Corrigan: The Many Inconsistencies of Abe's Policy
Readers of this blog are well aware of a number of key points we have made for a good while now, among others the one (which you'd think should be fairly obvious, but you'd be surprised…) that the BoJ cannot have '2% inflation' and expect that to happen with JGB yields remaining below 1% concurrently – unless it is prepared to become the sole owner of the entire JGB market.
Sean Corrigan was recently interviewed at CNBC Europe and has pointed out that Shinzo Abe's economic policies are riddled with many such inconsistencies. It really makes one wonder what the point of it all is.
Here is the link to a video of the interview with Corrigan. We highly recommend investing the few minutes. As Corrigan notes, one doesn't have to necessarily predict a catastrophic outcome, and such an outcome seems unlikely in the near term anyway. However, that does not alter the fact that the policy evidently attempts to achieve things that are inherently contradictory. As Corrigan says at one point: 'How any of this helps, nobody knows'.
Indeed, nobody knows, but Krugman likes the policy reportedly. Also, the assorted magic wand wavers at the G-7, G-20, the IMF and other political/bureaucratic outposts widely regarded as significant and/or important all have given their placet and endorsed this inflationist nonsense sotto voce.
Japan's GDP Data – or How to Become Richer by Becoming Poorer
As an addendum to the above, in a recent Diapason report, Corrigan inter alia tackles the 'good news' of 3.5% GDP growth that was recently reported by Japan and widely hailed as 'proof' that Abenomics is 'working' already.
As he points out, a significant worsening in Japan's terms of trade due to the declining yen (import prices went up by 6.9% or 30.8% annualized, while export prices increased only by 4.3% or 18.2% annualized in the quarter), led to a significant statistical improvement in 'real' GDP, as the larger deflator for import prices left a greater residual to be added to real GDP.
As a consequence, Japan's statistics minions concluded that real net exports were better by 31.7% on the quarter, or a stunning 238.7% annualized, instead of worse, as they were in nominal terms, thanks to the gain in 'real' exports of 3.8% or 16.1% annualized and the lesser increase in 'real' imports of 1%/4.06%. (note: annualized numbers are not simply multiplied by 4, but show the compounded gain if the quarter-on-quarter increases were to continue at the same percentage rates). Incidentally, as Corrigan points out, this exercise also pushed down the overall deflator, which is tantamount to a signal to Kuroda-san to inflate even more! Regarding the ultimate effect on the GDP report Corrigan remarks:
“To sum up, despite an appreciably worse monetary balance tinkling through the nation's cash registers, real net exports gave an overall boost to Q1's increment of real GDP of that of Q4 of no less than 50.4%!
This, then, was not so much the magic of easy money at work for good, but for ill. It was a classic screw-up in the calculation process which served to render an anyway highly schematic and invariably distorted GDP datum into even more of a fairground hall-of-mirrors freak than usual. Because the so-called 'terms of trade' – i.e., the volume of imports able to be gained in exchange for a given volume of exports – moved to Japan's disadvantage, its people were just shown to have become richer by dint of becoming poorer.”
As we have discussed previously, this is precisely how one could sum up the mercantilist fallacy underlying the so-called 'currency wars'. One does not become magically richer if the exchange value of one's currency declines. The opposite is the case; one needs to produce and export more goods than before to obtain an amount of goods from abroad that is equivalent to the previously imported amount. Whatever monetary gain the export industries can point to in domestic currency terms is but fleeting – it exists only for as long as it takes for domestic prices and wages to adjust to the new situation.
In short, the end result of a decline in the currency's exchange value is not that one becomes richer, but that one becomes poorer. It is a case of 'what you see is what you get', i.e., it couldn't be more obvious. Only those who believe that a nation's welfare depends on its trade balance would argue otherwise, but to this it must be repeated that national borders have no economic significance. 'Nations' don't trade with each other, individuals do. Every single trade is to the mutual advantage of the parties engaging in it, otherwise it would not take place. Whether such trading individuals reside in different nations is utterly irrelevant.
The only thing that can possibly be said to be 'bad' about e.g. the trade deficit of the US with Japan is the fact that it has been egged on by credit expansion causing overconsumption in the US and Japan's mercantilist currency policy impelling its central bank to monetize oodles of US debt in a kind of gigantic vendor financing scheme (the same can be said about China). It is a good bet that if everybody were using sound money and eschewing credit expansion via fractional reserve banking, international trade imbalances would be far smaller and correcting more frequently. However, this should not detract from the basic fact that all voluntary trade is beneficial as such. It is merely a comment on the current monetary system, not a belaboring of the alleged evils of trade deficits. Those are merely a figment of mercantilist imaginations.
Kuroda Calls on Banks to Lend
Obviously there has been a dearth of private sector credit demand in Japan in recent years/decades. At first, corporations as well as individuals were forced to deleverage after the bubble had burst. Banks had to deal with a mass of unsound credit on their books and likewise needed to slowly nurse their balance sheets back to something resembling health (of course it is debatable whether holding JGBs worth 900% of their tier 1 capital is really a sign of balance sheet health).
BoJ chief Kuroda has now come up with an idea how the banks may be better able to withstand the coming rise in interest rates. His advice: lend more.
“Bank of Japan Gov. Haruhiko Kuroda is calling on commercial banks with solid capital positions to be more aggressive in lending, something the central bank sees as crucial to getting the economy out of deflation.
"The process to overcome deflation is also the process for the financial system to recover its vigor," Mr. Kuroda said Sunday at a gathering of academics in Tokyo.
The BOJ regards a shift in funds by financial institutions from safe government bonds to riskier assets, such as stocks and foreign assets, as one of the mechanisms it wanted to put in motion with its unprecedented monetary easing undertaken in April. The strategy also includes getting banks to initiate more lending. Such a shift, called a "portfolio rebalancing effect," is one of the three things the BOJ hopes to bring about, the others being putting broad downward pressure on bond yields and achieving a rise in inflation expectations toward a 2% rate of inflation in two years.
Mr. Kuroda said that unlike in the late 1990s, when Japanese banks were saddled with mountains of nonperforming loans, banks now have the capital to expand lending and are resilient to external shocks, such as a rise in interest rates. Referring to a question of whether banks have been fulfilling their role in the economy, he said that low profit margins in lending have kept them from being "full of vigor and dynamism."
Mr. Kuroda acknowledged that recent reports showed that banks have increased lending for activities related to mergers and acquisitions, real-estate and natural-resources transactions, but he said loans to smaller companies have remained "sluggish."
Okay, but lend to whom? In Japan's case there is certainly not a shortage of wealth that could be lent by banking intermediaries to eager borrowers, if only there actually were enough eager borrowers. The problem is that Japan's demographic trend means there are fewer and fewer potential borrowers around year after year. It is not a matter of the banks not being able to lend (although the ZIRP policy has certainly sapped their interest rate margins), it is a matter of credit demand undergoing a natural shift in a downward direction. This is independent of the post bubble effects on private sector balance sheets, which have been largely worked out by now.
An essential point that seems to have escaped the members of the Abe administration and their appointees at the BoJ is that Japanese administrations have largely been tasked with what could be termed 'decline management' in recent years. Due to the country's culturally ingrained resistance to immigration, Japan's population decline is accelerating.
It may well be erroneous to extrapolate that decline indefinitely into the future (we cannot know whether some future Japanese generation decides to bear more children), but if the current trend persists over the next few decades, the population will decline by roughly 20 million people to 107 million from the current 127 million by 2040. The demographic profile of society suggest as much, with a quarter now aged 65 or older, while only 13% are children aged 14 or younger. Last year two ominous records were set: the biggest population decline in a single year in Japan's history, while at the same time the lowest number of babies was born since births have been systematically recorded.
Meanwhile, 10 year JGBs have been falling again overnight (May 28), but continue to cling to the previously mentioned important shelf of longer term lateral support that extends from about 139 to 141 points.
The JGB contract stair-steps lower again. While these moves appear to be small, they refer to the second biggest outstanding public debt pile in the world, so the absolute amounts lost by holders in the aggregate are fairly sizable – via Stockmaster.in – click to enlarge.
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
3 Responses to “‘Abenomics’ a Race to Nowhere”
Most read in the last 20 days:
- Gold Price Skyrockets in India after Currency Ban – Part III
When Money Dies In part-I of the dispatch we talked about what happened during the first two days after Indian Prime Minister, Narendra Modi banned Rs 500 and Rs 1000 banknotes, comprising of 88% of the monetary value of cash in circulation. In part-II, we talked about the scenes, chaos, desperation, and massive loss of productive capacity that this ban had led to over the next few days. Indian prime minister Narendra Modi – another finger-wagger, as can be seen in this...
- Gold Price Skyrockets in India after Currency Ban – Part II
Chaos in the Wake of the Ban Here is a link to Part 1, about what happened in the first two days after India's government made Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes illegal. They can now only be converted to Rs 100 (~$1.50) or lower denomination notes, at bank branches or post offices. Banks were closed the first day after the decision. What follows is the crux of what has happened over the subsequent four days. India's prime minister Nahendra Modi, author of the...
- Gold Price Skyrockets in India after Currency Ban – Part IV
A Market Gripped by Fear The Indian Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes would no longer be legal tender. Linked are Part-I, Part-II and Part-III updates on the rapidly encroaching police state. The economic and social mess that Modi has created is unprecedented. It will go down in history as an epitome of naivety and arrogance due to Modi’s self-centered desire to increase tax-collection at any cost. Indian jewelry...
- A Note on Gold and India – What is Driving the Gold Price?
Hidden Motives It is well-known that India's government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption. Obviously, this very bad Indian has way too much cash. Just look at him, he looks suspicious! Photo via thenewsminute.com In fact, as our friend Jayant Bhandari has pointed out, fresh avenues for corruption ...
- India's Currency Debacle – An Interview with Jayant Bhandari
A Major Crisis Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of “stamping out corruption” (see Gold Price Skyrockets In India after Currency Ban Part 1 and Part 2 for the details). Banned 500 rupee banknotes The problem is inter alia that the sudden ban of these banknotes has hit the Indian economy quite hard, given that 97% of all transactions in the country are cash-based. Not only that, it has...
- Will the Swamp Swallow Trump?
Permanently Skewed TRUMP HOTEL, New York – Trump’s rambling army – professionals, amateurs, camp followers, and profiteers – is marching south, down the I-95 corridor. There, on the banks of the Potomac, it will fight its next big battle. Lieutenants in Trump's army: Bannon, Flynn & Sessions Photo credit: Drew Angerer / AFP Here at the Diary, we do not like to get involved in politics. But this is a special time in the history of our planet – a...
- There Are Two Types of Credit — One of Them Leads to Booms and Busts
Stumped by the Bust In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs. What has caused the bust? The modern-day economic orthodoxy continues to be unable to provide...
- All Aboard! Trump’s Express Train to the Future
Free Money! BALTIMORE – Last week, the Dow punched up above 19,000 – a new all-time record. And on Monday, the Dow, the S&P 500, the Nasdaq, and the small-cap Russell 2000 each hit new all-time highs. The last time that happened was on the last day of December 1999. Ironically, two events that were almost universally expected to trigger large stock market declines were followed by quite rapid and strong gains. Would the market have fallen if Hillary Clinton had won...
- Attaining Self-Destruct Velocity
Bad Monday Some Monday mornings are better than others. Others are worse than some. For one Amazon employee, this past Monday morning was particularly bad. No doubt, the poor fellow would have been better off he’d called in sick to work. Such a simple decision would have saved him from extreme agony. But, unfortunately, he showed up at Amazon’s Seattle headquarters and put on a public and painful display of madness. Good-bye cruel world! On this our planet,...
- Gold Bull Market Remains Intact – Long Term Fundamentals Outweigh Short Term Market Gyrations
A Strong First Half of the Year, Followed by Another Retreat In early 2016 gold had a big bull run. The precious metal rose close to 25% this year, pushed higher in a summer rally that peaked on July 10th. Gold experienced a bumpy ride over the remainder of the summer though, as investors became increasingly concerned about a potential rate hike by the Federal Reserve. Uncertainty returned to gold market and has intensified further since then. Initially, gold rallied sharply...
- Too Early for “Inflation Bets”?
The Trump Trade After 35 years of waiting... so many false signals... so often deceived... so often disappointed... bond bears gathered on rooftops as though awaiting the Second Coming. Many times, investors have said to themselves, “This is it! This is the end of the Great Bull Market in Bonds!” The long bond's long cycle – red rectangles indicate when the post 1980 bull market was held to be “over” or “over for sure” or “100% over”, etc. We have...
- About that Economic Inequality
Illusory Riches, Obvious Impoverishment I address this essay to two groups. One group is those among the liberty movement, who believe that there’s nothing wrong with inequality. These are often Objectivists, who unknowingly defend a regime that artificially suppresses working people. And suddenly, you feel much lighter... The other group is those among the Left who still call themselves liberals. They say they don’t like inequality, but nevertheless...