In the short run, fiscal stimulus adds to GDP. In the long run it subtracts.
Damn the long-term consequences, Abe Orders New Stimulus Package After Election Win.
Japanese Prime Minister Shinzo Abe ordered a new round of fiscal stimulus spending after a crushing election victory over the weekend as evidence mounted the corporate sector is floundering due to weak demand.
Abe did not give details on the size of the package, but Japanese stocks jumped nearly 4 percent and the yen weakened over perceptions a landslide victory in upper house elections now gives him a free hand to draft economic policy.
An unexpected decline in machinery orders shows the economy needs something to overcome consistently weak corporate investment. Economists worry, however, that Abe’s focus on public works spending will not tackle the structural issues around a declining population and workforce.
The government was ready to spend more than 10 trillion yen ($100 billion), ruling party sources told Reuters before the election.
“We are going to make bold investment into seeds of future growth,” Abe told a news conference on Monday at the headquarters for his ruling Liberal Democratic Party (LDP).
Yen “Plunges” on Stimulus Announcement
Bloomberg reports Yen Plunges the Most Since 2014 on Abe’s Fiscal Stimulus Plans
Japan’s currency weakened against all of its 31 major peers after Abe, speaking in Tokyo on Monday, repeated his pledge for action on a stimulus package. He will order measures to support domestic demand, including plans to speed up the construction of high-speed trains.
Alleged Plunge Barely Visible
On a monthly chart the alleged plunge is barely visible, but the Nikkei rallied about 2.5% on the news.
More Good News
The Wall Street Journal reports Japan Set to Slash its 2016 Economic Growth Forecast.
The Japanese government is set to almost halve its economic growth forecast for this year after taking into account its changed sales tax policy and a global economic outlook darkened by the Brexit vote, according to people familiar with the matter.
Prime Minister Shinzo Abe’s administration plans to slash its 1.7% price-adjusted growth forecast for the year ending March 2017 to 0.9% in a new projection due for release Wednesday, the people said. The previous figure was released in January.
The revision is partly due to a decision announced in June by Abe to postpone a sales tax increase to 2019 from the previously scheduled April 2017, the people said. Officials had previously assumed that consumers would buy goods and services aggressively before items became more expensive with the higher tax rate.
Another reason for the large cut in the growth forecast is global market uncertainty stoked by the U.K.’s recent decision to leave the European Union and the impact it could have on Japan’s already lackluster exports and corporate spending, they said.
Abenomics Idiocy
Abe actually thought a sales tax increase would spur spending. Even if consumers did as expected, sales would have crashed after the hike.
Once again, Japan is back to the “tried and true” stimulus hat. I happen to have a picture of decades of stimulus.
Achieving Inflation is Child’s Play
Abe has also guaranteed 2% inflation but has failed in every attempt to deliver it. This guy cannot succeed at anything.
Once again, I present Mish’s Sure Fire Proposal to End Japanese Deflation: Negative Sales Taxes, 1% Monthly Tax on Gov’t Bonds.
Mish’s Four Pronged Proposal to End Japanese Deflation
- Negative Sales Taxes
- One Percent Tax, Per Month, on Government Bonds
- National Tax Free Lottery
- Hav-a-Kid
For additional details, please click on the above link.
My Price
My price for this amazing plan is $0. It’s free for the taking.
It’s truly pathetic when you cannot destroy your own currency despite years of trying.
Negative Results of Stimulus Explained
For those who really want to know why stimulus cannot and will not produce the desired results, please consider Lacy Hunt on Negative Multiplier of Government Debt.
Mike “Mish” Shedlock
Today’s David Stockman article about Bernanke and something for nothing, aka helicopter money, nails this concept. Japan’s leadership, any by inference their population because their government has been in the fantasy business too long, is trying to live the dream. Print money, live well, steal wealth from the middle class that currently earns it or has earned it as savings, and issue debt that will never be repaid.
