[This article, by Peter St. Onge, first appeared at mises.org]
One of the great economic myths of our time is Japan’s “lost decades.” As Japan doubles-down on inflationary stimulus, it’s worth reviewing the facts.
The truth is that the Japanese and US economies have performed in lock-step since 2000, and their performances have matched each other going as far back as 1980.
Either Japan’s not in crisis, or the US has been in crisis for a good thirty-five years. You can’t have it both ways.
Here’s a chart of per capita real GDP for both Japan and the US from 2000 to 2011. Per capita real GDP is the GDP measure that best answers the question: “is the typical person getting richer?”
The two curves look like they came from the same country:
Next, we can go back to 1980, to see where the myth came from. Japan was just entering its “bubble” decade:
We can see what happened here: Japan had a boom in the 1980s, then Japan busted while the Americans had their turn at a boom. By 2000 the US caught up, and Japan and the US synched up and shadowed each other, reflecting boom followed by the inevitable bust.
The only way you can get to the “lost decades” story is if you start your chart exactly when Japan was busting and America booming. Unsurprisingly, this is standard practice of the “lost decades” storytellers.
Of course, this would be like timing two runners, and starting the clock when one of them is on break. It’s absurd, but it gives the answer they want.
Things get worse when you include the artificial effects of inflation and population. Higher inflation and population growth both make the economy appear bigger without making people richer. If America annexed Mexico tomorrow, the US economy would grow by 30 percent. But that’s not going to make the average American 30 percent richer.
Adjusting for inflation and population is Macro 101. It’s so basic, in fact, that we might wonder if the “lost decades” macroeconomists are being intentionally forgetful. Why on earth would they do that?
Who Benefits from the “Lost Decades” Myth?
Who promotes the “lost decades” myth? Are the storytellers trying to make Japan look bad, or the US look good?
I suspect it’s a little of both: politicians in Japan need the sense of crisis to push their vote-buying schemes. It’s a lot easier to sell harmful policies if you can just convince the voters that everything’s already fallen apart. They’ve got nothing to lose at that point. In a crisis we are all socialists.
This cynical PR campaign is bearing fruit already, as Japanese voters accept inflationary policies from their new prime minister. In the name of reviving an economy that’s supposedly on its death-bed. Hard-working Japanese are losing their savings through low rates and inflation, but honor demands sacrifice so long as the future of the children supposedly hangs in the balance.
In reality, the re-telling of Japan’s myth reminds one of a doctor who lies to a patient so he can sell a cure that harms the patient.
On the American side, the myth of Japan’s “lost decades” is similarly useful: it makes our economic overlords seem like they actually know what they’re doing. And it serves to warn the naysayers: the “lost decades” myth is a bogeyman waiting to pounce if we ever falter from our bail-outs and vote-buying stimulus.
The truth, hidden in plain view, is that Japan’s not bad enough to be a battering ram for Japan’s Keynesian vote-buyers, and the US economy isn’t good enough for our home-grown vote-buyers to keep their jobs.
16 Franken, Helvetic republic, 1800, Gold
Following our Cobden Centre Radio interview last week with Thomas Jacob, and his plans to use a democratic Swiss plebiscite to re-introduce a Swiss gold franc, it is great to see that this story is beginning to grow, with an article in Marketwatch.
Here’s a quote:
Switzerland, which in 2000 became one of the last countries to decouple its currency from gold, is not the only place to contemplate a change in the precious metal’s role amid controversy over government involvement in the economy. In March, Utah became the first state in the U.S. to legalize gold and silver coins as currency, while similar legislation was considered in Montana, Missouri, Colorado, Idaho and Indiana.
“I want Swiss people to have the freedom to choose a completely different currency,” said Thomas Jacob, the man behind the gold franc concept. ”Today’s monetary system is all backed by debt — all backed by nothing — and I want people to realize this.”
To read the full article, click here.
UPDATE: The Swiss gold franc is also discussed by Eric King and Jim Rickards at 20 minutes into this interview, broadcast on Saturday.
