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By Sean Corrigan, on 11 April 11
Imagine a country where the average household routinely spends half its $100 income on buying in 4,000 calories a day of flour and half on all the other necessities, as well as the little luxuries, of life.
Next, picture the response if the subjectively perceived degree of scarcity of flour suddenly rises, pushing its price up 20% as it does. To keep matters as simple as possible, let us not delve too deeply into the whys and wherefores of this impetus, but simply let us insist it is not because of any actual shortage of physical supply on the cash market.
Assuming that demand for this staple of its members’ diet is close to an irreducible minimum, and that, in its anxiety to maintain its basic nutritional needs, the family will henceforth have to spend $60 on flour instead of $50 and so will be left with a mere $40 to devote to its purchases of everything else in place of the previous $50.
Supposing, too, that money in this benighted land is no longer an emergent construct of mutual intercourse and free exchange – and therefore, in some sense, ‘hard’ – but is rather issued without restraint, at the whim of a central collective of Platonic Guardians.
Let us further insist that Hoi Phylakes see it as their calling to ensure that the averaged prices of all things other than flour can never decline and, subject to some very woolly and ill-defined limits on how much politically insupportable harm they cause in the attempt, that no-one shall lack employment for reasons which a loose-thinker might attribute to a simple lack of money, no matter how sub-marginal or even blatantly unremunerative his labours might be.
Now, given that the jump in the price of flour has – at least as a first-round effect – led to only $4 being offered for a basket of goods which used to attract an offer of $5, the combined effect (differentiated among them as it will be in practice) is that they will fall in price by something of the order of 20%. Barring some miracle of instantaneous cost cutting, the total wage bill at the firms in that line of business will need to be reduced proportionately, meaning steep wage cuts or heavy job losses – each of them anathema to the Keynesian creed of orthodox economics.
Enter the central bank, stage right. If the lack of a post-flour disposable $10 (per household) has seen ‘deflation’ of such a hideous magnitude set in among the arbitrarily flour-excluding array of goods which it monitors, the instant addition of another $10 pro rata to the money supply should, it feels, set matters straight at once.
Alas for the conceit of the planner, for, as our original premise made clear, consumer preferences have decisively shifted in favour of buying flour not other goods, to settle at a new ratio of 60/40. Thus, the new exchangeable total of $110 (assuming the extra money to have been placed into the hands of the same family and not diverted off into some other passing fad or siphoned craftily into the pockets of the politically well-connected) is likely to have $66 of it used for flour and only $44 laid out on the rest, so ‘core deflation’ (in reality nothing of the sort, of course) will only have been ameliorated to -12% and not banished entirely, as was the naïve intention.
Chasing on through this battle of wills between the state and the individual – and still ignoring second order effects – an equilibrium might only be looked for when the supply of money has been artificially swollen by no less than a quarter – to $125 per household – whereat each family can spend three-fifths ($75) of this, as they desire to do, on flour and two-fifths – or the original $50 – on everything else and so finally eliminate ‘core consumer price deflation’ if only at the cost of magnifying the original, steep 20% rise in the price of flour to a vertiginous, final 50%.
Of course, that would not be an end of it, for none of this has masked a major alteration in the terms of trade between people in their (often simultaneous) roles as flour producers and consumers, nor between them in their non-flour equivalents. Ultimately, one set has benefited from the shift and one has lost out.
Granted, to the extent that flour producers and flour consumers are not entirely one and the same body of people and, hence, may express a varying menu of preferences, the former may seek to enjoy their relatively higher incomes by buying things other than flour for themselves and so partially mitigate the real effects on others.
Moreover, the change in relative pricing (something which would have taken its natural course even if there had there been no Ivory Tower full of academic meddlers and shallow special-pleaders) will have sent signals to people everywhere that they need to further adjust to a change of circumstances largely of their own creation. Thus, they might more closely review their use of the newly-expensive flour, making sure they maximise its utility and minimise any inefficiencies or identifiable excesses in its use.
They might devote care and attention to improving grain yields, bringing more land into cultivation, automating the milling process, easing the logistics of delivery to the point of sale, and even to developing alternative sources of sustenance.
