Businessman and investor Karl Denninger blogs on his Market-Ticker site about a recent Bloomberg news article, which says in part (with Denninger’s emphasis):
If there was any consolation in the Sunday New York Times front-page article, “In Fed and Out, Many Now Think Inflation Helps,” it was that the “in Fed” names were few and far between. Yes, Federal Reserve Vice Chairman Janet Yellen, who was nominated to replace Ben Bernanke in January, is mentioned in connection with the idea that “a little inflation is particularly valuable when the economy is weak.” But that was it.
…
There is no guarantee that wages will keep pace with prices. The Times’s Binyamin Appelbaum says as much in a blog post yesterday, responding to what he says were “skeptical responses” from readers to his Sunday article.
via Market-Ticker – My God, She Makes Sense?!
To which Denninger adds,
How about this: It has NEVER worked before and won’t this time either.
The global finance website Zero Hedge has this to say about “Abenomics One Year Later”:
Abe has managed to devalue his nation’s currency by 25.5% against the USD in that time and the price of Japanese government bonds (despite some early teething trouble with the government’s repressive activity) is practically unchanged up 0.75% on the year. But away from the ‘market’, Job creation remains stifled, inflation is rising (but thanks to import prices) and wages languish down 0.9% as the trade balance is collapsing.
Tonight provided another example of Abenomics failure to spur real growth… Jobs-to-Applicants ratio rose at the slowest pace since Abe started and missed expectations by the most in a year…
Both Denninger and Zero Hedge strongly suggest that Japan’s economic “growth” is illusory, and, as that of the U.S., is a result mainly of central bank spending. Take that away and there really is no growth.
Zero Hedge quotes a Financial Times article by Gavyn Davies:
the rise in the Nikkei has had positive wealth effects on consumption, so the central bank can claim some of the credit for the recovery.
Unfortunately, the “rise in the Nikkei” has not been due to real economic growth, and therefore has not been matched by wage increases, which phenomenon can also be seen in the U.S.
inflation has broken into positive territory after many years below zero. Unfortunately, much of this change has been due to the rise in import prices,
which rise itself is mainly due to Abe’s policy of weakening, i.e. cheapening, the yen. Under this policy, consumers get it in the shorts, but big export companies make money, so that’s all right, then isn’t it, boys and girls?
The FT points out that Japan’s experiment is unprecedented in modern times:
Japan is not alone among the developed economies in facing fiscal problems, but it has left it much later to begin to address them. (See, for example, Martin Wolf on why the US fiscal problem in the next decade is much less serious than many think.) According to the IMF, Japan is running a structural budget deficit of about 9.2 per cent of GDP in 2013, and that will still be as high as 5.7 per cent even if the sales tax increases are implemented in full, and the temporary fiscal boost is ended, by 2015. In fact, the IMF’s latest Article IV Report on Japan says that the full fiscal adjustment needed in Japan is about 11 per cent of GDP, only half of which has even been earmarked. This would be the biggest such adjustment ever undertaken by a modern democratic country.
The FT article concludes:
The great unknown for Mr Abe and his successors is whether this fiscal tightening can be accomplished without tipping the economy back into recession. If not, the future may eventually hold further monetisation of the debt, with an even bigger devaluation and much higher inflation.
Much higher inflation? How high? Well, India is facing food inflation now of over 18%, mostly a result of similar attempts by the government and the central bank to manage the economy. I’m reminded of a saying about time management: “Time management is an impossibility – you cannot manage time, time manages you.”
India is now finding out that trying to manage the economy is like holding a tiger by the tail. The government is hastily repealing measures it put in place not long ago to prop up its falling currency. Yet another example, perhaps, of unintended consequences (and on this topic, I warmly recommend Herbert Spencer’s little book of 1884, “Man Against the State”, especially chapter two “The Coming Slavery”, in which Spencer writes about unintended consequences, by which he means consequences that are quite unexpected by the politicians who enact their bills, but perfectly predictable by anyone with both common sense and a knowledge of history:
It is said that when railways were first opened in Spain, peasants standing on the tracks were not unfrequently run over; and that the blame fell on the engine-drivers for not stopping: rural experiences having yielded no conception of the momentum of a large mass moving at a high velocity.
The incident is recalled to me on contemplating the ideas of the so-called “practical” politician, into whose mind there enters no thought of such a thing as political momentum, still less of a political momentum which, instead of diminishing or remaining constant, increases. The theory on which he daily proceeds is that the change caused by his measure will stop where he intends it to stop. He contemplates intently the things his act will achieve, but thinks little of the remoter issues of the movement his act sets up, and still less its collateral issues.
When, in war-time, “food for powder” was to be provided by encouraging population—when Mr. Pitt said, “Let us make relief in cases where there are a number of children a matter of right and honour, instead of a ground for opprobrium and contempt,” it was not expected that the poor-rates would be quadrupled in fifty years, that women with many bastards would be preferred as wives to modest women, because of their incomes from the parish, and that hosts of ratepayers would be pulled down into the ranks of pauperism.
Legislators who in 1833 voted £30,000 a year to aid in building school-houses, never supposed that the step they then took would lead to forced contributions, local and general, now amounting to £6,000,000; they did not intend to establish a principle that A should be made responsible for educating B’s offspring; they did not dream of a compulsion which would deprive poor widows of the help of their elder children; and still less did they dream that their successors, by requiring impoverished parents to apply to Boards of Guardians to pay the fees which School Boards would not remit, would initiate a habit of applying to Boards of Guardians and so cause pauperization.
They never dreamed of these consequences, yet these were indeed the consequences of their acts, and in hindsight were they not obvious, or at least highly likely, given a knowledge of human nature? This chapter remains as fresh and relevant (unfortunately) as when it was written over 120 years ago. (I have been unable to locate a Japanese translation; if any alert reader can do so, perhaps he or she would have the kindness to inform me.)