One Million Mark notes, used as notepaper
Many of us in the mad-eyed gold bug community subscribe to King World News, to seek out affirmation for our crazy lopsided view of the world, in which we believe that virtually all of the world’s major governments – and related supranational bodies – are directing the global paper fiat system into a total paper money collapse.
However, occasionally, Eric King also interviews those whose net worth is concerned with much more than the price of gold or silver. One of those regular interviewees is Rob Arnott, who sub advises the Pimco All Asset Fund, and who manages around $80 billion dollars of other people’s money.
If you’d like to listen to some of the interesting things Mr Arnott had to say, today, to Eric King, click below:
For all of you King World News fans out there, there’s an interesting interview just out between Eric King and James Turk:
The interview discusses the accelerating fall of the dollar and its possible waterfall decline if it breaks down through the range of 71.20-74.20 on the dollar index.
Admittedly, the dollar index only measures the dollar up against other collapsing fiat currencies; however, Turk believes that if the dollar index punches down through 71.20, its previous low, then it could mark the beginning of a free-fall decline.
[And this is despite 58% per cent of the dollar index being set against the euro, that bastion of current monetary stability, with the Greek government currently paying credit card rates on its debt and the Greek populace becoming increasingly restive.]
Turk believes that all fiat currencies are declining because there is a global:
- Loss of confidence in paper currency
- Lack of confidence in Bernanke that he will truly fight U.S. inflation when even he can no longer ignore it and people are attempting to eat iPads
- Lack of confidence in politicians that they can stop themselves spending money they don’t have, except via a printing press, despite all the fine words, postures, and media-faced positions
In addition, for all of the crazy Daily-Bell-reading gold bugs out there (and you know who you are), Turk is completely unsurprised by gold’s steamrollering through $1500 dollars, and is still expecting $1850 by the end of the year as a possibility, and $1650 as a probability, as the dollar heads towards its ultimate confetti status, whereas gold just sits there, disproving Keynesian monetary socialism, on a second-by-second basis.
Here is the related KWN blog piece.
With paper currencies plummeting downwards at the moment, as silver and gold hold their positions at higher and higher paper money prices, we may be living through pivotal times.
Eric Sprott and Marc Faber discuss this, on King World News, in a sort of Yin and Yang way. Sprott (the contrarian) is expecting further large paper money price gains in both major precious metals, particularly in silver; whereas, Faber (the contrarian’s contrarian) is expecting a serious correction, particularly in silver.
Well, you wouldn’t want them both agreeing now, would you?
Listen out, in particular, for an interesting description of Ben Bernanke, by Doctor Faber:
In the KWN weekly metals wrap, we’re looking at $1,440 as the new ceiling and perhaps $1,420 as the new floor for gold (yes, the dreaded ‘G’ word). Although last week was indeed a consolidation week, if we break through $1,440, then we’re up through $1,450 and a new ceiling at $1,460. With gold going through these $20 window breakpoints, silver appears to be going through the same logical process, but with $2 dollar breakpoints, as people abandon paper currency, particularly the paper dollar (which other paper money printers still treat as their reserve currency, even though the dollar has been backed by nothing since 1971). The new silver ceiling target is $38 dollars. Once we’re through that, then we’ll probably be up to $40 as the new immediate target:
James Turk, the proprietor of GoldMoney, is more bullish than the metals wrap commentators (as you might expect, of course). The major difference between silver and gold at the moment, is that silver is in backwardation (the future delivery prices are lower than the on-the-spot prices), which indicates that people prefer physical silver in the hand, to two birds bearing paper promises of silver in the bush. Mr Turk predicts that if gold goes into backwardation too (a highly unusual and usually extremely fleeting occurrence), then it’s all over for the dollar. Backwardation in both silver and gold will indicate a major flight of wealth into private metal (solidity) and away from government paper (junk). Turk still says he believes in $1,800 dollar gold this year, and $50 dollar silver:
[For financial markets newcomers, future delivery contracts for hard valuable commodities are usually more expensive than on-the-spot delivery contracts. This is called 'Contango', which is a sort of cod-latin for 'I touch against'. The idea is this; I have two routes to holding a thousand ounces of silver, in one month from now. I can either buy hard physical silver today in the on-the-spot markets, and hold it for a month, or I can buy a promise from someone else to deliver me a thousand ounces of silver in a month. The problem with buying it today, however, and holding it for a month, is that you need to borrow money today to pay for it, then you need to store it in an expensive vault, and you also need to insure it from theft. These three costs of finance, storage, and insurance, are usually added on to the on-the-spot price to make it equal to the future delivery price. If this relationship is broken, then arbitrage theory might come into play. If the future delivery contract price is lower than the on-the-spot physical price, then you can sell all the silver you hold and save a month's finance, storage, and insurance charges. To keep your silver portfolio filled, you simply buy a future delivery contract from a reputable firm, and take their delivery of silver in a month to refill your portfolio. Therefore, you'll make a lot of money. For example, if physical silver is $36 dollars, and the total finance, storage, and insurance costs are $2 dollars, per month, per ounce, the futures contract for a thousand ounces should cost $38 dollars per ounce; this is sometimes known as the 'fair value' of the futures contract. However, if because of supply and demand the silver futures price for delivery in one month's time is $35 dollars (i.e. it is in 'backwardation') and you hold one contract's worth of silver, then you sell your thousand ounces of silver at $36 per ounce and buy a future for delivery of 1,000 ounces of silver, at a promise-to-pay of $35 per ounce; you then bank the $36,000 dollars you have just made, and start collecting interest on it. In one month's time, you take $35,000 dollars out of your bank account, and pay that to the reputable firm to take delivery of your silver, at a 'profit' of $1,000 dollars (plus one month's bank interest on the full $36,000). You also saved yourself $2 dollars per ounce in holding costs. So on a one month future contract, that's $3,000 dollars of gain, plus interest. On a thousand contracts, that's over $3 million dollars! When a market in a hard commodity like silver goes into backwardation, it indicates that there is a massive 'convenience yield' in holding physical silver right now, rather than waiting a month for someone else's promise to deliver it to you. What this might indicate in these markets, is that people believe silver's price rise is relentless, in terms of dollars and other unbacked paper monies, and that in a month's time silver is going to be priced significantly higher and rising, therefore wiping out any 'paper money' gains in arbitrage, because you have lost your real silver, and are left holding nothing more than a paper promise to deliver it back from someone else, who might have gone bust in the meantime, or who has resorted to hiding behind complex smallprint in the original future delivery contract because they cannot cover themselves and cannot find the silver in the market that they promised to deliver to you, at the cut-price rate you promised to pay, and cannot afford to fund the difference. If they are speculators rather than silver miners, they will have only sold you the futures contract in the first place, because they believed or hoped the price of silver would fall, and this rise has really caught them short. For instance, if the demand price for physical silver has gone to $50 dollars an ounce, and they sold you a thousand fair value contracts to deliver at $38 dollars an ounce, a month earlier, they are down $12 million dollars. You therefore want to keep holding all the silver supply you have now. You do not want to let a single ounce go. And you want more silver, real silver, in the hand, at your convenience. Right now. You do not trust even reputable exchange organisations to be able to deliver real silver to you in a month's time, without monkeying about with obfuscated exchange rules on paper money compensation in lieu of real physical delivery. You don't want $50 miserable paper dollars delivered late by a recalcitrant, possibly even, bailed-out exchange; you want your ounces of silver right now, which could be rising by a dollar a day, at this point. For instance, you might believe you will receive $50 miserable paper dollars in contracted compensation for not receiving a promised and undelivered ounce of silver, but that silver itself might be over $55 dollars an ounce, and rising, by the time you are so compensated (with the finagling firm or even silver miner that sold you the futures contract keeping hold of your silver, that they should have delivered to you). Your faith in paper money is, as they say, crumbling. (You might wonder therefore who is selling silver futures at $35 dollars an ounce? Well, there's lot of talk about that on the Internet, particularly if you stray anywhere near Max Keiser's web site, but if we're being generous, we'll say it's silver mining companies who are digging it out