President Obama and his Keynesian Policies are Working on a Lost Decade just like Japan’s

Posted by PITHOCRATES - May 19th, 2013

Week in Review

In the Eighties Japan Inc. was going strong.  The Japanese economy roared.  And the Nikkei soared.  The Japanese had more money than they knew what to do with it.  So they started buying U.S. assets.  People feared that Japan would one day own America.  And urged that we had to follow their lead before it was too late.  The American government should partner with business like in Japan.  So smart bureaucrats could maximize economic output.  Instead of leaving it to inefficient market forces.

But Japan Inc. was state capitalism at its worse.  Instead of letting the market determine the allocations of scarce resources that have alternate uses the government stepped in with their crony capitalist friends.  Leading to corruption.  And a lot of malinvestments.  Money invested poorly.  Causing great asset bubbles.  That burst in the Nineties.  Where Japan Inc. was replaced by the Lost Decade.  A decade or more of deflation.  To wring out all the inflation the government fueled with their artificially low interest rates that caused all of that malinvestment.  And those asset bubbles.  If you’re too young to have lived during this you can still see it in action.  This time in the United States (see The U.S. looks like Japan: Investors rejoice by Paul R. La Monica posted 5/16/2013 on CNNMoney).

The U.S. economy is still not close to being fully recovered from the Great Recession, but investors could give a mouse’s posterior about this sad fact…

…Consumer prices fell for the second straight month. The absence of runaway inflation is of course a good thing, especially when you consider that the Federal Reserve has pumped an inordinate amount of money into the system with its asset purchase programs. But if prices continue to dip, that’s a big problem. Deflation is much worse than mild inflation. Just ask Japan.

Ah yes, Japan! It has taken steps to combat deflation with a vengeance this year. The Bank of Japan’s stimulus, dubbed Abenomics in honor of the country’s prime minister, is like the Fed’s quantitative easing…on steroids.

There’s the rub. The longer that the U.S. stays in tepid growth mode — what I’ve been calling the “low and slow barbecue recovery” since 2010 — the comparisons to Japan will only increase. After all, the U.S. also has an aging population and a large government debt load. The Great Recession ended in June 2009 and here we are in May 2013 still with a lackluster recovery. So we’re almost halfway to our own Lost Decade…

The problem here is Keynesian economics.  It was Keynesian economics that got Japan into the mess they’re in by playing with interest rates to stimulate artificial economic activity.  But Keynesians are like drunks.  They think a little hair of the dog can cure their hangover.  So they binge again on artificially low interest rates to create more artificial economic activity.  Which will end the same way.  As it ended in the Nineties.  A long painful deflation to wring out all of that inflation they pumped into the economy.  Just as the Americans will go through.  Because Keynesians dominate their monetary policy, too.

Even though there are many smart people, including members of the Fed, who are worried that QE ∞ will eventually cause a huge inflation headache and create more nasty asset bubbles down the road, the market doesn’t expect the Fed to pull back on its easing anytime soon…

That’s why stocks could keep climbing. It doesn’t matter that the economy is not healthy enough to make most average consumers feel better. Wall Street only cares about the Fed.

This can’t last forever, of course. Sooner or later, the economy is either going to slow so much that we have to start worrying about another recession (and no amount of stimulus will help prevent a market pullback if that happens) or the economy will start showing signs of a legitimate, sustainable and robust recovery. In that latter case, the Fed will have no choice but to end QE and start raising interest rates.

But for now, at least, investors can enjoy the fact that the United States is basically morphing into Japan Lite. Who cares about the health of the economy as long as central banks keep those printing presses running 24/7/365? Joy.

The selling point of Keynesian economics was eliminating the recessionary side of the business cycle.  So it is interesting that some of our worse recessions have been in the era of Keynesian economics.  I mean, that’s what the New Deal was.  Keynesian.  And what did it give us?  The Great Depression.  Why?  Why are the recessions so painful in the era when they were supposed to be less painful?  Because all Keynesian economics does is to delay economic corrections.  By delaying the onset of recessions.  And because it delays the correction it allows a bubble to grow greater.  So when the correction comes prices have farther to fall.  Which makes a recovery in the Keynesian era more drawn out.  And more painful.  Unless you like your recessions to last a decade.  Or more.

