Reposted without comment. Is deflation good or bad? You decide. In the red corner, repeating the “20 years of deflation” myth (prices did not fall for 20 years in Japan; they were flat. The evidence is here):

“We should first make sure that Japan exits from 20 years of deflation,” said Hiromi Yoshida, acting secretary-general for the LDP upper house caucus, urging Abe to remain focused on the economy.

via Abe bracing for spring storm- Nikkei Asian Review.

And in the blue corner:

What is it with this perennial fear the chief money printers have of falling prices? Not that we are likely to see it happen, but if it does, what of it? Bloomberg reports on the recent ECB decision with the following headline: “Draghi Says Deflation Danger Should Abate as Economy Revives”
The headline alone is a hodge-podge of arrant nonsense. First of all, ‘deflation’ (this is to say, falling prices), is not a ‘danger’. Speaking for ourselves and billions of earth’s consumers: we love it when prices fall! It means our incomes go further and our savings will buy more as well. What’s not to love?

The problem is of course that when prices decline, the ‘wrong’ sectors of society actually benefit, while those whose bread is buttered by the inflation tax would no longer benefit at the expense of everybody else. But they never say that, do they? Has Draghi [or Abe, Ed] ever explained why he believes deflation to be a danger? No, we are just supposed to know/accept that it is.
… ‘Inflation’ is not the same as ‘economic growth’ – on the contrary, it both causes and frequently masks economic retrogression. …

As Austrian economists have long explained, it is simply untrue that prices must rise for the economy to grow. Consumers obviously benefit from falling prices … All of us can easily ascertain how beneficial the decline in computer prices, cell- and smart phone prices, prices for TV screens, etc. is. Naturally, it would be even better if all prices fell, not only those on a select group of consumer goods.

What about producers? Won’t they suffer? By simply looking at the share prices and earnings of the companies that make all the technological gadgets the prices of which have been continually declining for decades, everybody should realize immediately that the answer must be a resounding NO. This is by the way not only true of the firms that are in the final stages of the production process, i.e. the stages closest to the consumer. It is obviously also true for the firms in the higher stages of the capital structure. But why? It is quite simple actually: prices are imputed all along the chain of production. What is important for these companies to thrive are not the nominal prices of the products they sell, but the price spreads between their input and output.

In fact, the computer/electronics sector is the one that comes closest to showing us how things would likely look in a free, unhampered market economy.

via via Acting Man | No, Deflation is Not a ‘Danger’ |.

Tags: Japan

Can Abenomics save the Japanese economy? (Click the graphic to see a larger, clearer version.)

Here’s a useful “infographic” as they’re called on Abenomics, produced by investment group Saxo Capital.

Read the whole thing at Abenomics, Shinzo Abe, Bank of Japan Infographic – Saxo Capital Markets.

The main points:

• How does Abenomics work?
• Structural reforms key to Abenomics success
• Abenomics lifts consumer sentiment
• The dangers of Abenomics

And a few excerpts. These should be read in conjunction with “This Inflation is Supposed to be GOOD for Japanese Workers?” which I’ll comment on in a minute. As the mainstream seem to be harping on how “fresh” and “exciting” Abenomics is and how it has led to a surge in the Japanese stock market, I’ll focus here on some more sobering, long-term aspects of it.

• For Abenomics to succeed, Japanese households will need to reverse the recent deflationary trend of excess saving and encourage consumers to spend more.
• Further problems await Japan: the unsustainable ratio of the elderly to the working population, fallout should fiscal stimulus fail, and snowballing costs for imports.
• Abe’s structural reforms carry with them several risks. The domestic agriculture sector could suffer from increased marketplace competition should tariffs on imports be removed. Any agreements with the TPP would mean greater dependency on government support among Japanese farmers, adding a further load on finances.

Read the whole thing at Abenomics, Shinzo Abe, Bank of Japan Infographic – Saxo Capital Markets.

