Monday, January 14, 2013

Japan Steps in It

What do you know? Japan now is out of Paul Krugman's doghouse, and all it took was some inflation. Writes Krugman:
For three years economic policy throughout the advanced world has been paralyzed, despite high unemployment, by a dismal orthodoxy. Every suggestion of action to create jobs has been shot down with warnings of dire consequences. If we spend more, the Very Serious People say, the bond markets will punish us. If we print more money, inflation will soar. Nothing should be done because nothing can be done, except ever harsher austerity, which will someday, somehow, be rewarded.

But now it seems that one major nation is breaking ranks — and that nation is, of all places, Japan.  

Even though Japan's massive Keynesian spending plan in the 1990s did not prevent the "lost decade," nonetheless it seems that the Japanese are ready for their own version of Phase II. (True to form, Krugman claims that Japan's trouble was that it did not build enough roads and bridges to nowhere to have a sustained recovery.)

I'll let Krugman go on with his newest version of the magic of inflation, but I would like to share a great article on the Japanese experience, written by Doug French. Japan, says French, engaged in massive amounts of malinvestment during the 1980s, but the government did everything it could to keep the necessary liquidations from happening:
Between 1992 and 1995, the Japanese government tried six stimulus plans totaling 65.5 trillion yen and they even cut tax rates in 1994. They tried cutting taxes again in 1998, but government spending was never cut. Also in 1998, another stimulus package of 16.7 trillion yen was rolled out nearly half of which was for public-works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year an ¥18 trillion stimulus was tried, and, in October of 2000, another stimulus for 11 trillion was announced. As economist Ben Powell points out, "Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession," with Japan's nominal GDP growth rate below zero for most of the five years after 1997.
 That, folks, means a lot of bridges to nowhere. Unfortunately for Japan, when this latest experiment with inflation and new government spending provides results similar to what happened before, Krugman will claim that the problems was a lack of spending and inflation. I doubt seriously that the Inflation Fairy will grant Japan or Krugman their wishes: a booming economy.

42 comments:

Jonathan M.F. Catalán said...

I think the Japan story is largely indisputable, because it fits even with the narrative provided in Richard Koo's The Holy Grail of Macroeconomics. Koo's story depends on a large devaluation of asset prices, but essentially it's about maintaining a moribund industry paying back its debts, while nominal expenditure is maintained through fiscal policy. When I suggest that Doug French's story fits Koo's, I mean that French prefers outright liquidation, but if the Austrians are right then what dragged out the recession was the lack of liquidation and on-and-off fiscal stimulus packages.

William L. Anderson said...

Good point, Jonathan. Excellent comment.

Dnero said...

Austrians see the economy as the product of voluntary human choices. P Krugman sees it as , Quote ".. a social system, created by and for people."

heckpati 16 said...

Austrians see the economy as the product of voluntary human choices. P Krugman sees it as , Quote ".. a social system, created by and for people."

Lord Keynes said...

"Even though Japan's massive Keynesian spending plan in the 1990s did not prevent the "lost decade,"

Japan's fiscal policy in the 1990s did not involve "massive" Keynesian spending plans.

Your ignorance of facts is a credit to the tired Austrianism you peddle.

In reality, Japan had some mild to moderate Keynesian stimulus from about 1993 to 1997 (the actual fiscal impact of the early ones is grossly exaggerated). And the result was mild to moderate growth from 1993-1996. Japan was not in recession from 1993-1997, but had a serious deleveraging and banking crisis, and debt deflation problems.

But then from 1997 Prime Minister Ryutaro Hashimoto imposed sharp fiscal contraction and plunged the country into recession.

In contrast to Austrian fables, the Japanese press knows what happened:

"Japan's first experiment in austerity policies began under Prime Minister Ryutaro Hashimoto (1996-98). Severe spending cuts were seen as needed to rein in budget deficits caused by previous efforts to recover from the 1991 Bubble collapse. Recession followed quickly. Tax revenues collapsed. The national debt increased.