It was fairly easy to forsee that Japan will soon issue debt that will be monetized and will subsequently be burned by the Bank of Japan … In other words the BOJ will say don’t bother to pay us back. I did this a couple of years ago (not kidding, can’t prove it.) In this world of financial engineering, nobody will bat an eye. In fact, they will probably be emulated as the financial engineers of the year.
As long as someone somewhere is willing to work, the rich, poor, and governmental classes will scheme ways to exploit that labor and steal the wealth it generates or has already generated.
If all else fails, then start a war. Japan is pretty good at that, too, just not recently. If they win, they plunder the wealth of other nations. If they lose, they get rebuilt for free by sucker nations looking for a permanent peace.
You think I’m extreme and the only one who is on this line of thinking? Well, look at the growing number of articles that promote and / or analyze the concept of lifetime income without the need for work. The class war is ramping up and the monetarists are the generals. The politicians are the flunkies. The objective is to steal the wealth of those who are still willing to work.
Re war as an endgame: In the movie The Fifth Element, the villain destroyed some tableware and used it as a metaphor. While sitting there, it generated little value. As a destroyed item, it created jobs by the need to replace it. By being a destroyer, he saw himself as a hero of sorts. Logically correct, morally bankrupt.
This is the metaphor that those who follow the monetarist generals will follow as the value of money printing and debt destruction starts to fail. You read it here first.
You’ll see world war before you see national sales taxes.
I agree. So what are you going to do about it ?
As,
What I will do – probably hold my breath until I turn blue then go drink some alcohol. Or maybe just go straight for the alcohol. Also, not be suckered by bandwagon thinking and get invested in a stock market inflated with artificial value. I’d rather buy high yield debt but only on the next dip. Then maybe some good corporate debt to balance it off. All from funds. Then live a quiet life off on the side and watch the current generation be taken advantage of by too slick for words hustlers. Then try to figure out when Japan will strike and who gets it first. That’s still a few years off. Helicopter money is a prerequisite. The EU wants in on this game but the central govt is too weak for now to follow through. The US has Hillary and I expect her to go gung ho on some sorry bastard country within a year or two of inauguration – but it will be sold as a good and necessary war with no moral ambiguity. No plans to be ‘that guy’ like in the Die Hard movies. Too unattractive, too unmotivated, too poor, and too disinterested to run for office or support some slob who will probably be seduced by hustlers later on.
And you?
CDR,
Get out of the city and become a farmer. Cheap house in a small community. Learn some skills. Stash some gold. Take some cash and get a non recourse loan to gear up in property or stocks, whatever I can. Prepared to lose it.
There will be blood.
Hopefully we have a few years.
Enjoy the peace whilst we have it
Correction:
I ‘said this a couple of years ago’, not ‘I did it this couple of yeas ago.’
If I did it, I wouldn’t be bragging about it and I’d still be doing it.
Japan has the benefit of having accumulated many $trillions in capital during the 60 year period following the end of World War II.
It will take a lot of time – even with lunatics like Abe and Kuroda directing “policy” – for reality to fully assert itself.
My guess is that it will happen just as Hemingway described in “The Sun Also Rises” (ironically). They will go bankrupt “Slowly at first, then all at once.”
You’re on the right track. I think there’s a tipping point in there somewhere and it’s far below having all wealth squandered by debt that is either payable or inflation caused by a run-away printing press.
There’s also the very real possibility that the helicopter money will be saved and, by default, never enter circulation. Joke’s on Bernanke. Actually, he’ll probably recommend government spending as a proxy for consumption. The helicopter money will go out in wages and infrastructure, then into savings. Joke’s still on Bernanke. Then comes the Japanese war party to take it next level.
Sorry for the excessive commenting. It’s just an interesting topic.
“having all wealth squandered by debt ”
What exactly does this mean in the context of Japan?
Brian, all debt must be repaid eventually in some way. Most of the time the debtor repays the debt.
If it’s a balance of payments between countries, the country with the surplus buys assets such as real estate or corporations from the country in deficit. This is normal and the old textbook way of doing things.
If it’s internal, inflation can be used to cut the real value of the debt, but that also cuts the real value anything not pegged to rise with inflation. Today you have low to negative rates with actual inflation. Anyone with assets not keeping up with inflation is indirectly subsidizing the debt by having their wealth consumed via inflation.Countries are borrowing like there’s no tomorrow. The proceeds are used for normal day to day expenses.
The Eurozone has suggested bail-ins – which mean the bank depositors pay for debt owned by the bank that turns out to be bad debt. They are suckers left holding the bag.
Debt at non-negative rates requires interest payments. You pay for the government debt interest unless they borrow to pay for it.
If the value of assets expands artificially via financial engineering as opposed to entrepreneurs and innovation, the quality of jobs created is low. Incomes rise slowly. Savings is consumed just to live. Debt is used to finance rising asset values. Since the cash is not wealth based, the rise in value is artificial and will fall eventually without more artificial asset price increases. If bankruptcy is involved, the debtor gets off scot free. Not the lender.
If printed money actually goes into circulation, as opposed to being saved, then a high velocity of money will cause hyper inflation if enough is printed without sufficient collateral backing it. Hyper inflation takes the value of your assets. So does normal inflation, only slower.
Brian, the collateral backing the cash does not need to be gold. It’s currently the assets and productive capacity of the population. It’s more intangible than hard assets. Think of it as a bankers assessing your ability to repay a loan based on your income and current wealth. Now, think it on a national level.
Actually, hard assets only affect the denominator when calculating the value of the asset backed by gold. Any asset two people can agree on can serve the same purpose. Plus, the value of the backing asset must float. Hence, it’s only a denominator.
cdr,
You have a good analysis but you are missing what is probably the most important element, the difference between supply and demand.
GDP is supply, it is by definition the actual goods and services produced by an economy in a time period. It does not tell you who gets to enjoy those goods and services or how they pay for them. Whether the economy is making iPhones to sell to consumers or tanks to help the gov’t fight WWII, GDP is what the economy can supply now.
Paying back debt in itself does not stop GDP from being produced. A factory churning out tanks in WWII can churn out cars in 1950 even though the gov’t incurred massive debts. Even on the local level debt does not stop this supply. When a casino owner gets too far in debt, he may go bankrupt but that doesn’t mean the slot machines stop working. As long as the casino is profitable, all ‘bankruptcy’ means is someone else gets to take the ‘house’s profits’.
Clearly the core issue is how much GDP can an economy produce. If you let a factory rot today through non-use, you not only lower GDP from what it could be today you are also lowering it in the future. Ultimately the only real way to increase wealth is to also increase GDP.
So do you have a mechanism to show how Japan’s GDP tomorrow will be lower than what it could be *because* of the debt Japan is taking on now by running high stimulus programs? If tomorrow’s GDP is higher but Japan must tax some of that to service debt, that will be a small price to pay. Keep in mind after WWII the US did great despite huge debt increases.
“If printed money actually goes into circulation, as opposed to being saved, then a high velocity of money will cause hyper inflation if enough is printed without sufficient collateral backing it. Hyper inflation takes the value of your assets. So does normal inflation, only slower.”
Well while people here complain on one hand about Japan issuing more debt, on the other hand they are complaining about the BOJ buying up huge amounts of that debt. It sounds like the currency is already in circulation with no hyperinflation in sight. In order to get to inflation, you need more velocity, velocity comes from transactions, transactions comes from people buying and selling things which means you would see the economy increase its GDP. More GDP means more income which means debit is easier to service and you can increase wealth.
In short if you’re not seeing inflation then no one is really ‘paying for’ debt, ever…but we are all paying for the gov’t not issuing enough debt.
Brian, who is buying the debt? Who is selling the items needed to ultimately expand GDP?
Textbook balance of payments is self-balancing if a floating currency is involved.
If GDP growth is based on wealth that came from investment, job creation, and an economic machine, individuals seeking to maximize their own self interest will see growth that is self perpetuating.