So while Main Street America continues to suffer under President Obama’s Keynesian policies Wall Street is doing just fine.  As rich people always do when partnering with government.  Only Main Street suffers the fallout of their Lost Decades.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , ,

Wall Street is Doing Well because the Fed’s Inflationary Policies keep Raising Prices

Posted by PITHOCRATES - March 9th, 2013

Week in Review

Investors like rising stock prices.  They don’t like falling stock prices.  Which is why Wall Street likes inflation.  And fear deflation.  Even though the economy is still sluggish with more and more people dropping out of the labor market (which is why the unemployment rate fell) investors are bullish.  Because of the Federal Reserve and all of their quantitative easing.

The more the Fed increases the money supply the more inflation there will be.  Investors like that.  Because inflation increases prices.  Such as the prices of their stocks.  As well as gasoline and groceries.  Making the current economic times odd.  For the stock market recently reached a record high.  Even though the labor participation rate (see THE EMPLOYMENT SITUATION —FEBRUARY 2013, page 4) continues to fall.  It is now at 63.5%.  Which means 89,304,000 people are not in the labor force.  A record high.  But you wouldn’t know this by looking at the official unemployment rate.  Or the stock market (see Stocks And Inflation: The End Of An (Abnormal) Affair? by James Picerno posted 3/69/2013 on Seeking Alpha).

The positive correlation between the market’s inflation forecast and the stock prices appears a bit looser these days, but it’s premature to declare that the link has been broken…

Normally, rising/high inflation doesn’t inspire the bulls. But the last several years have been less than normal in terms of the macro backdrop. The crowd has remained worried about disinflation/deflation, which means that signs of higher inflation in the future have soothed anxious traders…

And why not?  For when have inflationary policies ever caused an asset bubble? That burst into a long and painful recession?  Except the housing bubble that brought about the 1990-91 recession.  The dot-com bubble that brought about the 2000-01 recession.  And that other housing bubble that brought about the 2007-09 recession.  AKA The Great Recession.  So there is no worry that these record highs in stock prices aren’t just another bubble.  Just waiting to burst.  Bringing on another deflationary recession.  I mean, what are the odds of that happening again?

Actually, the chances are pretty good that 2013 will have a very painful recession.  Because we don’t have any real economic growth.  These gains in the stock market aren’t because businesses are expanding and hiring.  Not with a falling labor participation rate.  No.  For all intents and purposes we are still in the 2007-09 recession.  Only we should probably call it the 2007-(end date to be determined) recession.  Because the president’s economic policies haven’t helped the economy yet.  And probably never will.

There’s no reason to believe that the fifth year will be any better than the previous four years.  In fact, it will probably be worse.  In fact one would almost get the impression that he is not trying to help the economy.  But, instead, trying to destroy the Republican Party.  So he can win the House of Representatives back in 2014.  So he can pass even more anti-business policies.  To transform the country into something it was never before.  Less prosperous than communist China.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , ,

The U.S. Economy entering the Lost Decade Phase like the Japanese in the Nineties?

Posted by PITHOCRATES - January 28th, 2012

Week in Review

If you listened to the 2012 State of the Union address you heard President Obama say that America was back.  The economy was growing again.  And businesses were hiring.  But if that were true the chairman of the Federal Reserve wouldn’t pledge to hold interest rates at zero for another year.  For that would indicate a sputtering economy that they’re trying to revive.  Not the rosy picture given at the State of the Union (see Bernanke Pledges to Keep Rates Low Thru 2014: A “Very Pessimistic” Outlook, Former Fed VP by Aaron Task, Daily Ticker, posted 1/25/2012 on Yahoo! Finance).

Keeping rates low until 2014 is “good policy [only] if you believe the recovery is going to be very weak and weak globally,” says Gerald O’Driscoll, former vice president and economic adviser at the Dallas Fed and currently a senior fellow at the Cato Institute. “If they really think they can project weak growth that far out, then they’re saying…the U.S. economy is becoming like the Japanese, no growth for long period of time. That’s very pessimistic.”