Meanwhile, the producers of non-flour goods – who nonetheless also require their daily bread if they are to have the energy to man their own offices and factories – will seek to change the ratio between the necessary flour input (and, indeed, of any other inputs) and both the physical output – and, more importantly, the value entrained therein – of what they sell in order to earn that same bread, whether for personal consumption or productive uptake.
All in all, the initial shift in relative prices – however painful to those caught unawares by it and however threatening to those improvident enough to be conducting their business without an adequate reserve against this or any similarly unforeseen vicissitude – will incentivise savers to direct funds to those entrepreneurs whose own success will depend upon serving the currently expressed preferences of their customers better than their competitors and who, along the way, will slowly but surely lessen any constraints imposed by the original re-ordering of wants.
It cannot be too strongly emphasised that this would have happened whether or not the central bank had embarked upon its Canute-like programme of futile – or, rather, actively counter-productive – monetary infusions. These will only have multiplied the confusions over both the nature and the degree of the shift which was taking place and so delayed the implementation of the necessary schedule of adaptations, something which could have been most swiftly and least wastefully realised on an entirely unhampered market.
However, given the all-but inevitable fact of the Bank’s visitations, let us pause a moment to reckon the true achievements of our pecuniary Politburo in its vainglorious attempt to frustrate the workings of economic law.
Above all, it has thrown obstacles in the paths of both the consumers and the entrepreneurs who seek to direct the productive methods by which those same consumers’ efforts aim to satisfy their own needs – whether through offering their current labour or the savings which represent the unharvested fruits of their earlier labour.
It has effected an inequitable transfer of real wealth from creditors to debtors as a result of the sharp reduction in the value of the money in which the contracts between the two are written. It has probably done something similar to relations between counterparts at home and abroad through the effect on the currency exchange rate – something in which it will take a truly perverse degree of pride. In each case it will have made people more distrustful of acting according to that very division of labour, both across space and through time, which is what so enriches us all.
It has protracted and exacerbated the first, spontaneous rise in the price of flour with no better aim than to give everyone else the illusion that their stabilized nominal receipts have in some way compensated for their sharply fallen real ones – a cruel enough illusion if it succeeds: a fertile seed of social discontent if it does not.
It is also likely to have involved the heavy-handed intervention of the other organs of state power. These will probably stir up animosity towards the flour producers (especially if they live abroad) even to the point of penalising them retrospectively (an affront to natural justice) and so stripping them of both the motivation and the means to increase supply.
In their inept, après moi le déluge populism, they may well stoop to subsidising the consumption of that very flour which the public interest insists should be the subject of a much closer economy of use. They will probably invoke an aggressive policy of autarky, banning exports and paying tax- or inflation-dollars to homegrown Ersatz boondogglers while spreading the discord across the nations’ borders to the detriment of all concerned.
Never wasting a ‘good crisis’, all this will inevitably enhance the office-holders’ power of patronage and increase the rents paid to their cronies at the expense of the well-being of all other members of the commonwealth at large.
Finally, the central bank will have helped fuel an increasingly feverish round of financial market speculation – not just in flour but, as the all-too fungible money pours into the system and the itch to play with it becomes undeniable, in all manner of other things as well. ‘Speculators’ – the most active of them ironically housed within or financed by the central authority’s very own, cherished recipients of corporatist largesse and protection – will then provide a convenient scapegoat upon whom to deflect all criticism about the economic pain being suffered as the result of its own criminally misguided actions.
I hardly need to say that to substitute ‘oil’ for ‘flour’ or to specify one central bank in particular is to turn our little Gedanken economy into a passably close representative of the situation in which we all find ourselves today, one from which there seem to be all too few pathways not strewn with thorns, their paving of good intentions long-since broken up into a wearisome thoroughfare of jagged rocks and ankle-twisting potholes.
In fact, in command of the Federal Reserve is a coterie which is at once seeking to rationalise away its implication in rising commodity prices—the infamous argument about the cheaper, hedonised iPad2 being enough to mitigate the strain on household budgets imposed by the soaring price of necessities—and simultaneously relying upon a future deceleration in their rise to make subsequent year-on-year changes less contentious, simply by dint of the arithmetical ’basis effect.’