If GDP growth is based on money printing disguised by debt monitization, it’s no different than Joe the counterfeiter getting by for as long as he can until he gets caught.
If GDP growth is based on legitimate debt, than at some point the debt must be repaid. If it was used for basic consumption, then the growth was pulled forward and GDP will suffer during the repayment years, assuming no financial engineering to kick the can down the road.
If you have negative rates, no inflation is inflation. Debt is depreciated. Savers are exploited. Bernanke’s solution.
Brian, your thinking in a closed system. If I borrow from you then pay you back and we both spend and save in the same city, then the economy is zero sum. It’s a closed system.
This is a world economy where England depends on Spain and China, who depend of Ecuador and Egypt. The balance of payments is ignored on your analysis. It’s absolutely fundamental. Learn it.
cdr,
Again back to basics. GDP growth means the economy this year produced more goods and services than it did last year. “Legitimate debt” should have nothing to do with it. If the car factory churned out 10,000 cars this year and the year before it could only make 9,000 cars, that is GDP growth.
But what if that growth was fueled by a bubble of ‘illegitimate auto loans’? It doesn’t change the fact that the factory, being able to make us more cars, is an asset to our economy and is in fact an exhibit of real growth.
The correction of the ‘bad debt’ might mean those who invested in auto loans now cannot afford those cars while those who shorted such debt now can.
Again look at the example of WWII. In economic terms this would have had to have been the most illegitimate of all growth. You had the gov’t convert US factories making consumer goods into making military goods. After the war was over, the military goods were not even good for defense (for example, jet fighters soon made most of the aircraft used in WWII obsolete). Yet despite that debt and all that ‘misallocation’ of capital, the economy quickly pivoted to consumer products and growth was rapid.
The delusion here is the false notion that debit is ‘paid off’ by suffering GDP declines. In fact its the opposite. Declining GDP increases debt even if you keep budgets balanced or in surplus.
Brian re your velocity of money concerns: if everyone is borrowing and investing, even in a closed system, the same cash is being borrowed, invested, deposited, borrowed, invested, deposited, …. many multiple times. Fast.
At some point, everyone is paying back everyone at the same rate, creating a kind of negative velocity. Instead of spending and investing, everyone is paying back debt. This is the effect of pulling spending forward. This is the blowback. It does not consume wealth, it creates negative GDP to offset the positive GDP from before, unless the borrowing was for investment, (not stock buybacks). Then it MIGHT generate subsequent growth which makes everyone better off.
Borrowing to finance consumption is dead weight. Inflation is needed to pay for it.
Wealth destruction occurs as a result of inflation (lots of ways to do that) or to finance war that is used to cover up excesses of past financial mismanagement. Inflation is used to finance debt. Hence, wealth destruction if debt is used for consumption, not investment.
As long as a country has the wealth to support profligate debt, said debt is more of an interest rate swap for people with excess cash. Repayment of principal by the debtor is not a concern as refinancing is available. When financial engineering is needed to convince borrowers that repayment is available, it is time to be concerned.
Brian end of discussion. you need to educate yourself and get away from hillbilly economics.It’s not a closed system, the balance of payments exists whether or not you choose to ignore it, and debt is real.
“In the short run, fiscal stimulus adds to GDP. In the long run it subtracts.”
They don’t care about the long run, they care about now.
Obama said that the debt was a problem in the long term, but not short and medium term. Thus nothing is done to correct the problem, as they can kick the can.
What evidence or logic is there to support the assertion that debt is always a long term problem, esp. as it applies to Japan?
Nin the case of Japan…and China I might add…the “price for admission” is not JGB’s but TREASURIES.
Right now those have been the best asset class in History as not only has the value of said debt soared but the Yen has soared in value against the dollar PLUS JGB yields remain at all time record. Since the USA is providing for all of Japan’s defense needs they’re basically in the driver seat right now.
The problem as i see it is that the Fed is simply not taking sound money…let alone confidence or even Bank profitability….seriously.
That is very BEARISH for debt and ultimately…certainly today…bad news for anyone holding long term treasuries which are getting clobbered.
So obviously if this is the beginning of a big sell off in long term debt (not like Government is slowing down the spending bender…quite the opposite) this could be a massive correction in debt markets indeed.
The pro’s are raising cash…and you should too.
And no that doesn’t mean buying some high yield piece of JNK either.
Quite the opposite actually.
“The problem as i see it is that the Fed is simply not taking sound money…let alone confidence or even Bank profitability….seriously.”
$1 today buys me roughly the same basket of goods and services that it did a year ago, in fact as it did 5 years ago. In modern history has the US dollar ever been this sound? It certainly wasn’t in the 70’s and 80’s.
As go Japan so goes the world. They are the canary in the coal mine. First Japan, then Europe and finally the US as the dominoes fall.
I’m sure they are aware that when you boost the sales tax you first get a sales boom (before the boost), and then a crash (after it). No one would expect otherwise.
Increasing sales tax is not a stimulus policy, it’s actually the opposite. Clearly discussions of stimulus get muddled because often a gov’t effort to increase stimulus comes packaged with policies that are non-stimulative (like selective tax increases).
Theoretically, in a fractional reserve regime, if most people are deemed not sufficiently willing to go into debt; taxing them, then transferring the money to those who are willing to take on additional debt, can be viewed as a stimulus. For every penny in dis-stimulus the tax takes from people, the annointed ones who gets hold of it can then “multiply” it tenfold, and spend that. On niceties like high speed trains to nowhere. So that people too old to want to leave the apartment can, theoretically, get nowhere faster.
I think you are referring to the ‘balanced budget multiplier’ where in a depressed economy the gov’t increases spending by $100 but also increases taxes by $100. This is really the combination of two different policies, one is the stimulus of $100 in more spending which multiplies and the other is the decrease in spending caused by paying the $100 in taxes. The two do not completely cancel so the result is GDP increases by $100 rather than $0.
This was not the case with the US stimulus package nor the Japanese one. What happens more often than not is no party is ideologically pure.
I was honestly just engaging in theoretical speculation. Not saying it makes any kind of sense, no matter where attempted.
In theory, if half the population spends all left over funds on paying down debt, while the other half is borrowing constrained; you can get a “stimulus effect” by taxing the former so that they have no money left over for debt payment, and transferring the money to the spendthrift types, who can be relied on to use it as collateral for taking on more debt to spend.
In the short run, fiscal stimulus adds to GDP. In the long run it subtracts Mish
Obviously SOME new fiat creation is good since the banks only create the interest necessary to pay off their loans as even more private debt.
So then the question is 1) who shall the new fiat be created for and 2) who gets to spend, save or invest the new fiat?
The answer to 1) is simple – new fiat should ONLY be created for the monetary sovereign, no one else.
The answer to 2) can be the monetary sovereign itself, the citizens, or both.
In some cases, such as National Defensive, the monetary sovereign should do the spending (it has no need to save or invest). In other cases, the citizens are the better choice to spend, save or invest the new fiat.
So it’s one thing to be against big government; it’s quite another to be against new fiat creation.
if you are looking to try to front run an inept central banker, this story is important. Jamie Dimon needs you to pay for another pool at his house.
If you are an investor looking to make money for yourself / your own family — you gave up on Japan years ago. They obviously don’t know how to fix their problem. Every few months / years, someone says “Oh, lets print some more currency and more debt!” and it has failed every single time for the last 30 years.
Japan is slowly dying, and instead of addressing real problems, they are focused on magic beans from BoJ. These two stories are about 6 years apart, but show the failure of Japan’s policies.
http://www.nytimes.com/2015/08/24/world/a-sprawl-of-abandoned-homes-in-tokyo-suburbs.html
http://articles.latimes.com/2009/sep/30/world/fg-japan-dying30
Neo-keynesian policy has destroyed the land of the rising sun. Investors should look elsewhere.
Most Japanese would have admitted to defeat, resigned and committed honorable hari kiri by now but not this clown.