Under Prime Ministers Keizo Obuchi (1998-2000) and then Yoshiro Mori (2000-2001, Japan returned to fiscal expansion policies and the economy recovered rapidly,"

http://www.japantimes.co.jp/text/eo20120815gc.html

A major consequence of the recession induced by fiscal contraction was that the Japanese budget deficit soared by 68% as tax revenue collapsed. This must be counted as another fundamental reason why Japanese public debt soared so badly.

When fiscal expansion was applied again on a large enough scale in 1998 the recession ended and growth resumed.

Jonathan M.F. Catalán says that "if the Austrians are right then what dragged out the recession was the lack of liquidation and on-and-off fiscal stimulus packages".

Although he is certainly right that there were "on-and-off fiscal stimulus packages", the Austrian solution of liquidationism would have induced utter economic collapse like the Great Depression, far worse than anything that actually happened.

See here:
http://socialdemocracy21stcentury.blogspot.com/2012/05/richard-koo-on-wests-lost-decade.html

Lord Keynes said...

"Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession," with Japan's nominal GDP growth rate below zero for most of the five years after 1997."

Two issues here:
(1) Japan's fiscal stimulus did not fail. When mild to moderate stimulus was tried 1993 to 1995, there was mild to moderate real GDP growth.

When austerity was imposed in 1997 the economy plunged back into recession. When stimulus was applied again from 1998, the economy recovered.

The excessive private debt and deleveraging and debt deflationary problems checked private sector investment and consumption spending in the 1990s without a doubt, but the government's fiscal expansion is what stopped a depression.

More could have been by the government done to fix the banks and clear the private debt, but that is a quite separate issue from the effectiveness of the stimulus programs.

This is all quite clear in the real GDP data:

Year | Real GDP* | Growth
1993 | 2425642
1994 | 2450521 | 1.02%
1995 | 2487838 | 1.52%
1996 | 2574912 | 3.49%
1997 | 2619694 | 1.73%
1998 | 2592327 | -1.04
1999 | 2609742 | 0.67%
2000 | 2669450 | 2.28%
2001 | 2624523 | -1.68

*millions of Geary-Khamis dollars.

(2) French says that "Japan's nominal GDP growth rate [sc. was] below zero for most of the five years after 1997".

That comment just stinks of utter stupidity.

Why does he cite the nominal growth rate??

Everyone knows that the real GDP growth rate is what is needed to look at real output growth.

Japan had real growth in 1999 and 2000, and plunged back into recession in 2001 because of the global recession that radiated out from the US in that same year, and because of Junichiro Koizumi's (2001-2006) return to fiscal contraction.

Bob Roddis said...

Richard Koo’s approach is very similar to that of Steve Keen. There is a disease rotting modern neoliberal capitalism. Many countries are stricken with debt deflation, caused by excessive private debt and the collapse of asset bubbles in real estate from 2007–2009, which led to severe recessions in many nations (or what Koo calls “balance sheet recessions”). The theory required to explain what is afflicting Western economies is Hyman Minsky’s “financial instability hypothesis.”

Minsky’s theory is simply the Austrian concept of economic miscalculation stripped (without explanation or acknowledgement) of the fact that economic miscalculation will invariably result from our current banking system which creates loans out of nothing. This must invariably distort the pricing process. Calling that system “capitalism” is intentionally misleading.

Also, Steve Keen urges a much more radical solution than Koo to the crisis of debt deflation: private debt write offs

Yes. The solution is liquidation.

Bob Roddis said...

How can anyone possibly call a process "austerity" and/or blame it on Austrians when the process results in a massive deficit due to low tax collections?

Lord Keynes said...

(1) What Steve Keen has in mind is very different from the insanity of Austrian liquidationism.

Keen's "QE for debtors" and restructuring or writing off debt that cannot be paid while protecting the financial system is not the Austrian "liquidationism" that would leave the financial system in collapse.

(2) Minsky’s theory is very different from ABCT.

