Mar 07, 2013 Michael 'Mish' Shedlock, Global Economic Trends Analysis Markets Comments OffPrinter-friendly Version | Email This Article
by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis
Some people are in favor of theft and fraud as long as it’s not deceitful. Financial Times columnist Martin Wolf is one of those people.
Let’s take a look some of Wolf’s ideas to “save” Japan with a campaign of forced inflation as presented in “Risky Task of Relaunching Japan“.
Here are some snips by Wolf followed by my immediate rebuttal.
Wolf: The question is whether inflation can be achieved and managed.
Mish: There is no question a policy of inflation for Japan is seriously misguided. If maintained, the policy will blow up in a spectacular currency crisis.
Wolf: According to economic advisers Smithers & Co net debt of non-financial companies has fallen from 150 per cent of equity in 1995 to 30 per cent. But government net debt has jumped from 29 per cent of gross domestic product at the end of 1996 to 135 per cent at the end of 2012. These facts have deep implications. First, ending deflation is going to be far harder than it would have been in the late 1990s.
Mish: The moral of the story is how futile (and how ridiculous) it was for Japan to try to “beat deflation”. Japan was once the world’s largest creditor. Japan now has debt approaching 250% of GDP, accumulated in ridiculous attempt to defeat deflation.
Wolf: Second, it would be helpful if higher inflation also made real interest rates negative, which would encourage people to spend.
Mish: Wolf implies “saving is bad” and spending is good. The idea is nonsensical. Savings allow banks to lend to credit-worthy customers without the need to inflate money supply. There can never be too much saving.
Wolf: Third, negative real rates would also redistribute wealth from the state’s creditors towards future taxpayers.
Mish: Exactly why should governments or central banks be in charge of redistributing anything? It is certainly not taxpayers who benefit from currency wrecking schemes, but rather those with first access to money, the banks and the already wealthy.
I offer conclusive evidence in Top 1% Received 121% of Income Gains During the Recovery, Bottom 99% Lose .4%; How, Why, Solutions.
Also see my follow-up article Reader Asks Me to Prove “Inflation Benefits the Wealthy” (At the Expense of Everyone Else).
Wolf: Such negative real rates can be achieved either by making inflation higher than expected or by capping interest rates. It is not, in fact, clear whether the Japanese authorities want to create strongly negative real rates of interest. But they should, even though this would also create the risk of a political backlash.
Mish: Once again, policies of deliberate inflation destroy those on fixed income (and much of Japan’s elderly are on fixed income), for the benefit of banks and those with first access to money. Quite frankly this is theft. There is no better word than “theft” to describe the deliberate destruction of taxpayer savings. For further discussion, please see Hello Ben Bernanke, Meet “Stephanie”.
Wolf: How should this be done and how transparently? The BoJ could insist that it is aiming at 2 per cent inflation, but follow policies likely to bring higher inflation than this. That would be risky deceit.
Mish: Wolf obviously believes that greater than 2% theft is OK as long as it is not accompanied with deceit.
Wolf: The current price level is 30 per cent below where it would have been if annual inflation had been 2 per cent since 1997.
Mish: That sounds like tremendous news to me. Who in the US would not like to see gasoline prices at 30% lower? Food prices 30% lower? Education prices 30% lower?
For a look at “hockey stick inflation” please consider Is Inflation the Legacy of the Federal Reserve?
Wolf: If the BoJ sought to return to the level of nominal GDP implied by 3 per cent annual growth from 1997, it would be committing itself to annual increase of close to 9 per cent a year over the next decade. That could surely reduce the real burden of debt!
Mish: Wolf is disingenuous. The real burden of debt is a function of real interest rates and real growth not nominal GDP growth. Should Japan succeed in causing a currency crisis (and it may do just that if it follows Wolf’s nonsensical prescription, who knows where interest rates will be? Even if Japan did successfully reduce its debt burden, it would be at taxpayer expense. And why is there a debt burden in the first place? The answer is economic imbeciles fought deflation with a combination of Keynesian and Monetarist ideas over the course of decades, and none of it worked.
Wolf: At the limit, Japan might use “helicopter money”, as discussed in my column of 12 February. If the BoJ uses fiat money it does not wish to withdraw, it will also have to impose explicit reserve requirements on commercial banks.
Mish: Wolf’s article The case for helicopter money starts off with a preposterous straw man idea “I fail to see any moral force to the idea that fiat money should only promote private spending“. In reality, there is nothing moral about using fiat money to promote any spending, ever. By its very nature, fiat money, created out of thin air, is immoral.
Wolf: The traditional view at the BoJ has been that monetary policy cannot raise inflation. This shows a surprising lack of imagination. In principle, the BoJ can use its fiat money to buy everything in the world, at any price it wanted. This would certainly lower the purchasing power of the yen.
Mish: Buying anything at any price is purposeful fraud to the benefit of those who were overpaid. And because it’s blatant and purposeful fraud, Wolf displays a surprising abundance of over-imagination. There are indeed limits on what central banks can do. They may step over the line by a bit, but not to the absurd heights Wolf suggests they easily can.
Wolf: The policy shift must be both credible and credibly contained.
Mish: Wolf obviously has learned nothing from central planning efforts in Russia, the housing bubble in the US, or Japan’s multi-decade attempt to destroy savers in Japan. What Wolf seeks is a set of central planners who will be wise enough at implementing what is tantamount to a stupid policy. If the central planners were that wise, they would not attempt something so ludicrous in the first place.
Wolf: One can envisage two big and clearly interrelated dangers. First, the new approach might be seen as a deliberate attempt at beggar-my-neighbour policies and would, as a result, cause dangerous retaliation. Second, it might stimulate flight from the holders of yen and so a currency collapse and soaring inflation.
Mish: Those are the first and only ideas Wolf presented in his article that make complete sense. Of course he goes on to ignore the ideas.
Wolf: Maybe, working to a 2 per cent inflation target will deliver what is needed. But I suspect that a more radical target, for levels of prices or nominal GDP, may be needed, at least for a while. The new team at the BoJ will have to avoid doing too little, even though it risks ending up doing too much. It will need much judgment and some luck. The world should wish it well.
Mish: Heaven forbid Japan does too little. My gosh, just look at the results. Why Japan actually has some semblance of price stability! Who wants that? Obviously not Wolf who suspects that “a more radical target may be needed”.
Wolf concludes with “Japan will need much judgment and some luck“.
If Japan had any judgment it certainly would not be doing what Wolf suggests. So yes, Japan will need “some luck” (but a miracle is more like it).
Wolf is willing to let Japan risk “doing too much” even though it might cause serious inflation, destroy the Yen, risk a political backlash, or cause “dangerous retaliation to beggar-my-neighbour policies”.
And he admits he does not know if a more radical target is needed! (which of course it isn’t).
I will be polite. Wolf is nuts.
Mike “Mish” Shedlock
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