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Tuesday, August 13, 2013

The Japanese experiment has failed

The impotence of Abenomics demonstrates that Karl Denninger and others were right, Paul Krugman was wrong, and quantitative easing does not magically produce economic growth.
In April 2013, Japan announced a QE program of $1.4 trillion, an amount equal to roughly 25% of the Japanese GDP. To put this into perspective, the US’s QE1, QE 2, QE 3, and QE 4 programs which were spaced out over four years are an amount equal to roughly 16% of US GDP.

Japan announced a larger program relative to its economy all at once. The idea was that by throwing around a big enough amount of money, Japan’s economy would finally waken from its 20-year slumber and take off.

This effort has been an abysmal failure. Japan’s second quarter GDP grew at just 0.6% quarter over quarter, registering the single biggest growth MISS in a year (economists were expecting 0.9% which, by the way had already been revised lower).

Put in plain terms, Japan announced the single largest QE effort in history, and not only did its economic growth projections have to be lowered, but it is failing to even meet these lowered growth projections.
The failure of Abe's daring plan to print Japan back into prosperity should suffice to explode the inflationista argument.  The US equivalent would be a $4 trillion spending program that barely managed to keep GDP from turning negative. And in directly related news, it is absolutely fascinating to see Paul Krugman complaining that Milton Friedman is no longer a hero on the economic right:
Friedman, who used to be the ultimate avatar of conservative economics, has essentially disappeared from right-wing discourse. Oh, he gets name-checked now and then — but only for his political polemics, never for his monetary theories. Instead, Rand Paul turns to the “Austrian” view of thinkers like Friedrich Hayek — a view Friedman once described as an “atrophied and rigid caricature” — while Paul Ryan, the G.O.P.’s de facto intellectual leader, gets his monetary economics from Ayn Rand, or more precisely from fictional characters in “Atlas Shrugged.”

How did that happen? Friedman, it turns out, was too nuanced and realist a figure for the modern right, which doesn’t do nuance and rejects reality, which has a well-known liberal bias.... He was willing to give a little ground, and admit that government action was indeed necessary to prevent depressions. But the required government action, he insisted, was of a very narrow kind: all you needed was an appropriately active Federal Reserve. In particular, he argued that the Fed could have prevented the Great Depression — with no need for new government programs — if only it had acted to save failing banks and pumped enough reserves into the banking system to prevent a sharp decline in the money supply.
Krugman fails to realize that the right wing is putting one of John Maynard Keynes's few legitimate ideas into action.

"When the facts change, I change my mind."

Friedman was a Keynesian, albeit a Keynesian heretic who rejected the use of fiscal policy in favor of monetary policy.  And, more importantly, he was completely wrong.  Ben Bernanke has followed an almost flawlessly Friedmanite policy, bailed out the banks, pumped massive reserves into the banking system, and prevented a sharp decline in the money supply.

And yet, it hasn't worked, because Friedman's monetarist theory failed to account for the fact that it is credit money that is the larger and more important factor with regards to prices and the limits of demand, and, as Abe has shown in Japan, even an unprecedented increase in the money supply is not enough to make up for the deflationary forces at work in the various credit sectors.  One cannot push on a string and one cannot print borrowers.

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117 Comments:

Anonymous Stilicho August 13, 2013 5:04 AM  

Clearly, 25% was not enough. More was needed but evil Japanese fiscal conservatives prevented poor Mr. Abe from doing what was needed... it's a B.S. argument, but it is all Krugman's got. The man isn't an economist so much as he's just another leftist political hack. Everything he writes is done with a political outcome in mind.

Anonymous Stilicho August 13, 2013 5:10 AM  

One cannot push on a string and one cannot print borrowers.

Too true, but give them time. Mandatory college/student loans and mandatory home purchases anyone? Perhaps mandatory, financed capital expenditures for corporations. Chief Justice Roberts says it's all constitutional as long as it's called a tax, because Congress can tax anything (or the absence of anything)...it's right there in the penumbras emanating from the, well, it's in there somewhere, right?

Anonymous Toby Temple August 13, 2013 5:19 AM  

They just spend the money themselves instead of waiting for borrowers.

Start an infrastructure project.
Start making more buildings to replace the ones destroyed by the previous tsunami.
Start making more warships to defend territories being claimed by China.

Anonymous Stilicho August 13, 2013 5:49 AM  

OT conspiracy for Dread: http://www.eutimes.net/2013/08/switzerland-warning-against-obama-regime-stuns-russia/

Anonymous Stilicho August 13, 2013 5:54 AM  

Toby, that's small ball compared to to the loans that the money multiplier theory tells us should have been born of the QE monetary expansion. What's a few hundred billion compared to the additional twenty or so TRILLION that would have been created via credit expansion by now had the rate of credit growth remained stable after 2008? Vox can give you the exact numbers since he's run the calculations in prior posts, but, IIRC, total Z1 debt would be close to 80 trillion now instead of remaining in the mid 50's for 5 years.

Anonymous scoobius dubious August 13, 2013 5:57 AM  

"Japan’s second quarter GDP grew at just 0.6% quarter over quarter, registering the single biggest growth MISS in a year"

Well I'm confused. Granted I'm not an economist (if anything I'm an *anti*-economist), but, in the spirit of a naïve or stupid question occasionally shedding some light that the experts missed, I'm going to ask a naïve and stupid question...

Japan's population is shrinking. So why is it an imperative for their GDP to grow at a robust rate, or even to grow at all? Why can't they just accept a temporarily lower GDP in synch with their temporarily lower population? If the pop. begins to grow again but GDP does not, that sounds like a cause for alarm; but their current stagnation sounds like an economic flu that you just live with for a while. After all, even with a stagnant economy, they still manage to live pretty damn well.

Back in the late 80s when everyone was scared that they would conquer and/or buy the whole world, their population was roughly 130 million. Presumably now it is a good deal less, and is on track to get even thinner (though as long as they check immigration and keep their borders sealed, the lesser population will still be Japanese, and on a crowded bunch of islands, what do they care if there are fewer of them, so long as they aren't replaced by Filipinos and Arabs and Pakistanis?).

So, as the gangsters kept saying to each other in Miller's Crossing... What's the rumpus? Outside of their traditional MITI-esque trade and industrial management, why do anything at all?

Anonymous Roundtine August 13, 2013 5:58 AM  

The impotence of Abenomics demonstrates that Karl Denninger and others were right, Paul Krugman was wrong, and quantitative easing does not magically produce economic growth.

Japan didn't have a magic negro.

Anonymous Stilicho August 13, 2013 6:00 AM  

Scoob, fair point. But you're looking at it from the interest of the Japanese nation. Abe et al. look at it from the point of view of a Japanese government that has made undeliverable promises from which only rampant inflation will save them.

Anonymous Stilicho August 13, 2013 6:05 AM  

Japan didn't have a magic negro.

We have one we can sell them. Hardly used at all. Low mileage, never had a real job, never had to answer tough questions or take a position for which he could be held accountable. Reasonable price. Don't ask for a carfax report, though. The chin of title has been clouded by, shall we say, less than credible documents related to the provenance of said magical light worker. Sold as is. No refunds.