The classic ABCT does not posit the collapse of debt-fulled unsustainable asset bubbles as the fundamental cause of business cycles. Nor does it deal with financial crises or debt deflation. In fact, it is laughably ignorant of those processes.

(3) No one blamed real world austerity on Austrians. It is mainstream neoclassical economics that is to blame for that.

Austrians are - and remain - fringe figures whose policy proposals are rightly rejected by policy makers.

Dinero said...

-Rob

"Banking system which creates loans out of nothing"

Banks create credit -

“There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan. The banker is not giving something for nothing.”

- Henry Hazlitt

Dinero said...

Typo corresction -

Banks don't create credit

Bob Roddis said...

(2) Minsky’s theory is very different from ABCT.

The classic ABCT does not posit the collapse of debt-fulled unsustainable asset bubbles as the fundamental cause of business cycles. Nor does it deal with financial crises or debt deflation. In fact, it is laughably ignorant of those processes.


The "classic" ABCT dealt with unsustainable lines of production. As I've informed you 75 times, the basic Austrian concept of economic calculation can be and is applied to every conceivable economic situation. The "classic" ABCT is but one example of the application of that concept. The "socialist calculation problem" is another.

Price distortions induced by funny money loans, or FRB loans will tend to cause more problems in more complex and longer term projects. It's the same as using a bad compass. If you go a mile from your campsite with a bad compass, it's not that hard to find your way home. If you go on a two month trek with a bad compass, you are probably up sh**'s creek. These concepts are not that complicated but must nevertheless be suppressed and ignored by you and all the other Keynesians.

Further, there were no consumer credit cards in 1935 and no home equity loans in a sea of housing bubble inflation caused by funny money loans. Those loans induced the misleading prices that lead to too much private debt and asset bubbles. That is completely consistent with BASIC AUSTRIAN CONCEPTS.

The basic Austrian concept is that unadulterated prices are the prime information that guides civilization and are contained, along with knowledge or personal circumstances, in the individual brains of the vast populace. Elite interference in the form of Keynesian policy distorts those prices and the essential information system.

The "Minsky theory" has things bass-ackwards. The misleading distortions do not arise from "capitalism" and do not need an elite response to cure them. The distortions arise from the elite interference itself. Like all Keynesians, the Austrian analysis is never ever even considered. It is just ignored, suppressed and/or misrepresented.

If you ever engaged those basic Austrian concepts, your preposterous and dishonest Keynesian hoax would be finished for good.

I've been saying this since before Joseph Salerno wrote this:

http://mises.org/journals/qjae/pdf/qjae15_1_1.pdf

Bob Roddis said...

We have the very same "debate" with the dishonest LK every few weeks. He learns nothing. On 2/8/12, JCat said to LK:

[B]ecause in all of your responses you focused entirely on the business cycle -- even though I told you from the very beginning that the business cycle is only one small facet of economic calculation (or, more accurately, miscalculation).

http://www.economicthought.net/blog/?p=594#comment-608997214

Bala said...

LK,

"The excessive private debt and deleveraging and debt deflationary problems"

which were both caused by the prior credit expansion and inflation

"checked private sector investment and consumption spending in the 1990s without a doubt,"

compared to the wild spending of the previous period, supported as that was by crazy credit expansion and inflation

" but the government's fiscal expansion is what stopped a depression."

that would have been nothing more than a liquidation of the malinvestments of the past, thus preventing the necessary correction for the insanity caused by the crazy credit expansion and inflation that caused the depression in the first place.

There!! It's corrected!!!!!

Tel said...

The classic ABCT does not posit the collapse of debt-fulled unsustainable asset bubbles as the fundamental cause of business cycles. Nor does it deal with financial crises or debt deflation. In fact, it is laughably ignorant of those processes.

Well you can't have debt deflation without a great pile of debt to begin with. A cycle, by the nature of being a cycle, must first pump up, and then deflate back down again, before pumping again. So Minsky’s debt deflation is at most half a cycle.

