Posted by Michael A. Kamperman on April 15, 2010
The news reported by the Daily Telegraph is “A draft by 130 lawmakers from premier Yukio Hatoyama’s Democratic Party of Japan said the country needs a radical shift towards growth policies, calling for an inflation target above 2pc. The exchange rate should be steered to ¥120 against the dollar, from the current ¥90.” To achieve this lawmakers are directly calling on the Bank of Japan to monetize the debt to help steer the country out of persistent deflation. However, the Bank of Japan has cited the post World War II inflationary period as reason enough not to risk monetizing the debt. What the Bank of Japan is missing is the world today is awash with idle factories as almost everything except I-Pad’s and 3-D movies are over-supplied. After the war there were shortages of goods to meet massively pent up demand. There is simply no comparison between then and now. Yet the aged institutional memory of those who serve on the Bank of Japan is currently blocking the single best solution to Japan’s Two Lost Decades of debt-induced deflationary economic depression, namely massive quantitative easing known as printing money. The ruling coalition will win in time as they get the chance to replace the members of the Central Bank. This is the most important economic story in the world. The Democratic Party of Japan wants to encourage consumption. They do not believe a society that consumes less, saves more, produces more, and exports more is the key to prosperity. They have been traveling down that hard road for 20 years and now they want off.
Japan’s government debt is already over 200% of GDP, the highest in the developed world. There is really no way Japan can work hard and pay the debt back in a deflationary world. There is no other realistic way out but to print money. It will happen sooner or later. So why not let it happen sooner and save everyone several more years of unnecessary hardship?
In the U.S. we have only been in a debt induced deflationary depression for a little over two years, as opposed to 20 years in Japan. Hence our leaders have yet to move to the best solution to solve the economic crisis. Japan has moved and now looks poised to lead the way. In the U.S. our leaders are all excited about the false dawn of economic recovery. Japan’s ruling coalition has seen multiple false dawns and realizes they need to use drastic shock and awe to push the economy back into a long term growth mode. We will need to wait for an official government statistic double dip recession for our leaders to get their heads out of the sand. In Florida one in five mortgages are 90 days or more past due. One in five. The weekly jobless continue to signal no employment growth. And, the small business survey shows the most pessimism in 10 months as sales have simply not returned. Large companies have had access to the capital markets and have been able to take market share from smaller companies who have had a very difficult time accessing credit. In February consumer credit sank another $11 billion. We should not mistake an end to the Lehman Brothers financial panic and an Easter holiday a week sooner on the calendar as a sign of renewed economic prosperity. Unfortunately, no major political figure is calling for us to follow Japan’s lead. So like the Japanese we will sit and wait and wind up disappointed.
Posted by Michael A. Kamperman on August 28, 2009
Japan just reported unemployment in the country has risen to 5.7%. While this is low by our standards, it represents a post World War II high for the Japanese economy. Additionally, Japan also reported that their core CPI for the last 12 months was -2.2%, which is also a post World War II low for deflation. It is widely expected that the Japanese people will vote out the ruling Liberal Democratic Party and change leadership. The Democratic Party of Japan is led by Yukio Hatoyama, who will become the Prime Minister should his party win. Mr. Hatoyama is promising to not raise taxes, cut wasteful government spending, and reign in the bureaucracy. Basically, Mr. Hatoyama wants Japan to revitalize its consumers to generate internal demand. He envisions Japan’s economy being less dependent on exports to the U.S. This is great news for Japan and for the world economy if the Democratic Party wins and Mr. Hatoyama is successful in implementing his vision. Japan will have a much healthier economy if it strengthens internal demand and is less dependent on exports. The people of Japan are voting to make their economy function more like the economy functions in the U.S.
