OMG! What is to be done?!
The Bank of Japan disappointed markets by holding off on adding any new monetary stimulus last week. Japan’s Nikkei index tanked, and the yen surged against the US dollar.
That’s OK…let’s just wait for the government to do some fiscal stimulus. From Bloomberg:
‘After the Bank of Japan on Thursday disappointed hopes for more monetary easing to revive the economy, the focus now turns to the Abe administration’s plans for fiscal stimulus.
‘With Prime Minister Shinzo Abe set to host his counterparts from the Group of Seven next month, ruling party lawmakers are debating the scope and priorities of a supplementary budget. Also on the table: Delaying a sales-tax increase scheduled for next April. Officials separately are finalizing a broader economic strategy presentation due in June.’
Year after year of useless stimulus and failed economic reforms, and we still wait for the next instalment with bated breath!
Are we insane?
According to the UK’s Telegraph, yes, we are:
‘Governor Haruhiko Kuroda dashed hopes for ‘helicopter money’, warning that direct monetary financing of spending would be “illegal”.
‘Mr Kuroda insisted that the BoJ still has plenty of firepower and can at any time push interest rates even deeper into negative territory or boost bond purchases beyond the current $74bn a month. “If additional easing is needed, we will do so promptly,” he said.’
The problem for Japan is that its long-running monetary experiment is now running up against not only legal constraints, but social constraints too. In a nation of savers, there’s a point where repressing interest rates starts to create a backlash.
Banks and money market funds have no sustainable business model when interest rates go negative. Since first implementing negative rates in January, the yen has done the opposite of what was expected…it has rallied 10% against the greenback. This adds to the deflationary forces dragging the economy down.
Clearly Japan has some deep economic problems. Most obviously it has a demographic problem. Population growth is the bedrock of economic growth. Without population growth, there is only productivity growth to drive economic expansion.
And productivity growth comes from rewarding creativity and embracing failure. Japan, like many economies these days, doesn’t embrace failure. Instead of being part of the learning curve, failure in Japan is shameful and to be avoided at all cost.
That’s partly why the economy has lumbered along following the early 1990s bust. Bad debts suffocated the economy for years. Low interest rates — not debt write-offs — were the way to deal with it. That encouraged a big rise in government debt, which is the most unproductive form of debt.
As a result, Japan has no population growth, and falling productivity growth. The result is an economy that falls in and out of recession, with absolutely no light at the end of the tunnel.
This is what happens in highly-indebted economies. Yet the fools running the world’s monetary institutions think increasing debt just a little more (it’s always just a little bit more) will somehow improve the situation.
They have no answers, which is why they’re just doing the same old thing and hoping for the best.
Stock markets, now heavily addicted to central bank stimulus, didn’t like the ‘do nothing’ response from the Bank of Japan. US stocks fell around 1%. But commodities and the Aussie dollar fared better, so falls should be muted on the Aussie market.
Poor first quarter data in the US didn’t help things either. It just goes to show that high debts levels make sustainably strong economic growth very difficult, if not impossible, to achieve. The world is slowly turning Japanese…
In the first three months of the year, the US economy expanded at an annual rate of just 0.5%. That’s down sharply for the fourth-quarter annualised rate of 1.4%. According the Reuters:
‘U.S. economic growth braked sharply in the first quarter to its slowest pace in two years as consumer spending softened and a strong dollar continued to undercut exports, but a pick-up in activity is anticipated given a buoyant labor market.’
Underlying domestic demand wasn’t as bad as the headline number, with real gross domestic purchases up 0.9% annualised, compared with 1.5% last quarter. The hope is that a strong labour market will continue to prop up domestic spending, which it should do. But it certainly won’t propel the US economy sustainably higher.
The US economy is already into its eighth year of economic expansion. The labour market has been improving for a long time now. So it’s hard to argue there is a lot more upside to come.
Investment is what drives productivity growth but, in the first quarter, gross private domestic investment contracted at an annualised rate of 3.5%. It was the third successive quarter of falling private investment.
That’s not a characteristic of a healthy economy.
Sadly, the US economy is considered the best of a bad bunch. If true, the global economy is not in a good way.
Keep this in mind next time you hear some politician or bureaucrat tell you this or that economy is ‘strong’ or ‘healthy’. The reality is that the global debt python is slowly strangling us all.
Editor, Crisis & Opportunity
Ed note: The above article was originally published in Markets and Money.
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