Abenomics is riddled with inconsistencies. He wants the world’s biggest bond market to sit still while he tells them they are going to lose money year-after-year (if his inflation goals are met). He wants to spark a renaissance by lowering the JPY and creating inflation but he doesn’t want real wages to drop. Of course, the CNBC anchor’s ironic perspective that the 80% domestic bond holdings of JGBs will ‘patriotically sit back and take the loss’ is in jest but it suggests something has to give in the nation so troubled. In fact, as Diapason’s Sean Corrigan notes, that is not what has been happening, “every time the BoJ is in, the institutional investors are very happy to dump their holdings to them.”
On the bright side, another CNBC apparatchik offers, this institutional selling will lead to buying other more productive assets to which Corrigan slams “great, so we have yet another mispriced set of capital in the world, that’ll help won’t it!” The discussion, summarized perfectly in this brief clip, extends from the rate rise implications on bank capital to the effect on the deficit, and from the circular failure of the competitive devaluation argument.
Well worth a few minutes:
Pater Tenebrarum, from his Acting-Man blog, adds further:
As Corrigan notes, one doesn’t have to necessarily predict a catastrophic outcome, and such an outcome seems unlikely in the near term anyway. However, that does not alter the fact that the policy evidently attempts to achieve things that are inherently contradictory. As Corrigan says at one point: ‘How any of this helps, nobody knows’.
Indeed, nobody knows, but Krugman likes the policy reportedly. Also, the assorted magic wand wavers at the G-7, G-20, the IMF and other political/bureaucratic outposts widely regarded as significant and/or important all have given their placet and endorsed this inflationist nonsense sotto voce.
Japan’s GDP Data – or How to Become Richer by Becoming Poorer
As an addendum to the above, in a recent Diapason report, Corrigan inter alia tackles the ‘good news’ of 3.5% GDP growth that was recently reported by Japan and widely hailed as ‘proof’ that Abenomics is ‘working’ already.
As he points out, a significant worsening in Japan’s terms of trade due to the declining yen (import prices went up by 6.9% or 30.8% annualized, while export prices increased only by 4.3% or 18.2% annualized in the quarter), led to a significant statistical improvement in ‘real’ GDP, as the larger deflator for import prices left a greater residual to be added to real GDP.
As a consequence, Japan’s statistics minions concluded that real net exports were better by 31.7% on the quarter, or a stunning 238.7% annualized, instead of worse, as they were in nominal terms, thanks to the gain in ‘real’ exports of 3.8% or 16.1% annualized and the lesser increase in ‘real’ imports of 1%/4.06%. (note: annualized numbers are not simply multiplied by 4, but show the compounded gain if the quarter-on-quarter increases were to continue at the same percentage rates). Incidentally, as Corrigan points out, this exercise also pushed down the overall deflator, which is tantamount to a signal to Kuroda-san to inflate even more! Regarding the ultimate effect on the GDP report Corrigan remarks:
“To sum up, despite an appreciably worse monetary balance tinkling through the nation’s cash registers, real net exports gave an overall boost to Q1’s increment of real GDP of that of Q4 of no less than 50.4%!
This, then, was not so much the magic of easy money at work for good, but for ill. It was a classic screw-up in the calculation process which served to render an anyway highly schematic and invariably distorted GDP datum into even more of a fairground hall-of-mirrors freak than usual. Because the so-called ‘terms of trade’ – i.e., the volume of imports able to be gained in exchange for a given volume of exports – moved to Japan’s disadvantage, its people were just shown to have become richer by dint of becoming poorer.”
As we have discussed previously, this is precisely how one could sum up the mercantilist fallacy underlying the so-called ‘currency wars’. One does not become magically richer if the exchange value of one’s currency declines. The opposite is the case; one needs to produce and export more goods than before to obtain an amount of goods from abroad that is equivalent to the previously imported amount. Whatever monetary gain the export industries can point to in domestic currency terms is but fleeting – it exists only for as long as it takes for domestic prices and wages to adjust to the new situation.
In short, the end result of a decline in the currency’s exchange value is not that one becomes richer, but that one becomes poorer. It is a case of ‘what you see is what you get’, i.e., it couldn’t be more obvious. Only those who believe that a nation’s welfare depends on its trade balance would argue otherwise, but to this it must be repeated that national borders have no economic significance. ‘Nations’ don’t trade with each other, individuals do. Every single trade is to the mutual advantage of the parties engaging in it, otherwise it would not take place. Whether such trading individuals reside in different nations is utterly irrelevant.
The only thing that can possibly be said to be ‘bad’ about e.g. the trade deficit of the US with Japan is the fact that it has been egged on by credit expansion causing overconsumption in the US and Japan’s mercantilist currency policy impelling its central bank to monetize oodles of US debt in a kind of gigantic vendor financing scheme (the same can be said about China). It is a good bet that if everybody were using sound money and eschewing credit expansion via fractional reserve banking, international trade imbalances would be far smaller and correcting more frequently. However, this should not detract from the basic fact that all voluntary trade is beneficial as such. It is merely a comment on the current monetary system, not a belaboring of the alleged evils of trade deficits. Those are merely a figment of mercantilist imaginations.