The ABCT explains that holding interest rates too low for too long is the most common way to inflate the debt bubble. It isn't necessarily the only way for the process to happen, but it is what we see most often.

The fundamental outcome is that capital assets become wrongly-priced and generally this is caused by business projects that looked like a good idea at the time but turned out to be unworkable. I'm not talking about just one bad business venture (which could happen any time) but a large and correlated set of bad ventures. The most obvious common factor being the central bank interest rates.

So now you have this great pile of capital assets that people have paid a lot of money for, and are determined to see a return on -- but the return simply isn't going to happen. In banking terms you have bad debts on your hands. That is to say, money has been loaned to someone who cannot pay it back. Or to put it yet another way, a promise has been made and the promise cannot be fulfilled. The word "credit" comes from the same root as "credulity".

The only way back to sanity is to revalue the assets, which almost always means devalue the assets (but actually, they generally aren't all bad, so devaluing some assets will inevitably allow the genuinely valuable assets to shine). That's where the debt deflation comes in -- cleaning up the bad debts. All bad debts do eventually get cleaned up one way or another, it just comes down to how much collateral damage we get in the process.

Tel said...

Dinero: Banks don't create credit.

Well as you point out, the credit in principle is there to begin with. Banks act as a facilitator, or broker, to help connect people who want to save with people who want to invest. However, there's a trick of course... banks dishonestly represent the position.

If the saver buys common stock in a company, the saver knows this is a risk and the company might go broke. However, if the saver buts money in a bank, they are told there is no risk and the money is at call, but the bank then lends the money to some sort of venture, and ultimately there is always a risk, and the money is not really at call. That's the "trick" of banking, and it allows more credit to be created, than what a cautious and well informed saver would normally allow.

More credit sounds like a good thing, but creating money does not create wealth, so the extra credit merely acts as a wealth transfer mechanism via Cantillon effects.

Government steps in on the side of the bankers, because government finds Cantillon effects and money printing to be useful for buying votes. This does not in any way remove the risk of bad debts, it merely dumps it onto someone else, either the taxpayer, or the person who finds their wages do not keep up with inflation.

The original manifestation of debt deflation was a good old fashioned bank run. The savers ended up making a loss when the bank was not able to make good on what it had promised. These days we are told than bank runs are impossible, so we have long drawn out depressions where everyone tries not to be the sucker carrying the bag. Still we face the same problem: there are bad debts in the system and they need to be cleaned up.

Steve Keen's proposal essentially makes the creditor carry the loss. Most forms of liquidation (including via inflation) end up hurting the creditor, so Steve is merely being more upfront about it.

Lord Keynes said...

"More credit sounds like a good thing, but creating money does not create wealth, so the extra credit merely acts as a wealth transfer mechanism via Cantillon effects."

That is patent nonsense, given that credit allows capital goods investment and high real output and employment.

Only if we were to live in a world with no idle resources, no unemployment and no goods available via international trade would this argument work.

We do not; and your argument is worthless.

As for Cantillon effects, any private sector credit money creation or capital account inflows also induce these.

Cantillon effects do not cripple economies nor do they have the significance Austrians think they do.

You have also misunderstood Steve Keen's "QE for debtors".

In fact, that plan would help debtors and protect creditors from loss.

Dinero said...

There is always credit available if borrowers want it.The borrowers sentiment determines the amount of credit outsatanding. Commercial banks can re-finance from the central bank at any time.

The amount of goods in the economy is not fixed. Entrepreneurial borrowing creates more.

Anthony Lima said...

At least the GDP growth recovered with stimulus application!

Anthony Lima said...

Really? The Japanese economy would have fallen into the deepest depression since the Great Depression just because of a lack of what you even term as inadequate stimulus?

Dinero said...

As the GDP measure includes government spending is not a tautology that it rises when government spends

Dennis said...