of the ground for $5 dollars an ounce, and who will be happy with a guaranteed $30 dollar profit on that in a month's time. They just want a predictable market for their effort, and are prepared to forego any speculative profit to get that guaranteed money, plus, as silver miners, they should be able to honour their obligations in physical metal.) Therefore, if gold does go into backwardation for any sustainable period, then Mr Turk is probably right. If you could believe in futures markets and paper money, then buying gold futures in backwardation would make lots of sense, thereby pushing the price up of these futures contracts. It only makes sense for gold to go into backwardation if a large mass of gold buyers, including central banks, have given up on paper money. It probably really is all over for the dollar if gold goes into backwardation for any sustained kind of period. The Federal Reserve will therefore have done its assigned job in less than a century, since 1913, when it was formed. It will have completely destroyed the dollar and the wealth of every dollar holder in the world, and passed this wealth on to the U.S. government to waste on itself in a century of imperial ambition. Well done, Alan and Ben. Your mission will have been accomplished. A truly magnificent effort in the face of so much economic logic from the Austrian School, of which Alan Greenspan, in particular, was intimately aware. As for Ben, he's really a confused cardboard cut-out character on sabbatical from 'Hector's House', and so is to be pitied more than defiled.]
Ben Davies speaks about George Reisman’s book, Capitalism (freely available for PDF download), and government price controls. Davies predicts that no matter how stupid price controls are, in an economic sense, western governments are heading towards more price controls to miserably fail to smother the paper money inflation they are creating with their printing presses.
He also talks about how the silver price has been artificially controlled, which has led to a shortage in physical silver, and therefore the current price explosion in silver as those controls fall apart (as price controls always do). Davies predicts a consolidating top for silver, at $45 dollars an ounce. He believes once silver reaches that point, then gold will be where the action is, with a breakthrough ceiling of $1,440 dollars an ounce, and then nothing to stop it rising another $400 dollars on the upside, if it breaks through that price-controlled ceiling, to match Mr Turk’s $1,800 dollars by Christmas. Interesting:
Rob Arnott speaks about the general inflationary cycle, moral hazard, and the policy blunders of central banks; he is alarmed. He also predicts that if the U.S. government keeps going with its money-printing policies, then it is heading for a Greek-style collapse. Listen out for the line about the iPad:
The heroic honey-voiced Robin Griffiths strays a teensy-weensy bit into Bastiat broken window territory, but we’ll forgive him for this possible faux pas because of the kicking he then gives Helicopter Ben. He believes it is reasonable to expect gold to hit $3,000 dollars an ounce, at some point, without a specific timeframe, though even $8,000 dollars is a not unreasonable target, if Helicopter Ben really keeps going with his prodigious money printing programme. On silver, he thinks a reasonable resting position is somewhere between $40-45 dollars, but that it should double from there within some kind of short-term horizon:
You might remember a couple of months ago that Jim Rickards came up with the intriguing theory that the Federal Reserve in the United States would soon go bankrupt even according to its own rules (such as they are).
Remarkably, within a few weeks of that, the Federal Reserve released bizarre new accounting rules for itself, which involved negative liabilities, which to all intents and purposes made it impossible for them to go bankrupt if they can continue to apply their own ‘change-the-goalposts’ accountancy rules to their own books (rather than using any common-sense accountancy paradigm that the rest of the planet might have used for the past several hundred years).
One therefore suspects that the Federal Reserve watch Mr Rickards’ ongoing statements with a hawk-like eye.
In his latest interview with Eric King, Mr Rickards puts forward another fascinating possibility, that the Federal Reserve will be able to announce ‘truthfully’ on July the 1st this year, that it has ceased its QE2 money printing programme.
However, if you follow the implicit logic in the interview below, you may agree with Mr Rickards that on July the 1st they will still remain able to monetize $750 billion of US government debt each year, for the foreseeable future, on the basis of all of the money printing that they have already rolled off the Bureau of Engraving’s printing press.
In the apocryphal words of a certain Austrian lady in the French pre-revolutionary court of Louis the XVIth, they may indeed be planning to have their cake and eat it.
