and private)Bank lending creates money and it is very important where banks lend money. are three types of lending:1) Into business and industry - gives a good return in GDP and doesn’t lead to inflation2) To consumers – leads to consumer price inflation3) Into real estate and financial speculation – leads to asset price inflation and gives a poor return in GDP and shows up in the graph of debt-to-GDPRichard Werner explains in 15 mins: we go  ......... going exponential, a credit bubble is underway (debt = money) 

In reply to by Batman11

Don Sunset Mon, 12/18/2017 - 14:44 Permalink

I looked into to paying my 01 FEB 2018 (due date) 2nd installment property taxes in 2017 to get the deduction included in the 2017 taxes, but I found that the new GOP Tax Law won't allow me to do that.

MusicIsYou Mon, 12/18/2017 - 14:47 Permalink

Japan is tiny compared to the U.S, and the once semi normal U.S is what allowed Japan to exist the way it has. The U.S is too large for it to work in the U.S and also the U.S doing what Japan has done will crash Japan and then boomerang back crashing the U.S. The U.S is just up the creek without a paddle and there's a waterfall approaching.

NumNutt Mon, 12/18/2017 - 14:46 Permalink

On the way in to work today I heard a talk show that was interviewing one of Trumps economic advisors, and I heard the first utterance of what I suspected was coming along since the first day Trump took office...."welfare reform", yep it is coming, that will fix all those pretty little graphs, going to piss off the free shit army but oh well.....

MusicIsYou NumNutt Mon, 12/18/2017 - 14:55 Permalink

Yep and the freeshit zombie army will be hitting the streets, that's what the military is training for, and why police are getting larger and more militarized. Of course as the U.S becomes an absolute police state it will usher in financial collapse. However you won't be able to reason that idea with the low IQ police forces.

In reply to by NumNutt

FORD_FIESTA Mon, 12/18/2017 - 14:50 Permalink

Turning The Vapors.......yup.Bullets, Beans, and Barter items,,,,,,,'cause you know it's coming. That is, if you Prep, you know, if you don't Prep,,,Fooook Yoooo.

buzzsaw99 Mon, 12/18/2017 - 14:50 Permalink

The danger is that the Federal Reserve is now potentially trapped with an inability to use monetary policy tools to offset the next economic decline when it occurs... with that one bullshit sentence you just shot your whole thesis the hell.  japanification of the usa absolutely requires unlimited fed buying of everything that isn't nailed down in the future.

Yellow_Snow Mon, 12/18/2017 - 14:52 Permalink

Just curious, if hyperinflation occurs worldwide -What happens to these Central Banks?  and what about those 'assets' they own, how does that play out ?

JibjeResearch Yellow_Snow Mon, 12/18/2017 - 15:18 Permalink

CBs will own most of the Stocks, they might get into Cryptos through the backdoor.  In a hyperinflation case, they will not suffer much.  The poor will suffer the most, look at Germany before WW1 and WW2.  For you, your cryptos (mostly from reading your posts) and some cash will do just fine if you make gain more than the inflation.   I supposed, most of us will be ok; however, living under a military state is not the  best choice because the military will come for your wealth.  Shit rolls down the hill, get it? Get a second passport.  Canada and Austrialia are my preference since English is good over there.  Cryptocurrency can move around easily, not so much for fiats and metal.  Some fiats will get destroyed. If we go to war, you can bet that the USD will get destoryed. The best think for all of us is to pay off our debt from winning with cryptos.  If we have debt, in a bad time, the debt mulitplies.  This is twice as bad.  Having no debt to deal with is a great start during hyperinflation. Good luck, I think you'll do just fine :)  

In reply to by Yellow_Snow

Hkan Mon, 12/18/2017 - 14:55 Permalink

Chinese currency get same status as $ in Pakistan.Pakistan will soon enjoy US rage and forced to leave Chinese currency or be wiped out.

BitchesBetterR… Mon, 12/18/2017 - 15:14 Permalink

I actually sensed awhile ago the USSA economy was likely to become like the Japanese- a "Zombie economy" based solely on "printing to infinity" policy in order to fill up the abysmal deficits, lack of manufacturing, healthcare deficits, social security pensions, while "pretending" to be growing .......    Japan claims to be at QE number 14, while the USSA is "unwinding" number 3...... but in reality it is QE 10, since the national debt grows a trillion a year, yet not knowing what is being printed off the books....

I am Groot Mon, 12/18/2017 - 15:13 Permalink

I don't feel my eyes getting slanty yet. I've never met a more zenophobic group of assholes in my life. No wonder everyone in Asia despises and lothes them with a passion. If Japanification means opening thousands of bars with schoolage girls dancing on tables in catholic school girl outfits, then count me in. Banzai !

falak pema Mon, 12/18/2017 - 15:33 Permalink

Okinawa has the best "old age" paradigm in the Orient; people live very long thanks to their diet and sustainence of 100 trillion gut microbes that ensure their ability to resist to man made opoids and pharma life killers... something which is the exact opposite of Amerika's lovestory with its own fabrication of man's ecosystem plant life life killers in the pursuit of "greed is good" paradigm...How do you make a serial killer civilization REALIZE it is the timebomb of Human decay; in terms of natural laws, not unnatural hubristic concoctions of man's own destruction or fallacious knee jerks back to the old paradigm of "malicide" being the JUST cure for deviance to "God's Law" ?Some Ponzi...that the three sons of Abraham have made the essence of Man's obsession with intemporal Nirvana; the Last Judgment of Man's timeline on Earth !Haha! Its the opium of the ages, but modern man can't find Arianne's thread!Some conundrum in the maze of the Minotaur of  Man's origins! Who knows how to gore man's rational mindset to smithereens !Meanwhile, we buy Bitcoin to soothe our desamour with Petrodollar !Hahaha ! 

rejected Mon, 12/18/2017 - 15:32 Permalink

Well this 'aging' useless eater has no bad or good debt depending on how one looks at it.As for government spending,,, most is going for foreign adventures to determine who's dick is the largest.As for tax cuts,,,the average American lemming that itemized, itemized an average of $27,000. Since the cap is now $10,000 I don't see how anyone can call this a cut. It's musical chairs, some will get a little more,,, some a lot less,,, same as it is now, same as it's been since they lied to ratify the 16th amendment. The US government has been out of control since the CSA lost their fight for independence. Today the insanity surpasses even that of the Hitler regimes last days.