Yes, this is exactly like the Japanese.  The Keynesian critics of living within your means like to point to the Japanese bond market.  They have no problem selling their bonds. Yet their debt is about 200% of GDP.  About twice the US debt (at about 100% of GDP).  But this debt had consequences.

The Bank of Japan made money cheap to borrow in the Eighties.  And people did.  Stock and real estate prices swelled into a great bubble.  Bringing on inflation.  So the Bank of Japan tapped the brakes.  And raised interest rates.  Causing a lot of that debt to go bad.  Causing a banking crisis.  Which led to a series of bailouts for banks and businesses.  Sound familiar?  Think Subprime Mortgage Crisis.

The great Japanese asset bubble deflated during the Nineties.  The Lost Decade.  And the Japanese have tried everything within their monetary powers to stimulate their economy.  Even kept interest rates at zero.  Just like the Americans are doing now.  It didn’t work for the Japanese.  And there’s little reason to believe it will work for the United States.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , ,

A Liberal Opines on things Economic, Confirms why they Suck at Creating Jobs

Posted by PITHOCRATES - January 16th, 2011

Liberals don’t know Business or Jobs but they have their Big Keynesian Words

If you want to know why liberals are so bad at stimulating economic activity just read Paul Krugman’s Wages and Employment, Again (Wonkish) posted 1/16/2011 on The New York Times.  He pontificates with an erudite air of all-knowing condescension.  He’s smart.  And he wants to make sure you get this.  So he writes with big words and references big demand-side macroeconomic theories that he and his kind accept as undisputed fact.  Despite what the lessons of history say. 

Krugman is a Keynesian.  So, as a Keynesian, he knows nothing about business.  But, like a Keynesian, that doesn’t stop him from opining on the subject of business.

Here’s a fundamental truth (FT) about business.  FT 1:  If you make the cost of doing business high, you will reduce the amount of business a business does.  Here’s another.  FT 2:  If the people are NOT buying whatever they’re selling, this will also reduce the amount of business a business does.  A couple of key things a business needs here.  To have the cost of doing business kept low enough so they can sell at a price that makes them competitive in the market place.  And they need people to have jobs so they can buy their competitively priced goods or services they place into the market place.

Liberals never seem to get either of these points.

High Wages have never Stimulated Economic Activity

Keynesians believe if you give money to people that fixes everything.  When Krugman says:

…I’ve also argued a number of times that cutting wages now would probably make the slump worse, not better.

That’s Keynesian.  You cut wages and the people have less money spend.  So that’s why Keynesians are all about high wages.  Of course, they miss the other side of high wages.  High wages mean fewer jobs.  Because high wages limit the number of employees a business can hire and still sell at prices that are competitive in the market place.

High wages have never stimulated economic activity.  They just raise costs.  This let the Japanese take huge chunks of market share away from the Big Three.  And it’s bankrupting our big blue cities and states that are drowning in debt because of their public sector union contracts.  If Krugman was right, these cities would be booming in economic activity because of those fat public sector pay and benefits.  But they’re not.  The only thing those high wages are doing is bankrupting these cities and states.

Liberals never seem to get this point.  So they trade off economic activity for votes, blissfully unaware of the extent of economic damage they’re doing.  Or they’re aware and they just don’t care.

Easy Money begets Irrational Exuberance which begets Asset Bubbles which begets Recessions

Another favorite of the Keynesians is manipulating interest rates.

…a rise in the real money supply reduces interest rates, leading to a rise in demand.

Read ‘a rise in real money supply‘ as printing money.  The idea here is to make money cheap and plentiful so people will borrow it to buy things.  Like houses.  Like they did during Bill Clinton’s and George W Bush’s presidencies.  And, boy, did they.  Times were good.  Real good.  Only one problem.  Irrational exuberance.

Clinton and Bush thought they found the magical economic elixir.  Home ownership.  So they did everything in their power to extend homeownership.  Even to the people who couldn’t afford it.