Obviously, with people like Mr Rickards around they will never be able to get away with it completely, and with the US government engaging in $1.5 trillion of deficit spending each year, ad infinitum — and arguing internally about a relatively paltry $60 billion dollars of ‘painful’ cuts — they may still need to rack up another $750 billion dollars a year from thin air, just to keep this party going a bit longer. This will be especially likely with a presidential election coming up, in which the Great Pharaoh King Obama will come off the golf course and read us all some more folksy speeches off his teleprompter, to make us realise that one day real soon he will finally deliver the change ‘that you can believe in’.
No doubt, he will win again, this time against Mitt Romney, unless something unbelievably improbable happens with Dr Ron Paul. (Well, I’ll keep with the dream until it becomes impossible to do so.)
However, what I like is the idea that the men and women at the Federal Reserve who gave us ‘negative liabilities’ — plus all of their satellite central banks around the world — still think they’re going to get away with all of these terminological inexactitudes and Byzantine subterfuges, and that they genuinely think the rest of us will still be fooled by their playground machinations, which involve the popular strategy of continually telling porky-pies to the teacher about what happened to the homework.
One day, the Great Big Dog in the sky that eats all such homework will regurgitate these endless excuses and reveal them for what they are; a forty-year blizzard of counterfeited lies. No doubt these same central bankers are already working out ways of how to blame the Libyan crisis and the Japanese crisis for everything that is about to go so very badly wrong with their Keynesian schemes, especially concerning the dollar, over the next few years.
But it will fail to wash, I’m afraid. Especially while splendid men like Mr Rickards are on their case:
You do, of course, have to wonder at the mentality of these people in the central banks, who are supposed to be the best and the brightest of us. As Hayek would have said, no man or group of men, no matter how intelligent, can match the entire market of all interacting humans; but when will they get the message? And why, for such ‘intelligent’ people, do they appear so stupid?
QE1 failed, so they tried QE-lite to fix that. Then QE2 was needed to fix that. And now Perpetual QE is going to be needed to fix that. And no doubt QE3 will be needed to fix that, and then QE4, when that goes wrong too.
When are these Über Supermen finally going to realise that money printing fails to solve anything, but only makes things worse for everyone outside the feeding trough of government, and even eventually fails for them too, when nobody will take their paper scrip any more or obey their costumed regulation enforcers? Or, in the words of Richard Bandler:
“If what you are doing is not working, stop and try something else.”
You never know, one day they may even phone Professor Philipp Bagus and ask his opinion about 100% reserve commodity money, and how this could instantly remove all negative externalities and negative liabilities from their Gordian Knot money printing scam, plus get us back to an honest system of enforceable property rights and monetary freedom unencumbered with all the usual government ineptitude, from the same kind of people that built so many nuclear power stations on one of the world’s most active earthquake and Tsunami-causing fault lines.
We can but hope.
With the price of gold crashing through record highs most days of the week at the moment, I should imagine most gold bugs are having trouble keeping smiles off their faces.
To keep all these fine people in a continuing happy mood — after a few months of nervousness that Ben Bernanke was somehow, despite all logic, going to get away with his quantitative easing money printing programme — I thought I would do a round-up of the latest MP3 shows on King World News, where a certain ‘dominant theme’ is evident, based upon the dreaded ‘G’ word:
The big date is going to be the 30th of June. If Mr Bernanke keeps going with his quantitative easing after this point — which in my own view is a no-brainer — then all bets are off on the upside potential of gold and silver in terms of dollars. We shall have to see if our own central planning money board at the Bank of England tries to accompany Ben down on his race to the bottom, to keep him company, but I would imagine they will, though hopefully not at the same prodigious rate, particularly given this news from Zero Hedge.
You might remember a post, a month or two back, about the Davos plan to flood the world with $100 trillion dollars of new fiat paper currency, in a global quantitative easing plan. This would keep the 1971 experiment of a pure global fiat currency scheme going for a few more years and replace all of the real Austrian productive capital which has been consumed in the last 40 years (e.g. tangible machines which make things), with even more paper Keynesian ‘capital’ (i.e. bits of fancy paper, or their electronic equivalent) to drown us all in; or, in the words of Del-Boy Trotter, we’re all going to be millionaires.