As well as being a decidedly obvious attempt at having things both ways, what we really have here is a hidden policy of rehashed, New Deal, price level targeting—i.e., price rises are not only not to be fought, but actively encouraged, so long as these erode both real debt levels and real wages, although it is also to be hoped that they do not increase for too long at the current rapid rate, lest that conditions an economic response which is only likely to see them spiral upward in a disastrously quickening fashion as echoes of Mises’ famous ‘crack-up boom’ begin to be heard.
Against this, the market has become somewhat fixated on what happens at the end of June when the current monetization of the misconduct of a derelict fiscal authority is due to end—an obsession which has some justification given that it has arguably been the single most important factor in a 32-week run which has led to the fastest, like-period gains in commodity prices since the first oil shock and to a rise in the S&P which, before being dampened by events in the Middle East and the Miyagi prefecture, had touched a rapidity only lately exceeded during the initial rebound from the GFC, the Tech Bubble, and the run-up to the Crash of ‘87.
Even if the winds are blowing against any immediate extension of this insanity, there seems little doubt that the Bernanke Fed is concreted into a position of chronic over-laxity and that if both asset prices and the macroeconomic aggregates subsequently start to suffer a bout of cold turkey, it will not be too long before the political calculus once again begins to coincide with the prejudicial leaning of the Chairman and his acolytes on the FOMC and some other, equally ill-advised measures are taken in response.
Two further market reactions may well prove conducive to such an early resumption of the game.
Firstly, much hinges on the fate of Treasury yields which will only have the support from any emergent ‘Risk Off’ move to help them and not the rather more tangible backstop of a near-100% central bank bid for net new debt. By seemingly ‘overtightening’ asset markets—and by dint of its possible repercussions for stock prices — this would see a widespread chorus of complaints—emanating from Wall St. as well as the Beltway—in favour of a prompt resumption of the policy of the printing press.
Secondly, any liquidation-led drop in key commodity prices—most notably oil – will strengthen the Fed’s hand in arguing, however speciously, that it was right all along not to compound the economically disruptive effects of a rapid rise in the stuff with a succession of higher interest rates, as was typically its response in the past.
Beyond the influence exerted by the Fed (and the policy paralysis evident at the BOE), we have seen the ECB make good on its threat to act just a little more responsibly when it raised its rates by 25bps and then backing this up with some reasonably forthright rhetoric which implies that the market is right to fear that there might be more in store where that came from.
In truth, we should not be as harsh about the bankers in Frankfurt as we are about their transatlantic peers, since the ECB has been reasonably successful in ring-fencing its emergency, quasi-fiscal role as financier of bust PIGS from its more typical function of providing liquidity to the system at large. So much so, in fact, that real Eurozone M1 is barely growing at all, having undergone its sharpest deceleration in at least thirty years—a grand aggregate phenomenon which presumably masks sharply divergent behaviour in a Germany where industrial production is rising at a trend 10% a year pace to within a whisker of its pre-Crash highs and the blighted, over-built periphery where the weeds are metaphorically springing up in the half-completed streets.
As for China, despite a swathe of surprisingly forthright local commentary underlining the inflationary horror which was unleashed by last year’s vast stimulus efforts, its central bank’s latest incremental tightening has been greeted with a yawn by a market both increasingly conditioned to such measures and wilfully optimistic that each such move simply hastens the great day when the series will end and we are off to the races again, trading everything frantically up on the wings of a newly invigorated Dragon.
That leaves as perhaps the most salient question to confront us as that relating to the side-effects of the BOJ’s programme of emergency liquidity injections, loan-support programmes, forex intervention, and—potentially—fiscal backstopping for another creakingly over-burdened state.
Already the Bank’s balance sheet has climbed to post-Lehman heights and the count of current account (reserve) balances has soared beyond all previous comparison, breaking the yen out against nearly every currency pairing of significance and taking risk reversals and basis swaps and other such positioning indicators with them.
The burning issue here, then, is this: in its misplaced anxiety to assist its people by showering them with money amid the rubble of their lives and homes, will the BOJ do enough to re-instate the yen as carry currency of choice and so negate any contractionary effects (however ephemeral) of the coming end of QE-II in the US?