Easy money.  Monetary policy that keeps money cheap and plentiful.  To entice people to borrow.  And they were.  Borrowing.  And buying houses.  So much so that they bid up the prices into a huge asset bubble.  Meanwhile, people who couldn’t afford to buy a house were buying houses, too.  The federal government pushed lenders to lend. Or face the consequences.  Be investigated for discriminatory lending.  Or, worse, suffer the public spectacle of having Jesse Jackson or an Al Sharpton publically calling them racist (a lot of the inner city poor were black).  So they came up with some creative ways to qualify unqualified people for mortgages.  We call them subprime mortgages.  And we know how those came back to bite us in the ass.

The problem with bubbles is that they burst.  And when they do, the life blows out of the economy like the air out of a popped balloon.  Deflationary spirals often follow.  And nasty, horrible and painfully long recessions.

Liberals never seem to get this point, either.  You’d think that they would as it has happened so often.

For Narcissists, it’s not the economy.  It’s their Egos, Stupid.

Krugman’s column really shows the problems with liberals.  They’re a bunch of narcissists.  Who love their superior minds.  They love to hear themselves talk.  And love to read what they write.  They write to impress.  And to stimulate themselves.  If you know what I mean.  Only those in his elite circle can understand what the hell he is writing about.  Not us.  The sloped-brow, knuckle-dragging, Neanderthals who didn’t go to the Ivy League schools.  We just work and live in the real world.  Raise our families.  And pay our taxes.

Liberals like to complicate things.  And to try to control the complex.  The economy will work fine on its own.  And when it does we experience some of the greatest economic expansions.   But when they tinker with their Ivy League knowledge, bad things typically happen.  Such as the subprime mortgage crisis.  The Great Recession.  Even the Great Depression.  All of which resulted from liberal tinkering.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Asset Bubbles and Deflationary Spirals in Japan, the United States and China

Posted by PITHOCRATES - December 25th, 2010

The Japanese Asset Bubble and their Lost Decade

During the eighties the Japanese government worked with Japanese business.  And the eighties in Japan were booming.  The Japanese went on an American buying spree.  They gobbled up American landmark buildings and business.  It was an economic Pearl Harbor.  Some people wringed their hands in distress, fearing the Japanese ascendancy.  Presidential candidates said we were fools for not following the Japanese model.

Easy money created excess liquidity.  Which created inflationary pressure on prices.  Real estate values soared.  And irrational exuberance bid up prices further, creating an asset bubble.  Times were good while they lasted.  But the bubble popped.  Real estate values tumbled.  And the Japanese suffered a deflationary spiral that would last a decade.  They call their 1990s the ‘lost decade’.  They still haven’t fully recovered.  And this was a direct consequence of government working with business.

The Subprime Mortgage Crisis and the Beginning of our Lost Decade

Totally ignoring the lessons of the Japanese, the Americans went down the same road.  Easy money created excess liquidity.  And like in Japan, this created inflationary pressure on prices.  And like the Japanese, real estate values soared.  Alan Greenspan warned us about our irrational exuberance.  But we didn’t listen.  We bid prices higher still.  Created the mother of all asset bubbles.  Times were good in the 1990s.  But the bubble popped.  As history has shown bubbles to do.  And real estate values tumbled.  But with a twist.

In America, government pressured bankers to approve mortgages for people who couldn’t qualify for a mortgage.  So bankers had to come up with some creative ways to make the unqualified qualified.  The weapon of choice was the subprime mortgage.  And everything worked as plan.  Until interest rates went up.  And then the whole deck of cards came crashing down. 

Fannie Mae and Freddie Mac (government sponsored enterprises) guaranteed those risky loans.  Then, to encourage bankers to make more of these risky loans, they bought them from the banks.  They chopped them up and created investment instruments.  We called them derivatives.  High yield (because of the ‘subprime’ in subprime mortgage).  And safe (because of the ‘mortgage’ in subprime mortgage).  So when interest rates rose and the unqualified couldn’t pay their mortgage payments anymore, we got the subprime mortgage crisis that reverberated throughout the world thanks to those derivatives.  All because government worked with business.