"....credit allows capital goods investment and high real output and employment." What do you mean by "credit"? Central bank "credit" which creates phony capital out of thin air? Phony capital will only create phony investments, which collapse once the actors figure out that the wealth needed to sustain the investments doesn't actually exist.

Real credit is created by a prior act of saving; i.e. of foregoing current consumption for the sake of future investment. Central bank pump priming, with it's regime of phony interest rates, discourages the very saving that is necessary to create credit in the first place.

Dinero said...

Financial intitutions don't need savers in oreder to be able to issue Cedit.
Credit card companies don't have any savers do they.
Commercial banks can re-finance from the central bank at any time. In the 18th centuy commercial banks didn't require the Central Bank to issue credit- they did it themselves.
Shops can issue credit its not unique characteristic of Banks.
The money will be there to repay the credit as it was put into the economy by the original act of spending of the loan.

Dinero said...

Correction - 19th century

Tel said...

LK: Only if we were to live in a world with no idle resources, no unemployment and no goods available via international trade would this argument work.

How do you measure those idle resources? Should we all go to you for instruction on which resources are idle and which are not? Is there some wise old man somewhere in the civil service who checks these things?

The concept that a Cantillon effect can sometimes happen and sometimes not happen is laughable.

Let's suppose some investor wants to build a factory and this requires one million bricks. The bricks must come from somewhere, someone has to make those. You think there is this great pile of bricks just sitting there already, waiting idle for someone to start building, but what actually happens is physical resources and commodities go one sale continuously to the highest bidder.

What the credit does is allow our factory builder to outbid everyone else, so the same brick that went into the factory wall, did not go into any other project. Creating credit merely allows the diversion of resources, it does not create wealth.

The physical universe never allows credit, you cannot borrow a bicycle out of the vacuum and then ride it to work, then return it later. You can only borrow a bicycle from another human who already has a bicycle.

In practice, it is worse than that, because government invariably favours the politically connected, so available credit is not equally distributed amongst all comers.

Tel said...

Dinero: Shops can issue credit its not unique characteristic of Banks.

Shops can issue credit, against their existing material stock of goods, by selling the goods with a delayed payment. They cannot issue more credit than they have goods, so the total credit is constrained. This is very important, because banks are not constrained in this way. The backstop for shop credit is physical material goods.

More than that, with a shop issuing credit, it is very well understood that the shop is taking onboard the risk of non-payment. In comparison, the bank actually takes risks on behalf of the depositors, but tells the depositors that there is no risk because the central bank covers it. In reality there is no backstop -- central banks cannot print material wealth.

Dinero said...

- Tel

In the case of bricks prices are not likely to be inflated by demand as there is competition between brick producers, unless brick production is uncharacteristically moribund.

Dinero said...

The shop keepers credit issue is not constrained by goods as the goods don't have a price untill the transaction is made, and that price will include the demand that the credit enables. The same as bank credit. The bank is an intemediary between seller and buyer.

Dinero said...

As for central banks debasing currency by papering over defaults, well I don't think they do that. Yes they provide bridging loans to help liquidity problems but in the case of an actual insolvancy then that is that.

Bearings

Lehmans

Northern Rock

Bob Roddis said...

Lord Keynes is apparently desperately seeking to be declared King of the Cement Heads. People buy more and more expensive housing during a housing boom because they believe that the eventual price increase in those houses will far exceed their debt in a few years and the huge resale price will make the purchase of the house better than cost free. This does not violate "the law of demand". Of course, the pricing of the real estate is distorted by Keynesian fiat funny money dilution, something LK does not and/or will not understand.

LK pontificates:

[H]ow do speculative bubbles ever emerge and develop in economies? If the price of houses is rising sharply, the law of demand tells us that demand should fall. People will substitute some other good for expensive houses. But that is not what happens during speculative bubbles: the demand for houses increases, and increases sharply, even as prices soar. In fact, the rising prices are clearly a causal factor in the increased demand, because the increase in value, and the desire make money, is what attracts people.

http://socialdemocracy21stcentury.blogspot.com/2013/01/is-law-of-demand-really-universal.html

Tel said...

