Mr. Gono, Are You On The Line


Source: Wikipedia

Dear Diary,

The Dow is still pushing higher. Gold is back below $1,200 an ounce.

The US economy appears stable. The stock market – which is supposed to know all, see all and understand nothing – tells us it is clear sailing ahead.

We are fools to believe it; perhaps we are fools if we don’t.

We can almost hear former governor of the Reserve Bank of Zimbabwe Gideon Gono’s phone ringing. He quiets his wives so he can hear. It is a voice with a strange accent… speaking from far away.

“Can you come give us some advice?”

Once again, the Japanese economy has slipped into a coma. And once again, the stimulus policies of the central bank… and the Ministry of Finance… have failed to revive it.

New York Times columnist and Nobel laureate economist Paul Krugman has gone to advise Shinzō Abe on how to deal with its latest crisis.

Could Abe find anyone worse to give him counsel?

That would be the aforementioned Mr. Gono.

The Curse of Weak Demand

Japan is Exhibit A for the central planners’ argument that the world lacks demand.

Chief economics commentator for the Financial Times Martin Wolf made the case for it in Wednesday’s edition. “The curse of weak global demand,” is the headline.

Why is weak demand a curse? How much demand should there be? Why is the demand given us by willing consumers and businessmen “too much” or “too little”? And how could there ever be more demand than there actually is?

Never mind. When there is not enough of it to suit their tastes, the central planners think they know how to get more. Wolf: “unconventional policy choices, probably more unconventional than those they have tried so far.”

We doubt Krugman urged Abe to try more unconventional policies. More likely, he argued for more of the same old hopeless elixirs that have left the patient as stiff as a board.

But the gist of all these policies – conventional and unconventional – is that they try to create demand where none exists. That is to say they make unearned money and undeserved credit available to people who are unable to pay it back.

What next?

We don’t know, but we hear that Abe is looking for Gideon Gono’s email address.

Animal Spirits

Longtime Diary sufferers will remember Gono as the man who turned the Zimbabwe story into required reading for the aficionado of hyperinflationary catastrophes.

What Gono doesn’t know about creating phony demand is probably not worth knowing. For years, we carried in our wallet a reminder of his handiwork – a 10 trillion Zimbabwe dollar bill!

What could you buy with it?

Nothing! It was worthless.

Gono’s advice would probably be cheaper than Krugman’s. Besides, the former central banker of Zimbabwe would provide more entertainment.

According to a report in Zimbabwe’s yellow press, Gono kept three wives at his mansion in Harare… and was sleeping with the president’s wife too. If it’s animal spirits the Japanese economy lacks, perhaps a dose of Gono would help.

But after being staggered by the news of Tokyo’s latest misadventures in monetary policy, our legs are steadying and a clearer view is coming into focus.

The stated purpose of the new, more aggressive QE is the usual claptrap about increasing the growth rate.

Supposedly, devaluing the yen would drive consumers to want to get rid of it faster – increasing the velocity of money, leading to inflation, sales, profits and new hiring… and all the good things of this transitory life.

What has happened so far is a devalued yen – along with an increase in the sales tax – has raised consumers’ cost of living and reduced their real incomes. Not what Abe was looking for.

But the closer you look at the numbers, the less any of it makes sense.

Japanese tax revenues have been flat for the last 30 years, as spending has gone up nearly 100%. Today, for every yen the Japanese feds get in tax receipts, they spend two. And 25% of tax receipts has to be used just to pay the interest on the debt – even at near-zero interest rates.

You see where this is going, don’t you?

Household incomes are falling. Trade surpluses have turned into large trade deficits. Savings rates are approaching zero.

Meanwhile, the Japanese are engaged in what could be self-extermination – due to falling birth rates, the population is set to fall from 127 million to 87 million over the next half-century.

And the most aggressive, most tenacious stimulus efforts over a 25-year period have been unable to boost real output by a single yen.

Can Japan stimulate its way out of its economic problems?

Not a chance.

It has too much debt. It can’t pay it. It must inflate it away.

Mr. Gono, are you on the line?




Disclosure: None

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Moon Kil Woong 9 years ago Contributor's comment

If Japan is so bad off why is the US copying it? I tend to agree, giving money/liquidity to those who don't earn it encourages bad behavior, pushes up asset prices, and increases their debt load. One can't simply do anything magical with the economy without repercussions. Sadly Japan and now the US, have fostered even bigger TBTF banks dependent on a flat economy and low interest rates on top of free QE money.

This is nothing but socialism for the banks and it leads to bad behavior and eventual ruin just like always.