The Keynesian Abenomics is Raising Prices in Japan

Posted by PITHOCRATES - April 14th, 2014

Week in Review

Money is a temporary storage of value.  We created money to make trade easier.  We once bartered.  We looked for people to trade with.  But trying to find someone with something you wanted (say, a bottle of wine) that wanted what you had (say olive oil) could take a lot of time.  Time that could be better spent making wine or olive oil.  So the longer it took to search to find someone to trade with the more it cost in lost wine and olive oil production.  Which is why we call this looking for people to trade goods with ‘search costs’.

Money changed that.  Winemakers could sell their wine for money.  And take that money to the supermarket and buy olive oil.  And the olive oil maker could do likewise.  Greatly increasing the efficiency of the market.  There is a very important point here.  Money facilitated trade between people who created value.  Creating something of value is key.  Because if people were just given money without producing anything of value they couldn’t trade that money for anything.  For if people didn’t create things of value to buy what good was that money?

Today, thanks to Keynesian economics, governments everywhere believe they can create economic activity with money.  And use their monetary powers to try and manipulate things in the economy to favor them.  And one of their favorite things to do is to devalue their money.  Make it worth less.  So governments that borrow a lot of money can repay that money later with devalued money.  Money that is worth less.  So they are in effect paying back less than they borrowed.  And governments love doing that.  Of course, people who loan money are none too keen with this.  Because they are getting less back than they loaned out originally.  And there is another reason why governments love to devalue their money.  Especially if they have a large export economy.

Before anyone can buy from another country they have to exchange their money first.  And the more money they get in exchange the more they can buy from the exporting country.  This is the same reason why you can enjoy a five-star vacation in a tropical resort in some foreign country for about $25.  I’m exaggerating here but the point is that if you vacation in a country with a very devalued currency your money will buy a lot there.  But the problem with making your exports cheap by devaluing your currency is that it has a down side.  For a country to buy imports they, too, first have to exchange their currency.  And when they exchange it for a much stronger currency it takes a lot more of it to buy those imports.  Which is why when you devalue your currency you raise prices.  Because it takes more of a devalued currency to buy things that a stronger currency can buy.  Something the good people in Japan are currently experiencing under Abenomics (see Japan Risks Public Souring on Abenomics as Prices Surge by Toru Fujioka and Masahiro Hidaka posted 4/14/2014 on Bloomberg).

Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales-tax bump.

Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5 percent, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of Japan’s economy for two years running in data compiled by Bloomberg…

“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position…”

Abe’s attack on deflation — spearheaded by unprecedented easing by the central bank — has helped weaken the yen by 23 percent against the dollar over the past year and a half, boosting the cost of imported goods and energy for Japanese companies.

Japan is an island nation with few raw materials.  They have to import a lot.  Including much of their energy.  Especially since shutting down their nuclear reactors.  Japan has a lot of manufacturing.  But that manufacturing needs raw materials.  And energy.  Which are more costly with a devalued yen.  Increasing their costs.  Which they, of course, have to pay for when they sell their products.  So their higher costs increase the prices their customers pay.  Leaving the people of Japan with less money to buy their other household goods that are also rising in price.  Which is why economies with high rates of inflation go into recession.  As the recession will correct those high prices.  With, of course, deflation.

Keynesians all think they can manipulate the market place to their favor by playing with monetary policy.  But they are losing sight of a fundamental concept in a free market economy.  Money doesn’t have value.  It only holds value temporarily.  It’s the things the factories produce that have value.  And whenever you make it more difficult (i.e., raise their costs by devaluing the currency) for them to create value they will create less value.  And the economy as a whole will suffer.

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Abenomics didn’t work because Keynesian Economics doesn’t Work

Posted by PITHOCRATES - March 16th, 2014

Week in Review

If President Obama and the Democrats had their way do you know what they would do?  All out Keynesian economics.  To the max.  Huge government stimulus upon huge government stimulus.  Keeping interest rates at or below zero so they can borrow as much as they’d like to pay for their deficit spending.  Or just printing the money to spend.  That’s what they’d love to do.  Because they don’t understand economics.  All they know is the politics of Keynesian economics.  Power.  It allows the government to spend far more than any other economic system.  And that lets them buy a lot of votes.

President Obama and the Democrats look at the Chinese with awe and reverence.  They would love to have the power the Chinese communists have.  So they could do whatever they wanted to do.  Just like the Chinese communists do.  And when Prime Minister Shinzo Abe revealed his three arrows of Abenomics the left was impressed.  Large-scale government spending.  Aggressive monetary easing (like all that quantitative easing Ben Bernanke was doing with the Federal Reserve).  And structural reforms.  Government just taking over the economy to fix it and correct all the failings of the free market.  This is what the Democrats want to do in the United States.  Because they are so conceited that only they are smart enough to fix the problems in the economy.  So how has this Keynesian assault worked in Japan?  Not so good (see Blow for Abenomics as Japan’s economy grows less than expected by Rebecca Clancy posted 3/10/2014 on The Telegraph).

Revised data from the government showed that gross domestic product growth was 0.2pc in the three months to December 31 and 1.5pc for 2013…

While the data still marked Japan’s best annual performance in three years, attention will now turn to the Bank of Japan’s monetary policy statement on Tuesday, as weakening growth before next month’s tax hike may push the central bank into a fresh batch of monetary easing measures.

“With Japanese data weaker than expected and their April consumption tax hike imminent, the state of the Japanese economy is cause for significant concern,” said Rebecca O’Keeffe, head of investment at stockbroker Interactive Investor…

Mr Abe swept into power in 2012 on a promise to catapult the Japanese economy out of a decades-long slump, but his policies have met with mixed success.

The weak data hit markets in Asia, with Japan’s Nikkei closing down 1pc at 15,120.14, while China’s Shanghai Composite plunged 2.9pc and the Hang Seng dropped 1.8pc…

While authorities blame the country’s holiday season for the weak results, they add to growing worries about the Chinese economy, with the latest surveys on its key manufacturing sector showing weakness.

Abenomics didn’t work.  Because Keynesian economics doesn’t work.  Government spending and artificially low interest rates just don’t create robust economic activity.  All they create are cronyism.  Malinvestments.  Asset bubbles.  And more painful and longer lasting recessions.  As history has shown.  Especially the deflationary spiral of Japan’s Lost Decade that they’re still trying to recover from.  And the Chinese may follow suit.  For they have nothing but exports.  And you cannot build robust economic activity on exports alone.  You need a thriving middle class.  Which China doesn’t have.

History has shown over and over never to vote for Keynesians.  For their policies never help the people.  They only help those in power.  And their crony friends.  Who get richer while the people get poorer.  The ruling Chinese communists are doing well but the majority of Chinese are still impoverished rural peasants living on subsistence farming.  And President Obama and his crony friends (especially those on Wall Street) have all been doing very well thanks to a booming stock market.  While median family income has fallen during his presidency.  Proving yet again the mistake it is to vote for a Keynesian.

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Abenomics appears to have Failed in Japan just as Keynesian Economics has Failed everywhere it has been Tried

Posted by PITHOCRATES - March 9th, 2014

Week in Review

The Keynesians were applauding Shinzō Abe’s economic plans for Japan.  To end the never-ending deflationary spiral they’ve been in since the late Nineties.  His Abenomics included all the things Keynesians love to do.  And want to do in the United States.  Expand the money supply through inflationary monetary policy.  Devalue the yen to make their exports cheaper.  Lower interest rates into negative territory.  Quantitative easing.  And lots of government spending.  The kinds of things that just makes a Keynesian’s heart go pitter pat.

They kicked off Abenomics in 2013.  And how are things about a year later?  Not good (see Japan’s deficit hits record as economic growth slows posted 3/9/2014 on BBC News Business).

Japan’s current account deficit widened to a record 1.5tn yen ($15bn; £8.7bn) in January, the largest since records began in 1985.

In further bad news, the country’s economic growth figures were also revised downwards…

The sluggish growth and growing deficit come just before a planned sales tax increase, scheduled to take effect in April.

They did weaken the yen.  Making it worth less than other currencies so those currencies could get more yen when they exchanged their currencies to buy those Japanese exports.  Of course, when Japanese exchanged their yen for those other currencies they got less of those other currencies in return.  Requiring more yen to buy those now more expensive imports.  Thus increasing their trade deficit.

Japan is an island with a lot of people.  They have to import a lot of their food, energy and natural resources as they have little on their island.  So the weaker yen just made everything more expensive in Japan.  Which, of course, lowered GDP.  As those higher prices reduced the amount of buying their consumers could do.

Japan’s greatest problem is her aging population.  And they have just about the oldest population in the world.  As the youth have slammed the brakes on having children.  So you have massive waves of people leaving the workforce the government is supporting in retirement.  And fewer people entering the workforce to pay the taxes that support those retirees.  Which, of course, forces higher tax rates on those remaining in the workforce.  Further reducing the amount of buying their consumers can do.  And no amount of Abenomics can change that.

Abenomics did not deliver what the Keynesians thought it would.  Because Keynesian economics (aka demand-side economics) just doesn’t work.  If it did Japan never would have had a Lost Decade to begin with.  For it was Keynesian economics that gave Japan that asset price bubble in the first place.  Which burst and deflated into the Lost Decade.

What Japan needs is a return to classical economic principles.  Focusing more on the supply side.  Lower tax rates and reduce regulation.  Let the market set interest rates.  Restore the policies that introduced ‘Made in Japan’ to the world.  They need to make their capitalism more laissez-faire.  If they do they can create the kind of economic activity that just might be able to support the generation who created the ‘Made in Japan’ label in their retirement.  But you must have robust economic activity.  So robust that lower tax rates can produce greater tax revenue.  The supply-side economics way.

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