Ironically, the let them eat cake leadership in Washington is looking to go in the opposite direction. The Obama Administration has decided to adopt the economic strategies of the very soon to be thrown out Liberal Democratic Party. Rather than fix the broken credit markets so that consumers and business can have easier access to credit, President Obama’s economic team has chosen to have Zombie banks that make loans only to the most credit worthy borrowers while leaving most others left out in the cold. Furthermore, rather than looking to stimulate internal consumer demand as the key solution to our economic woes, the Obama team is preaching a strategy of higher savings for U.S. consumers and more of a reliance on an export driven economy. Never mind that the Obama economists have yet to answer the crucial question export to whom?
The Obama Administration needs to take their cue from the Democratic Party in Japan. Empower the consumer and focus on an economy primarily dependent on internal demand rather than exports. To do this the Obama administration will need to get serious about fixing the broken credit markets. Unemployment will keep rising and deflation will keep going lower until the average U.S. consumer can obtain a loan to buy a new car or a home. Right now if your credit score is under 700 it is very difficult to obtain a loan. Many people cannot obtain loans that still have jobs and have credit scores over 700. Over half of the country has a credit score under 690. How can we sell all of the houses we need to sell when we have a supply of single family homes for 70% of our population and only about 40% of our population can qualify for a mortgage right now? To demonstrate the fallacy of the Zombie bank policy now over 9% of prime mortgages are 30 days delinquent, which is way above the normal average of 2%. Prime mortgages are made to people with good credit scores above 700. But a bunch of these people have lost their jobs because we no longer build houses or cars for the average American. Japan has learned that the traditional U.S. economic model is the best one available. So why are we trying to abandon it to develop a production based export economy?
Posted by Michael A. Kamperman on August 26, 2009
The media has hyped the recent GDP data out of France, Germany, and Japan and has declared their economies emerged out of recession in the second quarter and returned to growth. In July which is the start of the third quarter, Japan’s exports fell 1.3% from June. Exports in July fell 36.5% from year earlier levels and imports fell 40.8%. Should we really declare an export dependent economy exporting less than 2/3 of what they exported the year before as out of recession and growing? How weak is domestic demand in Japan if imports have fallen 40.8%? In July exports from Japan to the U.S. fell 39.5%. Now how is the U.S. economy on the verge of recovery if our imports from Japan are down nearly 40%? The clear answer is both Japan and the U.S. are still mired in a deflationary depression. If a V-shaped recovery is on the way, then it must have started in August because it certainly didn’t start in July.
But what really caught my eye from Japan’s report was that Japanese exports to China dropped 26.5% from a year earlier. Many economists expect China to play a major part in pulling the world out of the global economic crisis. These analysts point to China’s 7.9% growth rate in the second quarter as a sign their stimulus plan is working. I’m sorry, but an economy that is truly growing 7.9% per year does not have a 26.5% drop in imports from one of its largest trading partners. While China is not doing as badly as Japan or the U.S., in many ways the numbers out of China are more disturbing. China initiated an aggressive stimulus plan that is the largest in the world as a percentage of GDP. China’s stimulus plan has been front-end loaded, whereas the dysfunctional U.S. plan has been back-end loaded. China has also opened the lending spigot. Whereas total lending from U.S. banks has been negative the last few months, China’s banks have increased their loans by over one trillion dollars already this year. Shouldn’t China be showing growing imports based on all of the stimulus spending and lending in their economy?
China calculates their GDP data based on production and not on final demand. As long as products are produced they are counted in the GDP data even if they are simply placed in a warehouse for storage. The drop in imports is indicative of declining demand in China. Most likely China has been over-producing relative to real demand to maintain its growth rates. If this is so, then China will not need to increase production when real demand returns. If demand doesn’t return, then China has placed itself in a position whereby it will need to sharply curtail production. Perhaps the lack or internal demand in China is the reason China’s electricity consumption is down. It also explains the reason the Chinese economy is now experiencing deflation. In the Great Depression there was a sharp leg down in the economy, followed by a temporary flattening period, followed by a second sharp leg down in the economy. Another leg down in the global economy could originate with a loss of faith that China can actually pull itself out of the global deflationary depression, no less the rest of us.