The Chinese are Working on an Asset Bubble of their Own

In the 2000s, it’s the Chinese that everyone fears.  Economically speaking.  (For now at least.)  Over the past decade or two, China has become more capitalistic than communist.  It’s not pure capitalism.  It’s more government partnering with business.  Sort of a throwback to mercantilism.  They have tariffs and monetary policies to protect their domestic industries.  And they subsidize their export industries in an export-driven economy.  And it’s been working.  So far.

It worked in Japan for awhile.  But we saw what happened there.  It worked in the United States for awhile.  But we saw what happened there.  Government partnering with business has, historically, been a train wreck.  Now China is trying her hand.  Will history repeat itself there?  Perhaps (see China Raises Interest Rates Again to Cool Inflation by Edward Wong posted 12/25/2010 on The New York Times).

China’s central bank announced on Saturday that it was raising interest rates for the second time in about two months in what appears to be a long-term campaign to suppress inflation as many ordinary Chinese express discontent with rising consumer prices.

Oh my.  Inflationary pressures are raising prices.  And to tamp those prices back down, they raised interest rates.  This is giving me a strange feeling of déjà vu.    

The Chinese economy has been awash in liquidity due to government stimulus money and generous lending by state banks. Chinese officials are now concerned about an overheated economy and the inflationary pressures that come with that.

Awash in liquidity?  Government stimulus money?  Generous state bank lending?  It feels like we went through this before.  Odd.  This feeling of déjà vu.

But investment in large capital-intensive projects has also been fueling the economic engine and driving up prices.

Capital-intensive projects?  That requires financing.  Lots of it.  Lots of bank loans.  Lots of liquidity.  And a lot of liability on bank’s balance sheets.  Shouldn’t be a problem.  As long as those are safe loans.  Backed by safe assets.  Just like in the United States.  Before we started putting people into houses who couldn’t afford to buy a house.

Officials have signaled throughout the month that moves will be taken to better control spending across the country. China announced on Dec. 3 that it would tighten monetary policy next year, shifting it from “relatively loose to prudent.” That was a clear sign that Chinese officials were intensely concerned about inflation.

The Chinese get a little Alan Greenspan.  They’re getting a little nervous about their irrational exuberance.

The property market in China has been booming. Rising property prices, along with the government stimulus money and loose bank lending, have spurred new developments across the country. Even long-term residents on the tropical southern island of Hainan have had to grapple with soaring real estate prices from outsiders coming in to buy up land.

Some analysts say this growth has resulted in a gargantuan bubble in the real estate market, while others argue that the capacity will be put to good use.

And for good reason.  Real estate bubbles aren’t good.  Things can get really ugly when they burst.  If you doubt me, ask the Japanese.  Or the Americans.

Until now, low wages have helped to hold down inflation and keep China’s export industry competitive. But those wages in the context of soaring real estate prices mean that migrant workers from the interior of China are becoming less tolerant of poor work conditions on the coasts, where many of China’s export manufacturing factories are located. Many workers are now choosing to stay closer to home in the interior provinces, and some companies are moving their manufacturing centers inland.

They took our jobs.  But now they don’t want them.  Those people who worked dirt cheap (by our standards, not theirs) have learned from the West.  They want more.  And, in a booming economy, they probably have choices out there.  It could add huge inflationary pressures on wages.  Or force a government crackdown on individual liberty.  Neither will probably be good for the economy.  Or those balance sheets.  At the banks financing those capital-intensive projects.

History Repeats – Ignore her at your Own Risk

One thing history shows us over and over is that free markets work.  Managed markets don’t.  Government partnering with business doesn’t work.  It didn’t work for the Japanese.  And it didn’t work for the United States.  When you intervene into market forces you disrupt market forces.  And often have unintended consequences.  Such as runaway inflation.  Asset bubbles.  And deflationary spirals.

The Japanese lost a decade.  The United States is looking like they will lose a decade.  Will the Chinese be next?  If history repeats, as history has a penchant for doing, they may be the next to lose a decade.  Of course, that could be a bit of a problem for us.  They hold a lot of our debt.  And if they want their money back to save themselves, guess what that will do to us.  Suffice it to say that the historians will then be able to write about the rise and fall of the United States.

History can be such a bitch when we ignore her.

www.PITHOCRATES.com

 

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , ,