« | Home | »

An Economics Lesson For Obama From Japan

January 29, 2010

It seems those in Washington will not learn from history.  Printing money, and dreaming this will fix our economic woes only further exacerbates the problem.  We’re not suffering from a lack of “demand.”  Our monetary policies are not properly allocating resources, which is the true cause of the economic recession.  I can’t think of anyone better to explain this all to you than the president of the Ludwig von Mises Institute, and Austrian economist, Doug French.  Japan  was in the same boat we are now back in the late 1980s.  Their central banks flooded their system with cheap credit, creating a massive bubble economy, their housing prices went through the roof, and when it all popped they tried massive stimulus package after massive stimulus package, hoping to stave off deflation and cure their economy.  Did it work?  No.  In fact, they’ve been attempting massive stimulus programs ever since.  Did ANY of those programs work?  No.  But they keep doing it over and over and over.  The end result? After a decade of sucessive stimulus packages, Japan is now buried in debts, running huge deficits, and on the verge of a collapse.  Sound familiar?

The excerpts below can be found in their entirety here.  They are quoted from Doug French’s article ‘Illusions of the Age of Keynes.’  If this is all too much for you to read, I bolded the main points within the article, and put really key points in a huge font.

**********  Begin Quote  ******************************************************************

A year ago George Melloan wrote in the Wall Street Journal, “We’re all Keynesian’s Again.” You remember last January — change was on its way. We had a new rock-star president and he was going to get us out of the mess that Wall Street had got us into. “Now is the time to jump-start job creation, restart lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down,” President Obama told Congress. The new president has a worldview that is “all but in name Keynesian,” Carl Horowitz wrote last spring.

Meanwhile the guy running the Federal Reserve is an expert on the Great Depression. Ben Bernanke wasn’t going to make the same mistakes the policy makers made during the 1930s. After all, he pointed out back in 2002 when he was just a Fed governor,

the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Washington continues to have faith in government expenditure correcting the downturns of private investment. And the financial press has bought into the scam, evidenced by Time voting the Fed chairman “Man of the Year.” The economy would be much worse if not for the actions of Bernanke and the Federal Reserve is the thinking. “He didn’t just reshape U.S. monetary policy,” Time‘s Michael Grunwald gushes, “he led an effort to save the world economy.”

“The Greatest Depression that could so easily have happened in 2009 but did not is the tribute that the world owes to economics,” wrote Arvind Subramanian in The Financial Times.

….

So what kind of Keynesian world are Bernanke and the other wise ones in Washington shaping for us?

Keynesians see a depression as a lack of aggregate demand — as opposed to Austrians who know a depression is the required cleansing of the malinvestments created by the preceding boom of the government’s making. Policy makers, following the Keynesian playbook, enact policies to stimulate aggregate demand and offset the fall in private investment. On the fiscal-policy side, Keynesians advocate higher government spending. On the monetary side, they insist on lowering interest rates to zero if necessary.

The world has recent experience with attempts at resuscitating a bubble economy. The Bank of Japan cut interest rates six times between 1986 and early 1987 and all that new money caused the Japanese economy to bubble over. As Bill Bonner and Addison Wiggin write in Financial Reckoning Day Fallout,

the problem with all money is that it is as fickle and unreliable as a bad girlfriend. One minute she goes along with the flow. The next minute she turns silly and bubbly. And then, she gives you the cold shoulder.

The prolonged period of low interest rates created one of the largest domestic bubbles in the world. For a brief moment in 1990, the Japanese stock market was bigger than the US market. The Nikkei-225 reached a peak of 38,916 in December of 1989 with a price-earnings ratio of around 80 times. At the bubble’s height, the capitalized value of the Tokyo Stock Exchange stood at 42 percent of the entire world’s stock-market value and Japanese real estate accounted for half the value of all land on earth, while only representing less than 3 percent of the total area. In 1989 all of Japan’s real estate was valued at US$24 trillion which was four times the value of all real estate in the United States, despite Japan having just half the population and 60 percent of US GDP.

The Japanese asset bubbles were identical to other asset bubbles in the sense that they were essentially inflated by credit,” writes Asian bank regulator Andrew Sheng in his book From Asian to Global Financial Crisis.

Banks lent to highly leveraged developers to buy real estate against inflated collateral values, which then fueled the bubble further. Asset prices bore no realistic relationship to their return on capital, particularly since cost of funding was exceptionally low. The minute the credit stopped, the bubble began to deflate, and the main victims were the banks themselves.