In the case of bricks prices are not likely to be inflated by demand...

Bricks embody energy, so does lumber or any heavy building material because of transport and processing.

So you are telling me the supply curve is horizontal in the energy markets?

Tel said...

The shop keepers credit issue is not constrained by goods as the goods don't have a price untill the transaction is made...

Sure it's not strictly constrained to a number, but the buyer and the seller are still going to engage in some bargaining and for the most part there's a limit to how much extra someone will pay for the benefit of credit as opposed to just paying cash.

At any rate, if some sucker pays ten times the going rate for an item on credit, the money still can't enter general circulation, because there was no actual money. The retailer still has to sit and wait to get paid, and the mark still has to go earn the money to pay for the overprices goods. Late payment offers some elasticity in the whole monetary structure, but the banks can loop the same money round and round again, because they are never encumbered by dealing with real goods.

Lord Keynes said...

Tel@January 15, 2013 at 5:07 PM

"Let's suppose some investor wants to build a factory and this requires one million bricks. The bricks must come from somewhere, someone has to make those. You think there is this great pile of bricks just sitting there already, waiting idle for someone to start building"

Correct. We call them business inventories:

http://www.photostocksource.com/enlarge-160307031-piles-of-brick-inventory-trapeang-veng-kampong-thom-cambodia.php

And secondly, commodities like bricks are not generally auctioned off. They lie in stocks and are sold to the person who buys them.

Bala said...

Bob,

Thanks for the LK lead. This part

"If the price of houses is rising sharply, the law of demand tells us that demand should fall."

was especially hilarious. That ignoramus is worth it just for the laughs.

Tel said...

LK, you are trying to claim that a small pile of handmade bricks in Cambodia of all places (photo from some random year, without context) somehow represents an argument? You don't know whether they are stockpiling inventory or filling back orders there, or just operating under instructions from central planning.

Besides that, the existence of warehouses and stores does not magically cause the process of supply and demand to cease operation. Inventory exists only for the purpose of load levelling -- so if a large order comes at short notice, the business can fill the order, rather than turning a customer away. Business has incentive to keep their inventory at the smallest size that still fills orders, because storing excess inventory costs money.

If you had ever had even brief exposure to how real world business operates you would understand this.

If you believe that commodity prices are fixed irrespective of demand, maybe you want to explain why lumber prices dropped off rapidly when the housing industry ground to a halt in 2009 and then lumber prices came back up in 2013 as the building industry has started moving again?

Tel said...

There's your documented Cantillon effect by the way:

The rising cost of tuition has been largely blamed on the federal and state governments because they subsidize student loans. This has allowed educational institutions from exorbitantly increasing tuition costs because students have access to such large sums of money from the taxpayers.

Vice President Joe Biden agreed that the federal government is to blame for skyrocketing tuition costs, but said in the same breath that Washington will still continue to offer student aid – since 1978, the cost of college tuition in the U.S. has soared by 900 percent.



http://economiccollapsenews.com/2013/01/16/student-loan-delinquency-rate-now-higher-than-all-other-consumer-loans/

Dinero said...



Tel -
Demand doesn't increase price when there is ample suppliers- But I concir with your point that what consitutes an idle resource is not defined by LK.

Dinero said...

correction

-ample potential suppliers

Dinero said...

more potential credit rather than actual customers doesn't meen more actual bricks used

Tel said...

correction -ample potential suppliers

What makes the difference between a potential supplier and an actual supplier? Well, as the price rises, more suppliers step up to the plate, hence an upward sloping supply curve.

I think you guys are going to search hard to find a horizontal supply curve. The only one I can think of is software, music, movies, etc (once you have produced your first DVD, each extra copy is very cheap after that). Even with those things, they start discounting pretty quickly after they sense the market has hit saturation. A movie will be released in the cinema and then go to DVD when cinema sales drop off. It is bombs at the cinema it goes to DVD real quick.

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