Jim Rickards thinks he has detected the IMF plan to put this Davos proposal into action. He discusses this discovery in a 22-minute interview with Eric King, as below. With many other interesting topics under debate, the discussion on Davos and its subterranean link to the IMF begins at 5:35 on the clock:
Here is that IMF plan, in PDF form:
[You will also notice that it is dated January 7th, 2011, which is several weeks before the Davos announcement.]
As you might imagine, the IMF web site is hardly user-friendly when it comes to revealing such potentially devastating informational nuggets, only matched in its obfuscation and denseness by the Bank of England’s web site; however, with some karate-style googling technique, I eventually managed to ensnare the needle in the haystack.
Here is the key IMF quote, from that paper:
“An annual allocation of the equivalent of US$200 billion dollars would raise SDRs as a proportion of reserves to a little over 13 percent in the early 2020s.”
If you use fractional reserve banking at a 10% ratio to leverage this by ten, then this becomes $2 trillion pumped into the global economy each year, until 2025, giving us $28 trillion equivalent-dollars of extra fiat ‘liquidity’.
I think we can apply the Duncan’s First Law of Government to that — by which you take any publicly-released government number and multiply it by three or divide it by three, whichever presents a worse public relations figure, to produce the true number, as originally calculated by whichever dissembling civil servant first wrote the report.
When we apply Duncan’s First Law of Government, the real release of SDRs will be the equivalent of $600 billion dollars a year, leveraged up to $6 trillion each year, which gives us $84 trillion equivalent-dollars of extra ‘liquidity’, by 2025, which is a figure remarkably similar to the $100 trillion dollars of extra liquidity, as proposed at Davos.
With the IMF able to switch currencies around inside their SDR currency unit — for instance by dialling down the dollar component and replacing it with Chinese yuan — then welcome to the world’s new global fiat currency, born on a wave of enormous quantitative easing, courtesy of shadowy unelected bureaucrats being paid tax-free salaries and handsome pensions, paid from your pocket, and ensconced in luxurious office palaces all over the world. They are, after all, only thinking of you and your interests, rather than putting themselves and their friends first.
Once the cuckoo of the SDR has pushed the dollar out of the world-reserve-currency nest, the IMF can then roll out their even grander strategic plan of introducing the Bancor, as first proposed by their hero, Lord Keynes, as discussed in one of their papers from last April:
Here’s a sample quote from that report (my emphasis):
“A limitation of the SDR as discussed previously is that it is not a currency. Both the SDR and SDR-denominated instruments need to be converted eventually to a national currency for most payments or interventions in foreign exchange markets, which adds to cumbersome use in transactions. And though an SDR-based system would move away from a dominant national currency, the SDR’s value remains heavily linked to the conditions and performance of the major component countries. A more ambitious reform option would be to build on the previous ideas and develop, over time, a global currency. Called, for example, bancor in honor of Keynes, such a currency could be used as a medium of exchange—an “outside money” in contrast to the SDR which remains an “inside money”.”
We truly are alive in a world of Golgafrincham money cranks, who think there is not a disease on Earth which cannot be cured by the application of ever-more endless sheets of worthless paper, printed up with ever-more inky zeroes.
Have you bought any gold, silver, or oil, this month? Do you think you should?
Jean-Marie Eveillard, who manages $36 billion dollars of other people’s money via First Eagle Funds, discusses the current highly interesting markets in China, India, gold, silver, mining, and much more, in the 14-minute King World News interview below, with Eric King.
I thought this might be interesting, because halfway through his analysis, Mr Eveillard cogently explains how the Austrian School of Economics has provided the most convincing explanation for all the financial events over the last few decades, including the current peculiar circumstances in which we find ourselves, in which non-Austrian economists continue to find themselves baffled, month after month, with a global economy which adamantly refuses to follow the tenets of Lord Keynes: