Mathematical Certainties

Based on the simple reflection that arithmetic is more than just an abstraction, we offer a modest observation.  The social safety nets of industrialized economies, including the United States, have frayed at the edges.  Soon the safety net’s fabric will snap. This recognition is not an opinion.  Rather, it’s a matter of basic arithmetic.  The economy cannot sustain the government obligations that have been piled up upon it over the last 70 years.

 

Growing wrinkle coefficient… as the global population increasingly ages, the “pay-as-you-go” social security and pension Ponzi schemes of developed welfare states are inexorably careening toward insolvency. [PT]

 

In other words, the post-World War II boom is nearly over and the bills are coming due.  What’s more, greater and greater amounts of future growth are already claimed by existing debt obligations.  This, in turn, inhibits that growth from making its way into the larger economy, thus limiting future economic growth.

Perhaps this is why mature economies are finding it near impossible to attain 3 percent GDP growth.  In fact, the last time U.S. GDP grew by 3 percent or more for a calendar year was 2005, about 12 years ago.  Unfortunately, it doesn’t look like U.S. GDP growth will ramp up any time soon.

Over the last 12 years, GDP growth in the European Union has been equally lethargic.  However, Japan takes the cake.  GDP growth in the Land of the Rising Sun has been stuck in a quagmire for 25 years.

 

US annual GDP growth rates since 1949 – average output growth has consistently declined, while both public and private debt exploded into the blue yonder. [PT] – click to enlarge.

 

Fighting the Forces of Arithmetic

Aside from a generation of GDP growth stagnation, Japan also has another important distinction.  The country is serving as the canary in the coal mine for what happens to an economy that has a rapidly aging population, burdensome debt obligations and stagnating growth.

Specifically, Japan’s disagreeable demographic trend generally leads the trend in the European Union by about 5 years and that of the United States by roughly 9 years.  Japan’s worrisome debt and growth trends lead those in the European Union and the United States by about 15 years, give or take.  The simple arithmetic Japan faces, as reported by the Daily Times, includes:

 

“Japan’s $4.8 trillion economy is carrying a $10 trillion-plus debt load amid tepid growth, deflation and shrinking population, one expected to fall by about one-third by 2065. Unless Tokyo suddenly learns to grow 8 percent or more for many years to come and a level of fiscal sobriety it hasn’t exercised in decades, it can’t pay that debt.”

 

Yet the Japanese government and its central bank, the Bank of Japan (BoJ), can’t be faulted for lack of effort.  They’ve been at the cutting edge of executing policies aimed at fighting the forces of arithmetic for several decades.  So far it has been a losing battle, resulting in slow growth and runaway debt.

 

The “success” of implementing Keynesian and monetarist recipes in Japan to the hilt. In the past 17 years, nominal GDP is up 54%, government debt has nearly quadrupled and the central bank balance sheet is up 11.5-fold relative to economic output. This reflects the definition of insanity often ascribed to Einstein: doing the same thing over and over again and expecting a different result. [PT] – click to enlarge.

 

Yanking the Bank of Japan’s Chain

In today’s age, where expedient solutions are demanded, BoJ Governor Haruhiko Kuroda is compelled to do something.  But what? He’s already borrowing money into existence and plowing it into the stock market via exchange traded funds (ETFs) at an annual rate of $53 billion.

What this does to improve the real economy is unclear.  But like all types of depravity, the BoJ is finding these asset purchases are much easier to start than to stop.

As of April 2016, the BoJ was a top 10 shareholder in about 90 percent of Nikkei 225 companies.  Moreover, at their present rate of ETF buying, the BoJ will be the top shareholder of 55 Nikkei 225 companies by the end of the year.  What to make of it?

 

Introducing socialism through the backdoor: the BoJ owns an ever larger share of Japan’s  stock market capitalization, by buying up ETF shares with money it literally creates from thin air. This absurd activity did succeed in boosting Japan’s money supply growth for a while, but wealth can possibly be increased by printing money. If that were possible, we could all just stop working and simply cash a central bank check every month. Allegedly the BoJ “must” do this in order to “increase inflation” (meaning: boost consumer prices). How society is supposed to benefit from things getting more expensive rather than cheaper as they would in a progressing free economy was never satisfactorily explained.  There is neither sound theoretical support for this nonsense, nor does any empirical evidence to this effect exist – in fact, the opposite is true. [PT] – click to enlarge.

 

To start, this has had the direct effect of distorting stock market prices.  In addition, the BoJ’s stock purchases can be thought of as a form of transfer payments to corporations and the wealthy.  If corporations and the wealthy are getting direct funding via BoJ cheese, shouldn’t the common people?

These, no doubt, are the sort of unacceptable questions that come up when the rules of monetary policy are continually adjusted toward the expedient.  Naturally, when a country goes down this slippery road to hell there is always an endless supply of expedient solutions.  So, too, there is always an endless supply of crackpot economists to offer the next policy fix.

For example, Gabriel Stein of Oxford Economics has a novel solution to Japan’s perceived “demand problem”.  Since 2014 he’s been advocating that the BoJ pay Japanese citizens to shop:

 

“Instead of funding the deficit, you could credit bank accounts every year to get people to start spending.  Put money into the hands of people, not banks, and you will end deflation.”

 

Stein proposes BOJ-sponsored cash cards credited at about $8,000 or more per citizen.  These cash cards would expire at the end of each year, so that households would be forced to consume.

Could there be a more perfect economy?  You get free money from the government that you can use to buy real stuff.  Obviously, something doesn’t add up. Come on now Mr. Stein.  You don’t think Kuroda just fell off the turnip truck, do you?  Stop yanking his chain.

 

This turnip truck?

 

Charts by St. Louis Fed, Bloomberg

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

2 Responses to “Yanking the Bank of Japan’s Chain”

  • Kafka:

    Central Banking is creeping socialism that ends in totalitarian control of all assets.

    Japan’s solution is paying for babies.

  • jks:

    Rightly or wrongly, I look to Japan to see where the US economy is headed. The last 25 years have not been too bad for the Japanese considering all the interventions–the bad solutions to problems created by other bad solutions. Hopefully the flim-flam men and clowns running their government will never succeed in producing inflation.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Yanking the Bank of Japan’s Chain
      Mathematical Certainties Based on the simple reflection that arithmetic is more than just an abstraction, we offer a modest observation.  The social safety nets of industrialized economies, including the United States, have frayed at the edges.  Soon the safety net’s fabric will snap. This recognition is not an opinion.  Rather, it’s a matter of basic arithmetic.  The economy cannot sustain the government obligations that have been piled up upon it over the last 70...
  • Prepare for Another Market Face Pounding
      “Better than Goldilocks” “Markets make opinions,” goes the old Wall Street adage.  Indeed, this sounds like a nifty thing to say.  But what does it really mean?   The bears discover Mrs. Locks in their bed and it seems they are less than happy. [PT]   Perhaps this means that after a long period of rising stocks prices otherwise intelligent people conceive of clever explanations for why the good times will carry on.  Moreover, if the market goes up for...
  • What Went Wrong With the 21st Century?
      Fools and Rascals   And it’s time, time, time And it’s time, time, time It’s time, time, time that you love And it’s time, time, time… - Tom  Waits   Tom Waits rasps about time   POITOU, FRANCE – “So how much did you make last night?” “We made about $15,000,” came the reply from our eldest son, a keen cryptocurrency investor. “Bitcoin briefly pierced the $3,500 mark – an all-time high. The market cap of the...
  • The Future of the Third World
      Decolonization The British Empire was the largest in history. At the end of World War II Britain had to start pulling out from its colonies. A major part of the reason was, ironically, the economic prosperity that had come through industrialization, massive improvements in transportation, and the advent of telecommunications, ethnic and religious respect, freedom of speech, and other liberties offered by the empire.   The colors represent the colonies of various nations...
  • Bitcoin Forked – Precious Metals Supply and Demand Report
      A Fork in the Cryptographic Road So bitcoin forked. You did not know this. Well, if you’re saving in gold perhaps not. If you’re betting in the crypto-coin casino, you knew it, bet on it, and now we assume are happily diving into your greater quantity of dollars after the fork.   Bitcoin, daily – adding the current price of BCH (the new type of Bitcoin all holders of BTC can claim at a 1:1 ratio), the gain since the “fork” amounts to roughly $1,000 at the time we...
  • Seasonality: Will Patterns that Worked in the Past Also Work in the Future?
      Historians of the Future Every investor makes trading decisions based on what happened in the past – there is no other way. What really interests us is the future though. After all, what happens in the future ultimately determines investment success.   When in doubt, you can always try to reach the pasture...  In Human Action, Ludwig von Mises described stock market speculators as akin to “historians of the future”. This is without a doubt the most trenchant definition of...
  • Czar vs. Pope
      Vladimir the Great Sums Up Pope Francis the Fake Vladimir Putin has once again demonstrated why he is the most perceptive, farsighted, and for a politician, the most honest world leader to come around in quite a while.  If it had not been for his patient and wise statesmanship, the world may have already been embroiled in an all-encompassing global conflagration with the possibility of thermonuclear destruction.   Vladimir Putin is sizing up Pope Francis with his “good...
  • Bitcoin Has No Yield, but Gold Does – Precious Metals Supply and Demand Report
      Bitcoin and Credit Transactions Last week, we said:   It is commonly accepted to say the dollar is “printed”, but we can see from this line of thinking it is really borrowed. There is a real borrower on the other side of the transaction, and that borrower has powerful motivations to keep paying to service the debt. Bitcoin has no backing. Bitcoin is created out of thin air, the way people say of the dollar. The quantity of bitcoins created may be strictly limited by...
  • Is Historically Low Volatility About to Expand?
      Suspicion Asleep You have probably noticed it already: stock market volatility has recently all but disappeared. This raises an important question for every investor: Has the market established a permanent plateau of low volatility, or is the current period of low volatility just the calm before the storm?   All quiet on the VIX front... what can possibly happen? [PT] - click to enlarge.   When such questions regarding future market trends arise, it is often...
  • Why There Will Be No 11th Hour Debt Ceiling Deal
      Milestones in the Pursuit of Insolvency A new milestone on the American populaces’ collective pursuit of insolvency was reached this week. According to a report published on Tuesday by the Federal Reserve Bank of New York, total U.S. household debt jumped to a new record high of $12.84 trillion during the second quarter. This included an increase of $552 billion from a year ago.   US consumer debt is making new all time highs – while this post GFC surge is actually...
  • Will They Haul Off Trump’s Statue, Too?
      Confused by Shadows POITOU, FRANCE – This week, we are talking about theperishable nature of gods. Yesterday, the city fathers of our hometown of Baltimore let it be known that it was time to toss out the old deities.   The Robert E. Lee and Thomas. J. “Stonewall” Jackson Monument in Baltimore, which the mayor inter alia wants to remove. Suddenly it has become fashionable to erase the memory of an important part of US history all over the country. By experience, this...
  • Bad Ideas About Money and Bitcoin
      How We Got Used to Fiat Money Most false or irrational ideas about money are not new. For example, take the idea that government can just fix the price of one monetary asset against another. Some people think that we can have a gold standard by such a decree today. This idea goes back at least as far as the Coinage Act of 1792, when the government fixed 371.25 grains of silver to the same value as 24.75 grains of gold, or a ratio of 15 to 1. This caused problems because the market...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com