Now, are Japan’s workers all excited about inflation and Abenomics? Wolf Richter writes this article on Zero Hedge. “This Inflation is Supposed to be GOOD for Japanese Workers?” Key points:

• The Japanese Statistics Bureau just reported incomes and expenditures of households with two or more persons. This is by far the largest category of households in Japan. Due to the cost of housing in large urban areas – and due to remnants of tradition – a large number of singles live with their parents. This category is further divided into “workers’ households,” “no occupation” households, and “other” households.
• Incomes of the all-important “workers’ households” rose a measly 0.1% from a year ago to ¥482,684. In nominal terms. But adjusted for inflation – yes, here is where the benefits of Abenomics are kicking in – incomes fell 1.3%. Disposable incomes fell 1.4%. The details were ugly: “Current income” (salaries and wages) dropped 1.2% and “temporary bonuses” plunged 19.5%. Income from self-employment and piecework plummeted 20.8%.
• Spending rose a scant 0.4% in nominal terms from a year ago – but adjusted for inflation, spending fell 1.0%.
• And this despite rampant frontloading of big-ticket purchases. The consumption-tax hike from 5% to 8%, to take effect on April 1, is motivating households to buy big-ticket items now and save 3%. It has turned into a frenzy. Durable goods purchases, the primary target of frontloading, jumped 40.4% in October from a year ago. While it’s goosing the economy now, it will create a hole starting next spring. Japan has been through this before [w]hen the consumption tax hike from 3% to 5% was passed in 1996
• frontloading of a few big-ticket items is hitting day-to-day expenditures.
• This is the benefit of inflation without compensation! A process that ever so slowly hollows out the middle class and pushes the lower classes deeper in the quagmire. It’s hurting workers and consumers. It’s constraining the real economy. Yet, holders of assets that the central bank inflates into the stratosphere benefit.

Doesn’t look good, does it, boys and girls?

Tags: Japan

The natural path for all economies is a mild deflation in the amount of productivity improvement, averaging 2-3% annually.

via Here Comes the Spin (Central Banks) in [Market Ticker]

Coninuing my investigation into inflation (the desirability of) and deflation (the evils of), the above is one businessman’s opinion. He writes (emphasis in the original):

I’m going to keep hammering on this until people wake up and start demanding it: The natural path for all economies is a mild deflation in the amount of productivity improvement, averaging 2-3% annually.  That deflation — that is, increased purchasing power for the people of a nation, is yours.  It belongs to you.  It comes into existence because you perform your job, whatever it may be, with more efficiency due to the improvements of technology over time.

You do more with less and since you are the one doing the “more” the fruits of that effort are your property, not someone else’s.

What prompted his outburst is a Bloomberg news article, which states in part:

Central banks are finding it’s easier to push up stock and home prices than it is to prevent inflation from falling short of their targets.

While declining costs for everything from gasoline to coffee can be good news for consumers, disinflation makes it harder for borrowers to pay off debts and businesses to boost profits. The greater danger comes when disinflation turns into deflation, which leads households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up.

The above argument against deflation, namely that it “leads households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up” is an old one, and has been challenged before now. Just how solid is it? Read the rest of this entry »

Tags: Japan

“The JGB market is dead with only the BOJ driving bond prices,” said Tetsuya Miura, the chief bond strategist at Tokyo-based Mizuho, one of the 23 primary dealers obliged to bid at government auctions.”

Dead? That doesn’t sound very healthy, does it, boys and girls?

This blog post is part of a series on the subject of inflation and deflation, specifically asking if deflation is really so bad (consumers love lower prices), and if inflation is really so desirable. These lead to other questions, such as, “has inflation worked in the past to boost a flagging economy?” and “who benefits from inflation?” and “is deflation the same as falling prices?” and “who is really frightened of deflation?”

From Bloomberg’s  JGBs Declared Dead by Mizuho as Kuroda Hides Risks: Japan Credit

What caught my eye (my emphasis):

Totan Research Co. and Spiro Sovereign Strategy also said BOJ monetary stimulus is cutting the tie between economic fundamentals and bonds, which yield 0.6 percent for 10 years, the least in the world.

… Prime Minister Shinzo Abe, counting on fiscal and monetary stimulus to end 15 years of deflation, has yet to decide on whether to go ahead with the second planned increase to 10 percent by 2015.

Has Japan really suffered from deflation for 15 years? Let’s see what the Federal Reserve charts say:

Hmm. A fairly stable line with a brief period of inflation starting at the end of 2004 and ending sharply in 2008.

“These low yields are responsible for the lack of fiscal reform in the face of Japan’s worsening finances. Policy makers think they can keep borrowing without problems.” …

Why on earth would they think that? Could it be because that is what policy makers have been doing in Europe and the U.S., apparently with impunity?

 … “The BOJ’s priority is to lower Japan’s real interest rates and ensure an end to deflation, even if they have to sacrifice liquidity and trading volumes in the bond market,” Takatoshi Kato, a former top currency official at Japan’s Ministry of Finance said in an interview on Oct. 31 in Tokyo.

… “Market functions are sacrificed for the sake of ending deflation,” said Izuru Kato, the Tokyo-based president of Totan, a research unit of money-market broker Tokyo Tanshi Co. A reduction in monetary stimulus could cause a drop in bond prices, which “will make it difficult for the BOJ to normalize policy,” he said.

Why is inflation apparently so desirable? Rising prices means energy becomes more expensive as Japan has to import all its energy or at least the resources to produce its own energy (apart from a small percentage produced by water and geothermals). It also means that citizens will have to tighten their belts because wages are not rising (why should they? The stock market rises are not due primarily to increased production).

So why is inflation so desirable? Who wants it? Consumers don’t.  But the politicians do. Why? Politicians in the EU and a former governor of the ECB is also very worried about deflation, according to a Telegraph report:

Writing in The Telegraph (UK), Ambrose Evans-Pritchard reported that the data stunned the markets. He quotes remarks from a number of financial-market analysts who called this a “debt deflation trap.”

Evans-Pritchard also marshals the authority of an unnamed former governor of the ECB who is quoted criticizing the ECB for not acting to head off the deflation threat through more activist monetary policy.[“Europe moves nearer Japanese style deflation trap,” Daily Telegraph, 31 October 2013.]

A writer on the Mises.org website asks, How does a reduction in consumer price inflation become “deflation”? How does a minor improvement in the purchasing power of consumers become a problem for liquidity in the financial markets?

Good questions! And the answer?

European politicians and central bank policy-makers are concerned not about consumer price reductions but about real reductions in the money supply as such reductions would force governments to abandon permanent budget deficit monetization. That is why they maintain a monopoly over the power to create money and they like to control where money enters the economy. Politicians use these advantages in two ways.

First, they are all, with the sole exception of the Bundesbank, “inflationists” when it comes to monetary policy. Inflation (that is, an increase in the money supply) steadily reduces the purchasing power of a fiat money and, in parallel, eases the burden of debt repayments over time as nominal sums become progressively of less relative value…

for highly indebted Eurozone governments, price inflation is the perceived “get out of jail” card, permitting them to meet their debt obligations with a falling share of government expenditures.

With Japan’s debt-to-GDP predicted by the IMF to grow to 244% this year, “inflating their way out of debt” might well seem attractive to  Japanese lawmakers.

So, inflation (meaning an increase in the money supply) is desirable to the central bank and the government. What about the consumers? They vote, but apparently they don’t care, or else they are happy to vote for politicians who want to take away their purchasing power so that the government can continue deficit spending. It’s not even about saving the asses of Japanese companies that are in difficulties due to falling prices (i.e. failing competitiveness).

Yet growth of PIIGS governments’ debts as a proportion of GDP (Table 1) have now crossed above the critical 90 percent ratio advised by Rogoff and Reinhart as being the threshold above which growth rates irrevocably decline. [K. Rogoff and C. Reinhardt, “Growth in a Time of Debt,” American Economic Review (May 2010). Reported that among 20 developed countries studied, average annual GDP growth was 3–4 percent when debt was relatively moderate or low (i.e., under 60 percent of GDP), but it dipped to just 1.6 percent when debt was high (i.e., above 90 percent of GDP).]

Wha….? So economists know that a debt-to-GDP rate of over 90% is correlated with an irrevocable economic decline. How much is Japan’s debt-to-GDP rate again? 244%!?!?!?

I must be dim. I still don’t get why inflation is such a good thing? Do you?

Tags: Japan