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.