After the bubble popped in Japan, that government pursued a relentless Keynesian course of fiscal pump priming and loose fiscal policy with the result being a Japan that went from having the healthiest fiscal position of any OECD country in 1990 to annual deficits of 6 to 7 percent of GDP and a gross public debt that is now 227 percent of GDP. “The Japanese tried to cure an alcoholic with heroin,” writes Bonner. “Now, they’re addicted to it.”

Japan’s monetary policy was to aggressively lower rates to .5 percent between 1991 and 1995 and has operated a zero-interest policy virtually ever since.

Between 1992 and 1995, the Japanese government tried six stimulus plans totaling 65.5 trillion yen and they even cut tax rates in 1994. They tried cutting taxes again in 1998, but government spending was never cut. Also in 1998, another stimulus package of 16.7 trillion yen was rolled out nearly half of which was for public-works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year an ¥18 trillion stimulus was tried, and, in October of 2000, another stimulus for 11 trillion was announced. As economist Ben Powell points out, “Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession,” with Japan’s nominal GDP growth rate below zero for most of the five years after 1997.


After five years in an economic wilderness, the Bank of Japan switched, during the spring of 2001, to a policy of quantitative easing — targeting the growth of the money supply instead of nominal interest rates — in order to engineer a rebound in demand growth.

The move by the Bank of Japan to quantitative easing and the large increase in liquidity that followed stopped the fall in land prices by 2003. The Bank of Japan held interest rates at zero until early 2007, when it boosted its discount rate back to 0.5 percent in two steps by midyear. But the BoJ quickly reverted back to its zero interest rate policy.

In August of 2008, the Japanese government unveiled an ¥11.5 trillion stimulus. The package, which included ¥1.8 trillion in new spending and nearly ¥10 trillion in government loans and credit guarantees, was in response to news that the Japanese economy in July suffered its biggest contraction in seven years and inflation had topped 2 percent for the first time in a decade.

Newswire reports said the new measures would include assistance to the agriculture sector, support for part-time workers to find better employment, and rebates on toll roads. Additional spending was also to flow to healthcare, housing, education, and environmental technology.

Just this past April, the Japanese government announced another ¥10 trillion stimulus program. This was after Japan’s economy shrank by a record 15.2 percent annual rate in the first quarter of 2009. This drop was on the heels of a 14.4 percent drop in the fourth quarter of 2008.

Last month, Reuters reported that the Bank of Japan reinforced its commitment to maintaining very low interest rates and may provide even further easing. “The bank said that it would not tolerate zero inflation or falling prices.” The bank left its policy rate at .1 percent and analysts see the rate staying low possibly until 2012.

According to Reuters, the Japanese government “is fretting over the risk of the economy flipping back into recession and is pushing the bank for action.” Economy flipping back into recession? Are they kidding? Japan’s GDP at the end of this year will be no higher than it was in 1992–17 lost years.

“After 17 years of bailouts and stimulus programs, the Japanese should be getting good at them,” write Bonner and Wiggin. “But it’s a little like a guy who’s getting good at suicide — if he’s so good at it, you’d think he’d be dead already.”

Government Keynesians want to stimulate the economy by pouring taxpayer and inflated money into their pet projects. What they would spend money for stimulus on is different than, say, what Tiger Woods would spend his stimulus money on. And you may have noticed that energy, healthcare, education, infrastructure, and environmental technology are where Keynesians want stimulus money spent on whether they are American Keynesians or the Japanese variety.

“Producing things that nobody wants and propping up malinvestments cannot possibly help any economy,” writes Powell.

This policy is equivalent to the old Keynesian depression nostrum of paying people to dig holes and fill them. Neither policy will revive the economy because neither forces businesses to realign their structures of production to match consumer demands.

And why don’t those low interest rates get things moving? “With distressed banks, reflation fails to induce another bank credit expansion,” Professor Jeffrey Herbener wrote in the Asian Wall Street Journal. “Keynesians have mistaken the impotency of the Bank of Japan to restart credit expansion in the 1990s as a liquidity trap. But the problem is not that interest rates are so low everyone expects them to rise and therefore hoards cash. Banks refuse to lend because of the overhang of bad debt. Any cash infusion is held as reserve against it. Businesses refuse to borrow because of their debt burden, built up to expand capacity during the boom, and their over-capacity resulting from their malinvestments.”

*********  End Quote ************************************************************


Topics: Economics | 1 Comment »

One Response to “An Economics Lesson For Obama From Japan”

Leave A Reply