That, my friends, is the $64 trillion question!
By John Phelan, on 29 March 11
Several thoughts pirouetted across my mind as I watched the coverage of Saturday’s protest and riots.
I wondered why anti-capitalists were wearing clothing with prominent labels (don’t they know their Naomi Klein?); I wondered why defenders of the public sector were attacking publicly owned banks; I wondered how one protester could say, when interviewed, “Of course, we all know there need to be cuts” while a sea of people drifted past her waving signs saying ‘No cuts’; I wondered why Ed Miliband, a bloke without an alternative, was addressing the March for an Alternative.
But most of all I was struck by what a boon this all was for the economy, or so some would tell you. The standard Keynesian narrative of the Depression of the 1930’s, for example, holds that it was all about a collapse in aggregate demand which was only solved by, first, New Deal spending, and then war spending. As Paul Krugman once put it
Faced with the Depression, institutional economics turned out to have very little to offer, except to say that it was a complex phenomenon with deep historical roots, and surely there was no easy answer. Meanwhile, model-oriented economists turned quickly to Keynes — who was very much a builder of little models. And what they said was, “This is a failure of effective demand. You can cure it by pushing this button.” The fiscal expansion of World War II, although not intended as a Keynesian policy, proved them right
The fact that large swathes of the planet’s human and physical capital was blown to atoms represented simply an ‘opportunity for growth’.
So surely all the random destruction in the West End should be a good thing? Perhaps not. Back in 1850, Frédéric Bastiat asked “Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass?” In his classic, Economics In One Lesson, Henry Hazlitt took up the story
A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
The resilience of palpable nonsense is staggering. If, as Bastiat and Hazlitt demonstrate, the idea that the trashing of businesses is good for business, then consider what Clinton-era Treasury Secretary Larry Summers said about the Japanese earthquake recently
It may lead to some temporary increments ironically to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake Japan actually gained some economic strength
This is crass rubbish. Lots of new building activity may take place in Japan but they will simply be restocking on, say, housing. Rebuilding the house you have just watched destroyed does not make you better off.
Yet this drivel has the imprimatur of The Master himself who wrote in The General Theory
Pyramid-building, earthquakes, even wars may serve to increase wealth
That will no doubt come as a great comfort to West End workers and homeless Japanese.
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By Sean Corrigan, on 16 March 11
Rather than pretending to a level of insight into the scale of Japan’s problems which neither we nor anyone else truly possesses at this stage of the disaster, we think it might be worthwhile instead to run through some general considerations of what ramifications might be felt in its aftermath.
Before we do, however, we cannot abstain from expressing our utter contempt for the many idiots who have already begun parroting the standard Keynesian nonsense that this calamity will ultimately ‘prove positive for GDP ’, or that the rebuilding efforts can only redound to the nation’s well-being to the extent that they shake it out of its ongoing ’deflation’.
As is their wont, such imbecile Cargo Culters are once again making a fetish of a coarse-grained statistic which is supposed — however imperfectly — to offer a rough measure of material progress being made in the real economy and not the converse, leading them to lose all focus on what is actually happening to people’s living standards and wealth accumulation.
Japan has been stricken with a huge loss of productive capital — as well as an appalling toll of human suffering — and this cannot do anything other than to leave the nation discernibly poorer and, by extension, to curtail its ability to make people across the world better off than they otherwise would be by offering them valuable goods and services as part of that beneficent mutual enrichment which is the international division of labour, conducted under conditions of free(ish) exchange.
Contrary to popular belief, the Japanese have not, in fact, been trapped in a deflationary slough of stagnation these past two decades as both the real and nominal supply of money have risen throughout his period (with the exception of the worst months of the GFC itself), while real per capita national income has also increased modestly, especially on a PPP, or TWI-adjusted basis. Granted, the consumer price basket has trended lower at a rate of less than 1% a year, but this is something which is presumably no more than a reflection of ongoing productivity gains — ones delivered, to boot, in a country formerly marvelled at for the extreme levels of its domestic pricing.