Anonymous Stilicho August 13, 2013 6:06 AM  

Chain of title

Anonymous p-dawg August 13, 2013 6:23 AM  

@Stilicho:

"It is hardly lack of due process for the Government to regulate that which it subsidizes." Justice Jackson, Wickard v Filburn 317 U.S. 111

The reason for all the government funding of various programs isn't really to help people. It's to establish a legal basis for regulating anything and everything connected in any even tangential way with what the government is paying for. At least, that's the way it appears to me.

Anonymous Roundtine August 13, 2013 6:42 AM  

Some Austrians are God fearing atheists, believing in the power of the Fed to inflate. The formula seems to be the Fed will inflate, and that will lead to a crash, and then the Fed will inflate again, and this will continue into the future ad infinitum. But the Austrian school always says the boom ends, and if the boom ends, you can't print it back into existence. Even if you go full banana, eventually the whole economy implodes.

Anonymous zen0 August 13, 2013 7:08 AM  

All this money sloshing around...Where's my cut? I could use a few extra bucks to cover the cost of ever increasing food, energy, insurance premiums, taxes, maintenance services, yadda, yadda, yadda.

Anonymous USD Bug August 13, 2013 7:13 AM  

Deflation bitchez

Anonymous hardscrabble farmer August 13, 2013 7:57 AM  

I know that this is anecdotal, and that food prices are exempt from inflation but yesterday I was at a neighbors farm while he harvested sweet corn. You don't even want to know the gist of the conversation regarding where we're headed as a nation, but the bottom line was that he was telling me what the prices set was for sweet corn this year- agreed to by all the local farmers in our area- and that it was 50% higher than last year.

50% increase, one calandar year. For food.

Make of that what you will.

Anonymous Cinco August 13, 2013 8:00 AM  

@zen0

The boomer generation has all our money, they live in Florida on the beach. And no, you can't have it, you didn't win the Great War.

Anonymous Stilicho August 13, 2013 8:21 AM  

p-dawg, I'd say the goal is control and the courts are one lever, but money is another, more powerful lever. Wickard was a travesty in many ways, not the least of which is the idiocy on display in the quote you provided. Even if one accepts the premise that subsidy is a legal basis for regulation, that regulation could only logically extend to the subsidy itself (and don't forget, Wickard was about a farmer growing unsubsidized wheat for his own consumption). But Wickard was a federal power grab in search of a rationale, however weak, so the result was a foregone conclusion.

Blogger Miguel D'Anconia August 13, 2013 8:22 AM  

Krugman is an amazing moron. The "Nobel Prize" is a joke. There's nothing from Atlas Shrugged in a positive sense that any side of the guberment aisle is pushing. How anyone can give Krugman the time of day amazes me.

Anonymous Stilicho August 13, 2013 8:22 AM  

you didn't win the Great War.

Neither did the Boomers.

Blogger Akulkis August 13, 2013 8:23 AM  

Food and fueld USED to be part of the "standard basket of goods" used to determine the consumer prince index. The Obama administration wants to hide the damage that they're doing to the economy, so they removed both items from the standard basket to hide the inflation.

Anonymous Toby Temple August 13, 2013 8:24 AM  

Stilicho. I'm talking about Japan.

Anonymous Stilicho August 13, 2013 8:31 AM  

Toby, ok. What's the Z1 equivalent for Japan?

Anonymous Toby Temple August 13, 2013 8:41 AM  

Stilicho. I don't know.

What I am thinking is basically Japan can (re)start their own military industry with that $1.4 Trillion which could stimulate their economy.

Anonymous Roundtine August 13, 2013 8:42 AM  

Food and oil prices are excluded due to volatility (and this is called core CPI used by the Fed when they consider inflation, not the regular CPI used in government wage scales), but fuel costs are baked into everything, so even it still shows up in the core CPI. Americans spend much less on food and energy than they did 30 years ago, so they have less effect on CPI.

Finally, if there really is less oil to go around and there's rising demand for meat from countries such as China, then food and energy prices will go up no matter what. You can make a case that inflation in China is driving up oil demand and oil prices, but then we're going to see oil prices collapse again, which will reveal that it was not in fact inflation of the U.S. dollar.

Anonymous Zek August 13, 2013 8:43 AM  

I could never forgive Friedman for developing the idea of "withholding" after WWII.

Free to choose, great. Free to print money, not so great.

Anonymous scoobius dubious August 13, 2013 8:47 AM  

Krugman is pleased to mock Paul Ryan for taking Ayn Rand seriously (and of course, anyone who takes Ayn Rand seriously *should* be mocked, as should Paul Ryan just on general principle -- first time Krugsy's ever been right about anything, near as I can tell), but he forgets that Greenspan in his youth was also a disciple of La Grande Rand. Those books are so heavy, sometimes I think their whole secret is that readers accidentally get whomped on the head with them, and lose their ability to think straight. But I guess Krugsy got whomped on the head with some other doorstopper -- maybe Finnegans Wake, he makes about as much sense as that 'un.

Anonymous ZhukovG August 13, 2013 8:47 AM  

@Akulkis

I believe the CPI includes both food and fuel. It is the Federal Reserve that excludes them in measuring inflation. The manner in which the CPI was calculated was changed as result of the Boskin Commission in 1996.

The Boskin Commission was convened by the US Senate which was narrowly controlled by the Republican Party at the time. It resulted in a significant reduction in the CPI reported inflation rate.

Obama has only added to the evil previously done by both Democratic and Republican Administrations.

Quite frankly Obama is just a continuation of the Bush legacy.

As for Japan, I think they will eventually scrap the constitution we imposed on them and take a strong nationalistic turn. I say, more power to them.

Blogger Nate August 13, 2013 8:50 AM  

"The failure of Abe's daring plan to print Japan back into prosperity should suffice to explode the inflationista argument. "

No.

The failure of Japan's massive QE is totally irrelevant to the inflationista argument.

GDP is the pie. The pie doesn't grow during inflation. They just make the slices smaller.

Anonymous zen0 August 13, 2013 8:52 AM  

@ hardscrabble farmer

50% increase, one calandar year. For food.

What were the contributing factors in the decision?

Anonymous Stilicho August 13, 2013 8:53 AM  

Toby, I couldn't find it either, but I suspect it produces a debt to GDP ratio even higher than the US (350%) given the fact that Japanese gov't debt alone is 250% of GDP. Military and infrastructure spending can provide short term stimulus but ultimately you must produce more than you consume or you end up right where Nazi Germany was in the late 30's. Given Japan's lack of natural resources, they could hit that wall quickly and the Chinese won't allow the resurrection of the Greater East Asia Co-prosperity Sphere by anyone but themselves.

Anonymous Stilicho August 13, 2013 8:58 AM  

The failure of Japan's massive QE is totally irrelevant to the inflationista argument.

That you, Krugman?

Seriously, leveraged credit is employed as the functional equivalent of money in our current system. Final payment is delayed indefinitely to keep the scheme rolling. It's gonna crash. Unfortunately, this will give the Fed even more power since base money will be more valuable and they can directly inflate that.

Anonymous p-dawg August 13, 2013 9:03 AM  

@Stilicho: "But Wickard was a federal power grab in search of a rationale, however weak, so the result was a foregone conclusion. "

Yep. That's it in a nutshell. Also, if a power grab is what the gubmint wants, it really doesn't matter how stupid or illogical the premise is. It's going to happen.

Blogger Nate August 13, 2013 9:07 AM  

"That you, Krugman?"

Take a good look at the per capita GDP graph for the last 50 years of Zimbabwe.

You'll note something very interesting. It is flat.

Ya know why? Because inflation doesn't grow the GDP.

What this failure refutes is Government Intervention. It refutes Neo-Keynesianism and in fact... Keynesianism itself.

It is totally irrelevant to the inflation argument. The Japanese are likely culturally immune to the type of psychological phenomena that I demonstrated was the most common cause of hyper-inflation. They will not loose faith in their government. Tradition is simply to ingrained into their psyche. And given that they do not have a reserve currency on the scope of the dollar... there is not a massive international demand for the yen on that scope. So there is no demand to dry up to reduce the value.

Japan is not inflation proof... but they are far more likely to suffer a deflationary collapse than America is... and America is far more likely to suffer a hyper-inflationary collapse than Japan is.

Japan /= America

Anonymous Will Best August 13, 2013 9:08 AM  

Chief Justice Roberts says it's all constitutional as long as it's called a tax, because Congress can tax anything (or the absence of anything)...it's right there in the penumbras emanating from the, well, it's in there somewhere, right?

Just for clarification, Roberts said the government can tax inaction so long as the tax isn't punitive. It is hard to tell what he meant by punitive, and I am sure we will need more cases to figure out the bounds of it, but the guidance he gave was that it isn't punitive because the tax is less than what it is the government wants you to buy.

So I suppose if the government wanted to level a $25,000 tax on anybody that didn't have a home mortgage that would be acceptable as far as the Supreme Court is concerned.

Anonymous Stilicho August 13, 2013 9:13 AM  

Take a good look at the per capita GDP graph for the last 50 years of Zimbabwe.

Measured in what? Mugabe money or U.S. Dollars?

Regardless, GDP isn't my point (Vox can answer for himself). Any metric such as GDP is susceptible to nominal change based upon changes in the unit of measure.

Anonymous Harsh August 13, 2013 9:16 AM  

you didn't win the Great War.

Neither did the Boomers.


Did the boomers win any war ever?

Anonymous VD August 13, 2013 9:18 AM  

The failure of Japan's massive QE is totally irrelevant to the inflationista argument.

Hardly. Its failure reduces the likelihood that the Fed will try to print their way out of depression. There is no point in doing what Krugman and all the Keynesians are advising when everyone knows it won't work.

Blogger buzzardist August 13, 2013 9:20 AM  

Abe is following what has been Japan's policy for fighting economic decline for nearly twenty years. For that matter, these massive government spending policies were Japan's approach for decades before that, too, except that Japan's economy was still on the rise as the government spending also increased. But in all that two decades of a struggling economy, Japan has never managed to recover to a growth level that would sustain its debt levels, which now sit at more than double the nation's GDP. Granted, Japan is in a less precarious position with its debt because so much of this is owed domestically to the Japanese people and not to foreign investors, meaning that Japan's line of credit is not tapped out yet, but if two decades of tepid growth and deflation despite massive government spending, inflationary policies, and repeated attempts to weaken the yen have utterly failed, then at what point will the Keynesians finally be forced to admit that their ideological stance is empirically untenable. For two decades, a country has followed Keynesian policy, enacting bigger and bigger spending packages, and it hasn't worked.

Interestingly, the only slight break from this Keynesian policy also coincided with the few years when Japan's economy slightly shifted toward recovery. These were during the Koizumi years when Koizumi, a maverick who declared himself willing to tear his own party, the LDP, apart if it meant passing the necessary reforms, worked hard to get banks and corporations to deal with toxic debt, to restrict government spending, especially on projects that were meant to do nothing more than win votes for the party, and to privatize moribund state-run interests like the postal service, whose savings accounts had become a cash cow for the government. There were global factors apart from Japan's actions that affected this, too, namely the housing boom, but a boom abroad has not always meant a boom for Japan. Japan's economy, after all, remained relatively tepid through the dotcom bubble, even as Japan enacted huge spending packages. Koizumi held office for five years, longer than any other Japanese prime minister in recent memory. When his own party tried to derail his efforts, he called a snap election and ran his own candidates against the old-school LDP politicians blocking him...and won handily. During Koizumi's last couple years in office, Japan's economy actually seemed to gain some traction for the first time in years.

And then Koizumi retired, Abe took over, and things fell apart. Abe lasted barely a year before he had to resign. The LDP worked to undo a lot of Koizumi's reforms and to return to the old spoils system of massive government spending projects to shore up local votes. The results were predictable. The LDP went through three prime ministers in less than three years before losing power, a rarity for a party that ruled virtually unchecked since WWII. The DPJ, which took over, talked the talk on reforms, but then adopted many of the same LDP policies, which is not surprising since many of the DPJ politicians are renegade LDP members. Three prime ministers in three years, and out. Now Abe is back, not because anyone in Japan likes him, but because the DPJ made an even bigger mess of things.

I'd not be surprised at all if Abe's party lasted until the next lower house election, at which point things will be even worse in Japan. Eventually, maybe the people will be so fed up that they turn to the Socialists or some other fringe party. But, really, there is no viable party giving Japanese voters a real option on economic policy right now. It's Abenomics, Keynesianism, Keynesianism Lite, or some other version put to them each election. Whatever the politicians want to call it, the economic policy involves big deficit spending and inflationary monetary policy. It's virtually all Japan has ever known, and Japan hasn't had a politician other than perhaps Koizumi who could think outside this box.

Anonymous dh August 13, 2013 9:22 AM  

VD, if the natural case of things was an unprecedented crash, and that crash hasn't happened, can you really say that QE hasn't worked? What is the goal of the QE?

Anonymous FUBAR Nation Ben August 13, 2013 9:28 AM  

Friedman did not reject fiscal stimulus. If you take a look at some of his interviews he said that the New Deal programs needed to be implemented because it was an emergency.

Anonymous FUBAR Nation Ben August 13, 2013 9:33 AM  

Hyperinflation is almost impossible under a stable government with a functioning debt market.

The only way I see hyperinflation happening is if the US government is overthrown and the bond market collapses.

Blogger buzzardist August 13, 2013 9:41 AM  

Japan is not inflation proof... but they are far more likely to suffer a deflationary collapse than America is... and America is far more likely to suffer a hyper-inflationary collapse than Japan is.

Arguably, Japan is already in the midst of a deflationary collapse. It is a long, slow one, but it is very much happening. Despite interest rates that have been virtually at zero for well over a decade and despite huge government spending, prices have generally dropped in Japan over the past decade. Some of this resulted from a rise in the yen. Much of it was simply a deflationary unwinding.

Japan built up considerable wealth through the 1970s and 1980s. The pop of Japan's real estate bubble shook a lot of people, but Japanese people tended to save money even when money was plentiful. Japanese households have money socked away in drawers and mattresses in addition to all that they have in banks and postal savings accounts. And now, as the population shrinks, the economy is shrinking, and aging Japanese people are slowly using up those savings. In 30 or so years, Japan's population will have dwindled from over 120 million down to around 90 million, and I suspect that Japan's saved wealth will have shrunk even more. It's hard to say where consumer prices will bottom out in Japan. Many prices have, over the last decade, started to drift closer into line with American consumer prices. But wages can still shrink a lot in a deflationary environment, which means more people living longer with their parents, more people marrying and having kids later, more population loss, and a steadily shrinking economy for decades to come.

Unless North Korea or China decides to initiate a war, I don't see Japan going out with a bang. Japan has tried to stoke inflation for a couple decades with no success, so I agree that hyperinflation is unlikely. But I do think Japan is already whimpering in the early stages of a low, slow deflationary slide.

Anonymous Porky August 13, 2013 9:42 AM  

GDP is the pie. The pie doesn't grow during inflation. They just make the slices smaller.

Nope. Government spending that is funded by seignorage grows during inflation.

Anonymous E. PERLINE August 13, 2013 9:46 AM  

Japan makes better quality products but it has forgotten how to be competitive. Why should it do well?

Blogger James Dixon August 13, 2013 9:52 AM  

> Too true, but give them time. Mandatory college/student loans and mandatory home purchases anyone?

If the government can mandate medical care spending, it can mandate anything. We haven't had any constitutional limits for decades now. Some would argue for over almost 150 years.

> All this money sloshing around...Where's my cut?

It's all Bush's fault. He set these unrealistic expectations that normal taxpayers should get some of the money. :)

Anonymous TheExpat August 13, 2013 9:56 AM  

reality, which has a well-known liberal bias...

Got to be one of the best Krugman quotes ever.

Blogger Nate August 13, 2013 10:04 AM  

"Nope. Government spending that is funded by seignorage grows during inflation"

yes. And another part of the pie is reduced in direct proportion as those resources are wasted.

Blogger buzzardist August 13, 2013 10:05 AM  

Japan makes better quality products but it has forgotten how to be competitive. Why should it do well?

Japan is still competitive in many markets, particularly in cars. But it has slumped in electronics, especially with the rise of smart phones and tablets. For years, Japan's cell phones were technological marvels compared to the rest of the world's. No longer. The best phones in Japan are now the same ones sold everywhere else. Companies like Sony, Panasonic, and Pioneer are in the dumps. There just isn't as much demand for their products anymore as consumer tastes have changed, and the companies haven't been innovating as quickly.

Where a company like Sony has also been smacked around is in its entertainment division. People aren't buying CDs and DVDs anymore. Ouch. That's hundreds of millions of dollars in profit lost.

Where Japan has been innovative--personal robotics--is a market that is, as yet, virtually nonexistent. Japan is building some fantastic robots that could one day turn into impressive androids to do work in homes, offices, and elsewhere. But the market for these is probably a couple decades away, and Japanese companies don't have that long. They need some innovative, hit products now. But Japan's new generation of designers don't seem nearly as innovative, and with so much more competition coming from China and elsewhere, turning out reliable products just isn't cutting it anymore.

Blogger Nate August 13, 2013 10:05 AM  

"Measured in what? Mugabe money or U.S. Dollars? "

Measured in US Dollar value circa 2000.

Blogger Nate August 13, 2013 10:06 AM  

"Hyperinflation is almost impossible under a stable government with a functioning debt market.

The only way I see hyperinflation happening is if the US government is overthrown and the bond market collapses."

Obviously I need to get back to work on the E-book.

Supply and Demand.

Blogger Nate August 13, 2013 10:06 AM  

Also... Enough with this printing borrowers nonsense. The government doesn't NEED borrowers. It creates the money and spends it directly.

There is no limit on what it can create and spend.

Anonymous Saradin August 13, 2013 10:07 AM  

Please stop misrepresenting Friedman. Thanks.


http://reason.com/blog/2013/08/12/qe-phooey-milton-friedman-thought-there

Anonymous Toby Temple August 13, 2013 10:22 AM  

The government doesn't NEED borrowers

This.

Blogger buzzardist August 13, 2013 10:40 AM  

The government doesn't NEED borrowers.

Ah, but the government WANTS borrowers. People in debt are so much easier to manipulate. Government as loan shark....

Or did you mean "lenders"?

Anonymous DonReynolds August 13, 2013 10:49 AM  

Fiscal and monetary policy are two paths to the same desired end result and there are many books that compare the two.

Regardless of what economic theories you might enjoy reading, experience has shown that fiscal policy is actually better at stimulating the economy than monetary policy but those same fiscal policies are always products of the slow (and corrupt) political system and normally inflationary. Monetary policy has shown to be more effective at restraining an inflationary economy than in stimulating a sluggish one. As we have already seen, once interest rates are pushed to zero (or near zero) by the Federal Reserve, there is no influence left in monetary policy. Very clearly, that is where we are today. The only influence remaining in monetary policy lies in announcing a future date for a gradual increase in interest rates. Fortunately or unfortunately, the explosion of national debt under Obamba has made that announcement impossible.

Anonymous Stilicho August 13, 2013 10:50 AM  

There is no limit on what it can create and spend.

Then why hasn't it created enough money to make up for the failure of the credit markets to grow at their historic rate? Is it like communist apologists where the right people haven't been in charge, or that they weren't TRUE communists?

Anonymous DonReynolds August 13, 2013 11:04 AM  

FUBAR Nation Ben...."The only way I see hyperinflation happening is if the US government is overthrown and the bond market collapses."

That has not been the experience in history. The Weimar Republic in Germany deliberately hyperinflated the currency in order to pay off the war debts to the victorious Allies. When debt is a fixed number of German marks, it is rational to pay these debts with heavily depreciated currency.

If the Federal government is overthrown in the USA (or fails, or dissolves, or breaks up, or goes out of business), there would be no entity to inflate the currency, so I would not expect hyperinflation. There is every reason to believe that the big banks would survive, even if there were no Federal government, and being major creditors, the banks have every motivation to protect the value of the currency. They are not boy scouts but they are not fools either.

Blogger James Dixon August 13, 2013 11:08 AM  

> Regardless of what economic theories you might enjoy reading, experience has shown that fiscal policy is actually better at stimulating the economy than monetary policy...

Yes. But of the two monetary policy options, I think it's been fairly conclusively proven that tax cuts are more effective than spending at stimulating the economy.

Anonymous Noah B. August 13, 2013 11:12 AM  

The difference between inflationistas and communist apologists is that most inflationistas aren't actually advocating inflation. We just believe that the Fed will panic and create money with abandon. But it's an idiotic solution that most of us strongly oppose.

Anonymous Luke August 13, 2013 11:20 AM  

Japan does one thing very wisely, and that's to severely restrict immigration, especially from the Third World. However, they need to do one other thing to avoid demographic oblivion, and that's to figure out how to get their productive classes to once again reproduce above replacement rate. WRT fiscal policies, that necessarily includes lowering taxes to the point enough young working Japanese change their minds to again believing they can afford to have children (especially 2-3, as opposed to limiting reproduction to one mascot/token child as too many do now). This must be done even if it results in gov't revenue too low to house and feed tens of millions of (economically negative and reproductively irrelevant) pensioners. The alternative, to stay their current course, is to doom the Japanese to Admiral Bull Halsey's prediction shortly after Pearl Harbor, that Japanese would eventually be spoken only in Hell.

(Yes, yes, I know that they also in general need to recharacterize widespread female careerism, media male-bashing, easily available/renumberative frivorce, and carousel riding as as societally acceptable as is public pedophilic rape by known HIV carriers, but that's another thread...)

Anonymous Other Josh August 13, 2013 11:41 AM  

The only reason the stimulus failed is because it wasn't big enough.

Heh, heh. I just had to throw that in...

Blogger buzzardist August 13, 2013 11:42 AM  

Luke,

Japan doesn't restrict immigration as much as many people think, but it certainly does so more than the U.S. or Europe does. (Shoot, having any immigration restrictions is a step up from the de facto situation in the U.S.) Something like 1 in 20 new marriages in Japan now involves a non-Japanese spouse. No small number of these are women from places like the Philippines marrying Japanese men, especially in rural areas, who cannot find wives since many of the women have fled to cities and/or are refusing to marry until their 30s. There are some pretty large populations of Chinese and Koreans living in many parts of Japan, too, and this is aside from the zainichi Koreans who have lived permanently in Japan for at least two or three generations.

With a population set to shrink by a quarter or more over the next three decades and a debt more than double its GDP, Japan desperately needs more people. Loose immigration, so far, hasn't been the answer, but I will vouch that the equivalent of a green card for foreign spouses in Japan is a hundred times easier to obtain than is a U.S. green card for spouses, and plenty of foreigners are moving to Japan this way.

What makes a significant difference in Japan, however, is that the schools don't bend for foreign students nearly so much. Unless foreign parents want to spring for expensive private school, kids are all in Japanese classrooms being molded as Japanese citizens, and Japan still very much teaches students how to behave and function properly as Japanese people in Japanese society. Immigrant children in Diversity-Land (a.k.a., American and Europe) aren't trained what it means to be American, French, Dutch, or whatever the nationality is anymore nearly to such an extent. Even if the modest immigration now brings Japan's non-Japanese population up to as much as 5 or 10 percent, the schools could prove a bulwark provided they don't cave to multiculturalism. So far, they show few signs of doing so.

Blogger James Dixon August 13, 2013 11:49 AM  

> ...they need to do one other thing to avoid demographic oblivion, and that's to figure out how to get their productive classes to once again reproduce above replacement rate.

I'd think simply banning access to birth control methods would take care of a good chunk of the problem.

Anonymous tungsten August 13, 2013 11:55 AM  

you didn't win the Great War.

Neither did the Boomers.

Did the boomers win any war ever? - Harsh


Yes, sadly, the one against traditional America.

Anonymous fish August 13, 2013 11:58 AM  

Paul Krugman was wrong....

That's just crazy talk!

/Progtard

Blogger mina smith August 13, 2013 12:07 PM  

"So why is it an imperative for their GDP to grow at a robust rate, or even to grow at all?" All nations say they need to 'grow' because the implied message is that if you are on a prosperous upswing, your GDP should be going up.

The fact is that economies built on credit (as ours is, I don't know if Japan's is but I assume so) must always 'grow' in order to service interest payments on the outstanding debt.

It's the way the system works - that's why they are killing themselves trying to get people to take out more credit and to make the GDP grow.

Anonymous DonReynolds August 13, 2013 12:10 PM  

> Regardless of what economic theories you might enjoy reading, experience has shown that fiscal policy is actually better at stimulating the economy than monetary policy...

James Dixon....."Yes. But of the two monetary policy options, I think it's been fairly conclusively proven that tax cuts are more effective than spending at stimulating the economy."

Taxing and government spending decisions are fiscal policy.
Managing interest rates and the money supply is monetary policy.

Tax cuts and government spending are political decisions and necessarily slow. Republicans are convinced tax cuts are the best way to improve the economy. Democrats are convinced more government spending will do the trick.

Blogger JCclimber August 13, 2013 12:30 PM  

Japan's main problem is apathy combined with hedonism, unrestrained by any kind of serious religious belief.

The young have no religious belief whatsoever, there is no hope, no view of any morality beyond this life, no incentive to do more and make yourself a better person.

High suicide rate, high alcoholism, very very high consumerism with buying frivolous stuff like designer purses and constant upgrading of wardrobe. These are all signs of a society in decay.

What Japan desperately needs is some serious austerity. A refocusing on what really matters. It will come, but are their religious institutions ready for it?

Anonymous DonReynolds August 13, 2013 12:31 PM  

Tax cuts and government spending are political decisions and necessarily slow.

Republicans are convinced tax cuts are the best way to improve the economy.....which does not make much sense when the main complaint is budget deficits (adding to the national debt) caused by a LACK of tax revenue....and only half the people pay ANY Federal income tax at all.....and half the Federal income tax revenue is paid by a tiny fraction of the population. Tax cuts today do not mean much. Reganomics was baloney, since it was based on the idea that if the rich get richer, they will tip more.

Democrats are convinced more government spending will do the trick......but nearly all the spending is paid for with borrowed money....and too much of the spending targets the pockets of political cronies and campaign contributors, instead of where it is needed the most or would do the most good. The overwhelming bulk of the benefit of goverment stimulus spending comes from the multiplier effect, but there is no cascading of economic activity when the money goes directly to Wall Street or foreign aid or the big banks, and stops cold.

Blogger Nate August 13, 2013 12:33 PM  

"Then why hasn't it created enough money to make up for the failure of the credit markets to grow at their historic rate? Is it like communist apologists where the right people haven't been in charge, or that they weren't TRUE communists?"

Because they haven't bothered to really tried yet. And the difference between my argument and communist argument... is Communism has never worked... and hyper inflation has actually happened over 40 times. All of which were in credit based economies.

The theory that one can't print borrowers is very nice. Unfortunately Zimbabwe didn't have any borrowers either.. and yet Hyper Inflation didn't give a damn.

Blogger James Dixon August 13, 2013 12:34 PM  

> Taxing and government spending decisions are fiscal policy.

Yes. I can't talk and type at the same time today. I meant fiscal policy.

Anonymous civilServant August 13, 2013 12:35 PM  

Also... Enough with this printing borrowers nonsense. The government doesn't NEED borrowers. It creates the money and spends it directly.

There is no limit on what it can create and spend.


And there is no limit to what it can borrow. The Fed indeed cannot print borrowers but one may be assured there is pressure for more government debt.

one cannot print borrowers.

Perhaps what is meant is that one cannot print productivity?

Anonymous civilServant August 13, 2013 12:38 PM  

So why is it an imperative for their GDP to grow at a robust rate, or even to grow at all?

The currency is a pyramid scheme utilizing debt. Debt must expand exponentially or the currency collapses almost immediately.

Go to youtube and look up the video "Money as Debt".

Blogger mina smith August 13, 2013 12:43 PM  

This is the best video series to date on money and the economy and the pending collapse (in my opinion):

The Crash Course

Chapter 12 is all about debt and the currency system
http://www.peakprosperity.com/crashcourse/chapter-12-debt

Anonymous Van August 13, 2013 12:51 PM  

"reality, which has a well-known liberal bias"

If you live in an insane asylum, crazy is normal.

Blogger Nate August 13, 2013 1:09 PM  

"Perhaps what is meant is that one cannot print productivity?"

Someone may be but Vox isn't. Vox is just pointing out that they tried to dump a huge amount of money into the economy and failed to do so.

Both Vox and I agree that you can't print productivity.

Anonymous FUBAR Nation Ben August 13, 2013 1:16 PM  

Don Reynolds,

This link details how there was very little confidence in the Weimar government and no one was willing to lend them money. These are ripe conditions for hyperinflation.

http://www.historylearningsite.co.uk/weimar_republic_problems.htm

Anonymous Porky August 13, 2013 1:30 PM  

And another part of the pie is reduced in direct proportion as those resources are wasted.

GDP calculation only cares about the spending, not whether the investment may turn out to be wasted in the future.

Measured in US Dollar value circa 2000.

The benefit of seignorage is reaped in Zimbabwean dollars. You can't blow GDP sky high in Zimbabwean dollars, reap the benefit in Zimbabwean dollars, and then turn around and say "well, in US dollars GDP hasn't changed".

That would be like hyperinflation in the USA blowing GDP through the roof only to say that GDP has grown modestly when measured in Dutch guilders.

GDP is what it is, not what we all know it should be.


Blogger mina smith August 13, 2013 1:44 PM  

This comment has been removed by the author.

Blogger mina smith August 13, 2013 1:45 PM  

"GDP calculation only cares about the spending, not whether the investment may turn out to be wasted in the future."

I think Nate's point is that private spending has to decrease to account for the increase in Government spending.

In order for Government to spend more, they have to take it from the citizens first, which reduces how much they can spend.

So the pie stays the same size (total spending) but when the Government's slice gets bigger everyone else's slice has to get smaller.

The fact that the spending is productive or unproductive isn't really pertinent.

Blogger Zachriel August 13, 2013 1:52 PM  

TheExPat: Got to be one of the best Krugman quotes ever.

It's a quote from Stephen Colbert's infamous appearance at the 2006 White House Correspondents' Dinner
http://www.youtube.com/watch?v=U7FTF4Oz4dI

Anonymous Porky August 13, 2013 2:01 PM  

In order for Government to spend more, they have to take it from the citizens first...

No, they really don't.

Blogger Nate August 13, 2013 2:04 PM  

"No, they really don't."

Its actually not first. It is created from thin air. It ultimately does come from the purchasing power of everyone else's money... so it is taken from the citizens but it doesn't actually happen until the prices go up do the the increase in supply.

Blogger Nate August 13, 2013 2:07 PM  

"That would be like hyperinflation in the USA blowing GDP through the roof only to say that GDP has grown modestly when measured in Dutch guilders.
"

Hyper inflation doesn't blow gdp through the roof.

Its like taking a yard stick... and looking at the number of inches in it... then looking at the number of millimeters... and concluding that the yard stick is longer because the number of millimeters is really big.

Blogger mina smith August 13, 2013 2:11 PM  

Good clarification Nate, thanks.

Blogger Eric August 13, 2013 3:08 PM  

Japan's population is shrinking. So why is it an imperative for their GDP to grow at a robust rate, or even to grow at all?

Because GDP is a terrible way to measure growth. If the government borrows (or prints) $1bn and uses it to build a carrier^H^H^H^H^H^H^Hdestroyer, GDP goes up by $1bn. That's growth in the same way charging up your credit cards to live it up for a month is growth in your personal finances.

The point is if the government is borrowing or printing GDP growth, you damn well better have GDP growth. Otherwise out in the real world the economy is shrinking.

That said, I have to believe if the Japanese government announced this kind of stimulus program in April the vast majority (maybe even all) of the money hasn't actually been spent yet. Japanese bureaucracy doesn't move any faster than the US variety.

Anonymous Porky August 13, 2013 3:10 PM  

Its like taking a yard stick...

I think you are mistakenly imagining that GDP is an actual measure of value.

In truth I can win a one trillion dollar government contract to dig a hole in my backyard and this makes GDP rise significantly.

And this is actually not an unthinkable scenario under hyperinflation. We just haven't seen it happen with the world's reserve currency yet. What happens when the world loses faith in the world's reserve currency? Are you still going to measure GDP in US dollars? Euros? Gold bullion? Pork bellies?

Mmmm. Pork bellies.












Blogger Phoenician August 13, 2013 3:56 PM  

The failure of Abe's daring plan to print Japan back into prosperity should suffice to explode the inflationista argument.

Uh-huh.

http://www.ibtimes.com/japan-gdp-growth-2013-falls-06-second-quarter-downwardly-revised-09-first-quarter-saar-falls-26-38

----
Expansion of Japan’s GDP may have appeared a little anemic in the second quarter this year, but the country’s economy was a lot more robust than it was in the comparable period last year, when its GDP actually contracted 0.2 percent from quarter to quarter and 0.6 percent from year to year.
----

So much for "failure".

But, of course, the key idea from the Chicken Little school is that QE inevitably produces inflation.

The inflation rate for June2012 to June 2013 for Japan was 0.2%.

Dipshit.

Blogger buzzardist August 13, 2013 4:13 PM  

JCclimber,

You may have a somewhat skewed view of Japan. Yes, Japanese people can be pretty apathetic, at least from the outside. Usually, this view of Japanese people is more a cultural misunderstanding than an accurate description, but it is true that the young are more apathetic than their parents and grandparents. It kind of comes with the territory when they've come of age in a shrinking economy that doesn't let them have nearly so much as their parents had.

And while Japanese people are given to brand-name consumerism, they are hardly hedonistic in the way you describe. Japanese people save at a considerably higher rate than Americans or Europeans do. Most carry no personal debt load. They only buy what they have money to buy, and that's after they sock away much of their money in savings. Japan has its oddities, geek fascinations, and perversions, but for hedonistic spending, look to America.

Blogger buzzardist August 13, 2013 4:23 PM  

But, of course, the key idea from the Chicken Little school is that QE inevitably produces inflation.

The inflation rate for June2012 to June 2013 for Japan was 0.2%.

Dipshit.


Phonecian, look a little closer at Japan's economy before you call names. Japan spent much of the last decade in deflation. Just a bit of inflation is actually a change for the country right now.

QE doesn't have to cause rampant, double-digit inflation. Sometimes it can just mask the deflation that is naturally occurring. And as soon as the QE prop is pulled away, deflation kicks back in.

Japanese politicians are trying to use QE to spark inflation because they fear how destructive deflation is to an economy where the government debt surpasses double the GDP. With deflation AND a shringking population, Japan will never service that debt over the long run. It's not just the "Chicken Little school" that is seeing inflation from QE. It's the very people orchestrating the QE who want inflation.

The problem is that they aren't finding enough inflation for all the money they are dumping into the economy. Government deficits increase faster than inflation or economic growth do, and that's a problem.

Anonymous Luke August 13, 2013 5:06 PM  

DonReynolds August 13, 2013 12:31 PM
Tax cuts and government spending are political decisions and necessarily slow.

Republicans are convinced tax cuts are the best way to improve the economy.....which does not make much sense when the main complaint is budget deficits (adding to the national debt) caused by a LACK of tax revenue....and only half the people pay ANY Federal income tax at all.....and half the Federal income tax revenue is paid by a tiny fraction of the population. Tax cuts today do not mean much. Reganomics was baloney, since it was based on the idea that if the rich get richer, they will tip more.

Democrats are convinced more government spending will do the trick......but nearly all the spending is paid for with borrowed money....and too much of the spending targets the pockets of political cronies and campaign contributors, instead of where it is needed the most or would do the most good. The overwhelming bulk of the benefit of goverment stimulus spending comes from the multiplier effect, but there is no cascading of economic activity when the money goes directly to Wall Street or foreign aid or the big banks, and stops cold."


Don, it's even worse than that. Very little gov't spending in the U.S. now even comes close to a "multiplier" of 1.0, breaking even compared to the result of not having taxed/inflated it out of the private economy.* (Vox has previously demonstrated this unequivocably.) Business contract enforcing courts, land/patent registration, property crime oriented police, some highways and other infrastructure IMO would be largely all IMO that conceivably could qualify.

*Keeping ghetto welfare queens and their progeny alive via tax dollars long enough for them to commit crimes if male/birth more bastards to commit same if male or birth more if female, ad infinitum, would have negative economic multipliers, of course.

Blogger JCclimber August 13, 2013 5:21 PM  

buzzardist,
perhaps you are correct. I'm basing my perceptions on my trips to Japan to visit family and friends. And from the dozens of Japanese friends I have discussed this type of thing with over the last 13 years.

Of course it is a generalization, but many of the friends (the ones who have moved to America) share the view that their home country suffers from non-productive spending.

Buying accessories and treats and vacations instead of continuing education. Preferring to live a selfish lifestyle rather than "settling" for a spouse who is less than the TV version ideal and get busy with making a large family.

There are a lot of Japanese children, and it is fun to see them when we go to Japan, out on their field trips and going to and from school. But there aren't enough of them, many rural areas have closed their schools and even have a large percentage of abandoned homes and farms.

Too much of their economy has been going into dead end directions.

I'm not condemning them, I have a lot of respect and admiration for the Japanese people, but just like my native country, I'm not afraid to notice the failures and shortcomings....

Anonymous Mr. Rational August 13, 2013 5:48 PM  

Japan's economy is contracting because fiat money cannot substitute for physical capital.  After the 2011 tsunami, Japanese radiation paranoia forced the shutdown of all of the country's nuclear generating capacity.  The replacement of this capacity required physical capital in the form of LNG, oil and coal.  This drove Japan's trade deficit much higher and also made manufacturing more expensive, cutting profits and wages.  The economy contracted.

Abe is on course to restart most of Japan's nuclear generating capacity.  This will reduce the fuel imports, make electricity cheaper, and increase profits and wages.

Anonymous Stilicho August 13, 2013 6:24 PM  

Its like taking a yard stick... and looking at the number of inches in it... then looking at the number of millimeters... and concluding that the yard stick is longer because the number of millimeters is really big.

Quite right. I see that I'm getting through to you. But only partially. Your Zimbabwean millimeters did not make the yardstick any longer than a yard. GDP has nothing to do with inflation per se. What GDP can do (imperfect a measure as it is) is to give one an idea of the ability of an economy to support a certain level of debt. Capisce?

Blogger Scott August 13, 2013 6:26 PM  


"No, they really don't."

Its actually not first. It is created from thin air. It ultimately does come from the purchasing power of everyone else's money... so it is taken from the citizens but it doesn't actually happen until the prices go up do the the increase in supply.


This is SUCH a simple concept. Why does Nate have to spell this out?? Why isn't this common knowledge? How is it that otherwise intelligent adults listen to Krugman? Tell a lie a thousand times...

Blogger Nate August 13, 2013 6:48 PM  

"Quite right. I see that I'm getting through to you. But only partially. Your Zimbabwean millimeters did not make the yardstick any longer than a yard. GDP has nothing to do with inflation per se. "

Dude. Where the hell have you been? That is my point. Inflation does not effect GDP. I made it in the debate. I just made it again.

Blogger Nate August 13, 2013 6:54 PM  

"What GDP can do (imperfect a measure as it is) is to give one an idea of the ability of an economy to support a certain level of debt. Capisce?"

Son you can prattle on about debt and credit all ya want. At some point you have to deal with the fact that hyper inflation has occurred in credit based economies over 40 times.

Its a cute theory. It really is. It just doesn't happen to have anything to do with reality.

Anonymous Augustina August 13, 2013 7:56 PM  

Here's one thing I don't get. People often say that Japan's debt isn't so bad because it is owed to its own people. Well, how is that a good thing? Japan's population is declining, and aging fast. All those oldsters are not going to be buying new Japanese Government bonds, they will be selling. There aren't enough younger people to make up the difference. I can't see Japan carrying this debt for much longer, much less increasing it substantially.

Perhaps someone here with a better understanding of economics can help me out. How is Japan going to continue to issue bonds to a declining and aging population?

Anonymous Porky August 13, 2013 8:11 PM  

Inflation does not effect GDP.

It absolutely does. This is why GDP reports adjust for inflation when comparing year to year numbers.

Your Zimbabwean chart is misleading for two reasons:

1) It is in USD.
2) The effect of inflation has been removed.







Anonymous Roundtine August 13, 2013 9:14 PM  

Chinese GDP is over stated by $1 trillion (PPP I believe) because the gov't inflation numbers are wrong.

Blogger James Dixon August 13, 2013 10:07 PM  

> It absolutely does. This is why GDP reports adjust for inflation when comparing year to year numbers.

Am increase in value measured in devalued dollars may not be an actual increase. It may in fact be a decrease in real value.

Anonymous Porky August 13, 2013 10:35 PM  

@James Dixon

True, but GDP is a not a measure of real value.

Blogger buzzardist August 14, 2013 12:37 AM  

Augustina,

It's not a "good" thing that Japan owes so much debt to its own people, but it is considerably less crippling to the Japanese government than are bonds floated on open markets. The government can set much lower rates on the debt if the debt is owed to government-controlled pension funds or is borrowed from quasi-government-run savings accounts. More importantly, this gives Japan greater flexibility when it does want to borrow from investors. Basically, it's supply and demand. There is less Japanese debt on the market to buy, and so the price for that debt is higher (i.e., the interest rates are lower). Investors still have to be convinced that Japan won't default, and most investors assume that the Japanese government would pay them off first and stiff the Japanese people if the country risked default.

The other respect in which Japan is better off is that personal debt is exceedingly low in the country. Take the total debt levels in the country (government, corporate, and personal debt combined), and Japan doesn't look nearly as bad as it does when looking just at government debt. Japanese people have a lot of saved wealth and not much debt, which means that the government has resources from which to draw (i.e., tax) if the need arises. In the wake of the earthquake and tsunami a couple years ago, Japan began to do just this--the government put a tax on the interest earned from savings accounts. It's not quite like the freezing of bank accounts and robbing of principal that we've seen in Europe, but the government has shown that it is willing to skim from savings to shore up government finances. And since Japanese people have so much in savings, this offers a huge reservoir from which the government can finance its excesses.

But, yes, one way or another the aging population is a problem. Young people aren't earning as much as their parents and grandparents did. Full-time jobs are harder to find. A decade of deflation has eaten into wages. As retirees age, they will increasingly use their savings, and young people won't be able to buy as much government debt. Already, Japan has seen a greater share of its debt held by foreign interests, and that trend will continue. It's really a question of at what point investors will start to balk and demand reductions in debt. If they stop buying, or if they demand exorbitant interest rates, this will cripple Japan's ability to keep spending at current levels. And since Japan's population is aging, Japan not only needs to keep up current spending, it needs to add more spending in the form of pensions and health care.

Japan has no real solution for its aging population. The population is already shrinking. Birth rates don't go up, even with extremely generous government subsidies for children (especially third and fourth children). This is why Japan is working so hard on robots--they know they will need androids and robots of various sorts to fill roles in the workforce. Old people will need care, which will be hard to provide (let alone pay for) if the elderly population outnumbers those of working age.

Japan's debt situation is a mess, no doubt. It's just that owing the debt to the Japanese people gives the government more ability to continue selling debt on the open markets when it needs to, which Japan's government increasingly does need to do. Japan can keep up its deficit spending for at least a few more years because it currently owes so little internationally, but eventually that line of credit will become tapped out just as the domestic line of credit has become. When that happens, Japan will be in a very bad way. Unless the country pulls off an economic miracle that makes the 1970s and 1980s look paltry in comparison and that allows the government to pay down debt before a crisis hits, Japan will flounder along as its debt options become increasingly limited.

Blogger buzzardist August 14, 2013 1:25 AM  

JCclimber,

You're entirely right about all of that. Rural areas are dying. Schools are shuttering. People are continuing to move to the cities, and many aren't marrying until their 30s, if at all. Too many families have only children, and hardly any have three or more kids.

The government has put many economic incentives in place to have more kids, but nothing has really worked. Japan spent a generation or two with the salarymen going off to work while the mothers almost single-handedly raised the children, and the result was a bunch of selfish young women who want nothing to do with marriage and a lot of young men who don't know how to behave like men. Young people have been almost entirely inculturated by women, and the cracks in society are showing from all of the absent fathers who entirely sacrificed families for work.

Japan also does spend a lot on overpriced designer goods, but not nearly to the levels it once did. Vacation spending has also dropped considerably. Those luxuries have gotten squeezed out in the deflating Japanese economy. Buying nice, quality goods is still a priority for many people, and Japanese people still spend a lot on expensive gifts. But this is much more about a culture of exchanging gifts as a means of establishing and maintaining relationships than it is about destructive economic behavior.

But I still maintain that most Japanese people are much more austere than most American people are. How else to explain the sharp difference in savings rates between the two countries? Japanese people may have a nice widescreen HD television, but it might not be quite as big as those in America, and it almost certainly won't be purchased on credit. When Japanese people spend money, it's usually because they actually have money to spend, and you can bet that they also have saved as much as that television cost them.

And Japanese people aren't just splurging on frivolous, selfish baubles and entertainments. Some do, but part of the deflationary problem in Japan is that not as many people spend like this anymore. But many Japanese people do open their wallets for what we would probably consider more sensible spending. Parents spend lavishly on their kids' educations. One can question how well the style of education actually prepares students for the future, but Japanese people do invest a lot in what they regard as important for the future.

One difference from America, perhaps, is that one doesn't see a lot of Japanese people rushing back to school themselves in their middle ages. This, I'd argue, is also because Japanese people are more sensible. The government didn't create a higher education bubble through destructive, cost-inflating programs that often put people deeper in debt than the credential will ultimately earn them, assuming they even finish the degree. Generally, Japanese people got decent educations in school, and they know that in Japanese society going back to school at 40 isn't going to gain them anything. They put money toward their children rather than on redundant education for themselves.

So many of the destructive, selfish behaviors that we see in America's baby boomers, we don't see in Japan's. Japan's boomers have their own destructive behaviors, but my feeling is that they haven't been nearly as selfish as America's have been.

Blogger buzzardist August 14, 2013 1:33 AM  

Mr. Rational,

That argument about Japan's economy contracting because of the tsunami isn't entirely incorrect, but it forgets that Japan's economy was already contracting. The tsunami created a blip in Japan's economy, but the larger pattern of deflation and contraction was already set.

What the tsunami did do was to send the yen soaring. The markets speculated that Japanese companies would return home a lot of their foreign profits to help with the rebuilding, and so demand for the yen went up. At the same time, a lot of the rebuilding construction actually took up some of the slack in the economy, giving temporary jobs to an industry that had been slumping badly.

Overall, yes, the tsunami pushed up government spending and debts. It also prompted Japan to pass some new taxes, the most crippling of which (a sharp increase in the consumption tax) will hit next year. The shuttering of the nuclear plants also sent energy imports and costs soaring, although these were partly absorbed by efforts to cut energy usage. But none of this changes the fact that Japan's economy was already stagnant, contracting, and/or suffering from deflation for most of the last 20 years.

Anonymous Toby Temple August 14, 2013 1:35 AM  

True, but GDP is a not a measure of real value.

GDP is basically the goods produced by a country. It is just presented using the world's reserve currency, USD.

And GDP is dependent on the purchasing power of the country or its people. During inflation, purchasing power decreases.

Anonymous Porky August 14, 2013 10:36 AM  

During inflation, purchasing power decreases.

During hyperinflation, government spending goes berzerk.

Blogger mina smith August 14, 2013 10:42 PM  

A lot of economists actually predicted that Japan would pull out of its depression (economic expansion) based on the re-building activities post-tsunami.

Blogger mina smith August 14, 2013 10:45 PM  

"broken window fallacy"

Anonymous Toby Temple August 15, 2013 2:38 AM  

in other news....

EU recession finally ends!

Blogger Zachriel August 15, 2013 8:29 AM  

This effort has been an abysmal failure. Japan’s second quarter GDP grew at just 0.6% quarter over quarter

That's an annual rate of 2.4%, which is weak, but hardly negligible. The first quarter annualized rate was 3.8%.

mina smith: "broken window fallacy"

The fallacy is only apparent due to a conflation of terms. A stimulus trades wealth for economic activity.

Blogger Zachriel August 15, 2013 8:32 AM  

Toby Temple: in other news.... EU recession finally ends!

Eurozone, not EU.

Compare the general austerity of the Eurozone with the moderate stimulus of the U.S., and how much sooner the U.S. left recession along with rapidly falling deficits.

Anonymous Toby Temple August 15, 2013 9:37 AM  

Ok. Eurozone.
I posted that with sarcasm though. I do not believe that the recession is over.

Blogger mina smith August 15, 2013 11:56 AM  

Zachriel: I'm sorry I was pointing out that this: "A lot of economists actually predicted that Japan would pull out of its depression (economic expansion) based on the re-building activities post-tsunami." represents the broken window fallacy.

Blogger Zachriel August 15, 2013 12:10 PM  

mina smith: represents the broken window fallacy.

Yes, we understood that. There is no broken window fallacy as long as you don't conflate wealth and economic activity.

For instance, a king has a large treasure which he inherited long ago. The kingdom goes into a recession. He spends the treasure to build a new addition to the castle. This reduces the kingdom's wealth, but generates economic activity as idle people are put to work.

Blogger mina smith August 15, 2013 1:08 PM  

Thank you! I found some interesting information on Mises Institute that explains this.

Blogger buzzardist August 16, 2013 9:45 AM  

Here is a good article that details what Japan is doing, what the government officials hope to gain, and why its failure is going to implode Japan's currency and economy, if not the entire world's economy:

http://nationalinterest.org/commentary/tokyo-time-bomb-japans-looming-debt-disaster-8885

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