But, even were we to subscribe to this myth of secular slump, the idea that to eradicate a large quantum of people’s possessions or to evaporate a sizeable fraction of their nest-eggs would be to contribute to their prosperity is to reckon that in futilely striving to heft his rock up the hill for all eternity, Sisyphus was the most tireless ‘engine of growth’ for Hades at large.
If you go to the trouble of cooking yourself a dinner, only for the dog to snatch it from the sill where you placed it to cool, do you congratulate yourself on your own good fortune as you troop back to the larder to begin again? If a sudden hailstorm strips bare the groaning ears of your wheat crop the day before you were due to harvest it, do you cheerily go about preparing the field for replanting, content in the knowledge that your doubled labour is being duly recorded in the plus column by a mindless government data-gatherer?
After all, if the awful spectacle of vast swathes of land littered with shattered buildings and crumpled vehicles — or the concern that they suffer the invisible hazards of radioactive contamination — offers such grand opportunities for advancement, why stop there?
Why wait for the vagaries of the climate, or the tortured creaking of continental plates to bring about such a ’stimulus’ to growth? Why not declare war on ourselves and unleash our titanic arsenals of destruction on our own towns and cities, and rain down hellfire upon our own farms and gardens, razing the first to the ground and sowing the last with salt, until we make a self-inflicted Carthage of them, one in whose midst we can hope to become rapidly richer than our neighbours as, shivering and starving, we pick our way among the debris of our former civilisation to the nearest construction site?
This is all such arrant nonsense that you should banish from your consideration, henceforth and forever, all of the jejune scribblings of the fool whom you once catch propounding it!
But enough of this! The real crux of the matter is to look at the two sides of Japan, Inc. — both as a user (and end-consumer) of certain goods and as a provider of often highly-valued and not easily replicated material inputs to the world economy in exchange.
All else being equal, the country will be consuming some goods (e.g., lumber, steel, copper wire, concrete, fossil fuel) far more directly in the near future and, moreover, consuming them with little onward production of value from their use.
The first order effect of this would be expected to push up preferentially the prices of both the materials they will be absorbing and those whose production by them is temporarily being reduced.
Conversely, the consumption patterns of the ordinary Japanese will also suffer a compositional shift away from the enjoyment of certain goods and services and, ceteris paribus, the prices of these should be less well supported as a consequence.
Where they no longer supply goods to the market — initially being completely unable to do so., perhaps, and, later, devoting selectively less resources to that production as they first tackle the problems of rebuilding — there is certainly scope for their competitors to prosper, but also significant dangers that the partial or total absence of such goods will disrupt production in factories and fab plants elsewhere, too. [Incidentally, the possible fall in the external surplus this comprises is one offset for the fabled yen ‘repatriation’ flows which the market so fears]
In short, where Japan’s goods are competing for sales, others may benefit at her expense: where they are complementary to them, they will equally share in her ruin. In the counter-weighting of these two factors will be decided the first question of whether output suffers beyond her shores and of what impetus is given to what prices.
By confounding entrepreneurial planning, dislocating production schedules, hampering timely onward delivery, etc., the damage could be widespread and should certainly belie Monday’s initial market insouciance. Given that profitable production is the only true source of sustainable consumption and that business-to-business spending is normally a good multiple of what is captured in the blessed GDP numbers, the earthquake-induced fall in Japanese incomes could soon be reflected elsewhere, too.
Where business planning (and the structure of financial exposures which embody this) has been too casual in its concern for such upsets (however unforeseeable the particulars of this one were), such frictions can rapidly mount to the point where they strip the drive-train of all further functionality and the firm finds itself staring failure in the face.
In this context, we again must draw attention to the alarming upsurge in pestilential credit practices — such as cov-lite, loans, PIK notes, PE dividend-stripping, and buoyant junk financing in general — which so exacerbated the last bust and which have been allowed to re-infect the economic corpus with the active cheer-leading of its central banks, especially the one housed in the Mariner Eccles building.
Furthermore, financial markets have entered this crisis having only grudgingly tempered their inordinate, Fed-fostered levels of bullishness (that, as a result of the Arab unrest) and with leverage, carry–trades, and crowding therefore all notably elevated.
A narrow replay of the kind of crash which followed the San Francisco earthquake and fire of 1907 are perhaps not to be looked for in the absence of a hard money kernel to the pyramid of credit, but that is not to say that ‘contagion’ and the forced liquidation concomitant with it cannot course through other financial channels instead, especially since people are all too aware of the continued fragility of the associated plumbing, even here, on the third anniversary of the Bear, Stearns bail out.
One obvious fracture plane could be the finances of Japan itself, a legacy of two decades of failed New Deals whose eventual unravelling has been exciting the attention of the bears for some good while since. The usual defence is that Japan ‘owes much of the debt to itself’ – a macro-accounting identity which an Austrian is willing to concede while questioning its practical validity.
That some elements of Japanese society have debts greatly in excess of assets (principally, the state) while others (mainly in the private sector) are in the opposite condition is only a comfort inasmuch as it reduces the nation’s exposure to the vicissitudes of the forex market or to the vagaries of offshore investor sentiment.
Thus, while it may provide a convenient smokescreen under the cover of which today’s hard-won savings are funnelled to Leviathan, there to plug the holes left by the squandering of yesterday’s savings, as well as to disburse the doles from which a good percentage of tomorrow’s savings are, in turn, generated, this quadrillion yen round-robin cannot permanently disguise the chronic nature and mind-stretching scale of the capital consumption it entails.
The circling financial vultures are therefore looking forward to the moment when domestic Japanese investment is no more sufficient to absorb all the government’s issues, (without perhaps contemplating the drain on the other improvidents when the giant, state-owned — or state-cajoled — institutions sell their USTs and kangaroo bonds, and realise their Nasdaq holdings and Eurobank CoCos in the effort to plug this gap).
What they now anticipate is that the costs likely to arise in the course of rebuilding the nation cannot fail to have advanced the date of that long-awaited morrow when the piper must be paid and JGB yields start to soar in consequence (even though, were we consistent, the Keynesian theory of fruitful holocaust would suggest ‘growth’ could, meanwhile, repair the finances painlessly).
In this, they may even be right, yet their positioning may well not survive to see the great denouement, for the route to a complete breakdown in the Japanese fiscal position surely lies through the Nihonbashi and the unbridled monetization powers of the BOJ.
Indeed, the additional threat posed to the economy — not just of Japan, but to those of all of its foreign trading partners — is not so much that the government runs out of cash, but that the whole country comes to drown in the stuff.
Indeed, while recognising the short-term, emergency need to reassure people that they will continue to have access to a medium of exchange and a functioning payments system, it is more than a little worrisome that the Bank has doubled its long-term QE programme, citing a desire to ’pre-empt a deterioration in business sentiment… from adversely affecting economic activity’ and to ‘…make contributions…’ in order to ‘…overcome deflation…’
As we wrote of a New Zealand whose own affliction has been swiftly forgotten in this larger tragedy, no good can come of a policy which can only serve to add to the confusion and bewilderment already occasioned by the violence of the tectonic shift in trying to suppress — by means of a crude resort to the printing press — the all-too evident fact that Japan is less well endowed with capital than it was and thus, that interest rates should naturally rise to reflect this inescapable verity.
It is not Yen that Japan now finds itself short of, but potable water, medical supplies, bridging materials, constructional steel, and electric power. The BOJ cannot help deliver these more readily or more efficiently by debauching the currency via its attempt to divorce financial asset prices from the diminished earning potential they incorporate.
Similarly perilous is the incitement this will give to the pump-primers elsewhere in maintaining — or even extending — their own easing programmes. Nor will they be consistent in this for, if they conveniently ignore the rise in food and energy prices, they will just as conveniently point to any liquidation-induced falls in these groupings to confirm the accuracy of their interpretation. On top of this, the many extant doves will be only too happy to protract their tenure as supposed saviours of the universe by enacting extra easing measures should Japan’s woes conspire to slow the upward momentum in the local recovery
Do not write-off QE-III just yet.
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By Andy Duncan, on 28 October 10
In a fascinating 36 minute interview, Cobden Centre Radio’s very own Brian Micklethwait speaks to James Tyler, the Chief Executive of Tyler Capital and a member of our Cobden Centre advisory board.
Describing the world through the educated eyes of a practical businessman, Tyler describes the 2008 crash and how this brought him gradually towards the Austrian school of economics. After uncovering these free market foundations, Tyler walks through several major aspects of the Austrian Business Cycle Theory, malinvestments, and the repercussions of government interference as executed via Gosplan-style central planning boards over the last few years, while adding a few unique and interesting observations of his own.
Moving on to how the economic land lies now, Tyler discusses how we could move forward from where we are now but what he thinks global governments will do instead, thereby keeping us in depressed financial straits for perhaps some time to come, using the Japanese two lost decades as a model for what they will probably do.
However, he does see light at the end of the tunnel and describes how we can ignite this light.
The James Tyler article mentioned in the radio show above, can be found here:
By Andy Duncan, on 7 October 10
Hugh Hendry, of Eclectica Asset Management, has just visited Japan and what he found there was a booming economy. So why has he just placed a $2 billion short bet on the 10-year paper of Japanese corporates? Mr Hendry explains all in the King World interview below:
His complex technical answer is beyond a simple annotation and requires careful attention as it spins through an eclectic mix of contrarian ideas, but is still worth listening to despite that.
Mr Hendry finishes with a discussion of what he believes is a forthcoming recession in the western world combined with a global bond bubble. Concluding with precious metals, Mr Hendry says he prefers to invest in assets which are more contentious than the current state of gold, where he believes the gold market has regained some of its once-lost legitimacy. He does though believe that there will be a large price move, in gold’s current phase, and recommends some purchase of physical metal to protect yourself from any potential hyperinflation created by the politicians, suggesting a figure of between 5% and 10% of your assets for this purchase.
By Steven Baker MP, on 1 February 10
Over at Moneyweek, Bill Bonner argues in a subscriber-only article that ersatz money is a flop.
Bonner describes John Law‘s disastrous paper money scheme and the origins of ‘our current experiment with paper’. He identifies the features of the long credit boom, which has come to an end, with reserves of dollars worlwide, over consumption and over production. Bonner argues that Japan blew up first and that the planet-wide bubble burst in 2007. He says we are now all following Law’s example.
Bonner quotes — as emphasised below — Mises in Human Action:
The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
I recommend the article, which can be read by taking a free trial.
By Toby Baxendale, on 26 November 09
Our good friend of the Cobden Centre, Sean Corrigan, is a wealth of fresh economic insight. Here in this small piece, he shows us that, if you strip out Government from GDP figures, you actually see what the private, productive sector of the economy is doing.
Sean does this for Japan. It shows that the current GDP recovery that has been reported widely in the press for this country, when you strip out the Government part of the economy, has actually gone backwards for 6 successive quarters. It has retuned to a level not seen since the early 80’s.
Sean is of course quite right to strip out government, as doing a bit of QE here and a bit there will inflate GDP figures for sure, but do little to grow the economy as we have previously explained before in this article . Now government can spend your money as a taxpayer on things that it views to be priority, i.e. transfer payments to the worthy and not so worthy and building cap ex projects such as railways, providing services such as justice etc, but this just redistributes what you as a taxpayer has earned and moves it form A to B.
To be clear nothing new is created from a wealth perspective, as it was already created by you, the taxpayer, to be given to someone else, directed by the government. More than ever, we need to be looking at how the productive sector is performing in all economies and not how the transfer, sector i.e. government, is doing. This is the engine of recovery and not the government side of the economy for the reasons stated.
I hope Sean or one of our readers would like to prepare this data for the UK. I suspect it would show a similar dismal story. In fact, when we hear of all these nations lifting out of the recession, I have a nagging doubt in my mind that this is the case.
The other interesting measure Sean uses is Debt to Private GDP. In Japan it has risen a staggering 28% in 18 months and is now sitting at 237%. In the UK we are told we now have a Debt to GDP ratio of 59%. What do we think it is in the UK? Without doing the numbers myself, I would suspect for us the Debt to Private GDP is over 100% as government is well into the high 40% + range of the economy.
A third insight is the Japanese MI money measure which is 31% up YOY and that correlated, with a time lag to inflation, so beware Japan for the inflationary Tsunami!
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