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Market Oracle FREE Newsletter


Missing Lynchpin Of Japan's Great Experiment - Trust

Politics / Quantitative Easing Apr 11, 2013 - 09:49 AM GMT

By: Andrew_McKillop


Describing the antics of the Japanese government and its central bank (BOJ) as "not just running the largest monetary experiment in their history, but also the largest social engineering experiment", Chris Martenson of Peak Prosperity in a recent ZeroHedge post concludes: "Were I a Japanese citizen, I would immediately convert my Yen holdings to something, anything, else.  Swiss francs, gold, dollars – anything (!) would be preferable......Once your central bank declares war on its own currency, this is just the prudent thing to do".

This so-called Great Experiment is running to packed houses and wordwide. The only problem is that no average person wants it, and reactions are going to get violent, sooner or later.

On April 10th, Bloomberg reported on Barack Obama's budget proposals: "The administration projects the deficit for fiscal 2014 would be $744 billion, or 4.4 percent of the economy. That would mark the first budget shortfall of less than $1 trillion since Obama took office". Bloomberg also cited the comment the proposals sparked from Senate Republican leader Mitch McConnell: "It sounds like the White House just tossed last year’s budget into the microwave".

The first deficit of less than $1 trillion in 4 years. This is supposedly an "achievement". What would an average US citizen do - buy Yen?  Cypriot citizens, almost certainly, are thinking about buying dollars, CHF, gold or other "less soft assets", including material assets - in fact anything but the decreasingly convertible euro.

Japan officially intends doubling its monetary base in just two years. Supposedly, this would create or enable a 2% annual inflation rate within 2 years. Cynics call this Prime minister Abe's 2-2-2-2 Plan: doubling the money base will give inflation of 2% in 2 years if his government has 2 times more luck than previous governments. These governments ran what we can call "previous economic models", like other governments, worldwide. The model assumed for example that "economic agents", meaning everybody from private citizens through entrepreneurs to politicians and central bankers, was governed by linear, rational or transparent processes. Under thos model, doubling the monetary base could only raise inflation.

This is not at all the case today - which is not good news.The reason is simple: government have broken with the voters and the people they claim to serve. Trust is gone.

The "monetary base" only means the amount of money and near-money that the banking system has available. Traditionally or previously, the banking system used this to make more loans. The amount used by banks for delevering or debt reduction, or recapitalisation, or "purely financial" operations was relatively low, sometimes very low. In previous so-called economic cycles (the term "economic cycle" being controversial, especially to present-minded economic and financial deciders) simply pumping up the monetary base did not however automatically result in more money chasing goods. For example and notably the velocity of money circulation could fall, sometimes by a lot. The reasons for this often featured "economic psychology factors', more simply lack of trust and confidence in the banking system or even in the whole economic process. Economic crises could "unexpectedly" intensify.

For the post-2008 world we add in record-high unemployment, and politicians who tell the people their savings are going to be debased, destroyed, even confiscated. Economic recovery becomes a fantasy. Kick savers and abuse the confidence of ordinary working people - and they will not spend.

Today and now, across the developed world, and even in the Emerging economies which now have their "new consumer middle classes", private banks report monetary reserves are piling up in the banking system, chasing nothing related to real goods and services in the real economy.  The new reserves simply chase financial assets such as stocks, commodities and bonds. These as we know can collapse overnight. The casino and one-armed bandit "economy" carries a deathwish.

As elsewhere, practically worldwide, Economic and political psychology is vastly important in the BOJ Great Experiment. It is also the key to why "Waiting for inflation to hit" almost everywhere outside Japan, and possibly also inside Japan, seems like Waiting for Godot.

Minutes of BOJ meetings show there is near-perfect total internal dissent as to how Japan can reach its 2% inflation target. A recurring argument of the Nay-sayers is that a short-term inflation target of 1% is more realistic because 2% annual inflation has not occurred or has not been "achieved" in more than 20 years. How the BOJ should work this Great Experiment is the focus of continuing dispute. Issue and buy short-term bonds, purchase longer-term bonds, ditch the interest rate floor, encourage capital flight. There is no coherent plan. Political pressure from "on high" is however very strong, so "letting things drift" - in the wrong direction - has been and will be the default policy at the BOJ. To be sure, this means the potential for runaway collapse of the Yen's value is high. Very high.

The BOJ cannot really be criticized. Unreal or unrealistic targets are the single unifying formal fiscal and monetary goal, the same basic economic psychology factor, worldwide. Outside "wartime conditions", Obama's budget proposals are so unreal and exotic they are science-fiction. European "coordinated and integrated" fiscal and other policies are a nightmare circus of last-second panic decisions following "last-minute marathon talks". But the one-way drift to a constantly growing and accumulating monetary base sitting underneath (or on top of) a flaccid, stagnating, low-growth economy, is global. Deathwish economics.

The reason why this can only fail is the mega-gulf between people and politicians. They are targeting their own people’s trust in national (or in the Eurozone case the euro) money.  The policy-theory is drastically simple. If there is inflation, people get out and spend knowing their money has less and less value. Threatened by inflation, average zombie-persons will make a kneejerk flight to buy and hold ‘material assets', anything instead of money. For this high-level theory set by "the deciders", who are self-satisfied persons with rock-solid high revenues a million miles from the real world, the consumer "cycle" will kick-start back into life, an idea as old as Keynesian notions dating from the 1920s.

Which never worked.

The fundamental political problem is easy to state. The politicians have to tell the people who voted for them, that their money is going to be trashed. Put another way, the people are told there is a New Order in which their confidence in money will be debased. They did not vote for it, but too bad. It was not a democratic decision, but too bad.

Already in Japan, and totally predictable, importers are whining about rising Yen-costs of their imports. Exporters could or may be pleased, and are keeping a low profile, due to the subject being a hot political potato, cutting across society, creating new losers and new winners.  Average consumers who make up about 85% of the total population are not exporters of anything - so they lose. From the lofty heights of monetary theory, forced devaluation of the Yen will also force savings to rise, through raising the costs, and forcing down the consumption, of all or most articles of everyday consumption. People will buy less, so more can be exported.

This again is already bad psychology - since the Japanese were record savers to start with. Also, this recipe spells deflation, and the Japanese economy was already deflating. More important and as elsewhere outside Japan, but most clearly in Japan, the New Order is a deadly attack on savings. Savings are now "anti-constitutional", anti-progress, anti-everything. So-called "new liberal" nostrums, as extolled with hysteria by England's Mrs Thatcher, of thrift, balanced budgets, paying your bills on time have all been trashed, when the national money is trashed.

Economic psychology can only be political. For the 1980s New Libs debasing the national money and the personal savings of citizens was instantly set as a Choice of Civilization, the "CDST" choice between Communism, Democracy, Socialism, and Totalitarianism. There was No Alternative but face up to this four-way choice on offer. Unfortunately or not, things have moved on a long way since the early-1980s heyday of this cut-and-dried intellectual preening and posturing, which went nowhere.

Since the 1980s, all 4 of these doctrines or systems have wilted or disappeared, have mutated and reappeared under new garments. Before the 1980s, each of these 4 doctrinal systems could take other garments - for example Fascism. An Italian doctrine, it established peace with the Vatican, made the trains run in time (not like in Thatcher's England), but exactly like Nazism was a rabid, nationalistic variant of socialistic corporativism, what we call Crony Capitalism today, seeking monopolistic partnerships of business and industry, with the State always the commanding partner.

Central banking is easy to place - fully outside the democratic part of this four-way split, with the monopoly of issuing money, acting for supposed nationalist, but really for corporatist ends and goals, seeking total power, sooner or later. Alternatives to centralized money-issuance however are few in number and always a failure, historically. Where they have worked, this concerned low-tech, small scale, non Western societies, or Western societies at least 250 - 500 years back in time.

The political challenge (over and above the moral challenge) is to make known the tradeoff that modern consumer democrats make, whether they know it or not. It is even a "Faustian bargain". Operating a complex. high tech, heavily populated industrial society (sometimes laughably called "post industrial" because the industries making the consumer good are "over the horizon"), with cities each of several million population, with Seveso-type industrial pollution risks, with nuclear power plants, needs heavy constant organization - unsuited to democracy. Allowing "consumer democrats" to print their own money, Hippie style, is a recipe for Anarchy - which is another alternative doctrine, but a non-organizing principle of society.  Anarchy is almost always the intemediate transitional format.

Today and at least since the 1980s, these are the real questions, the real issues and choices. They have all been shuffled out of sight.

With the doctrinal attack on savings and money decreed by supposedly democratic politicians in almost every "advanced mature democracy", today, these are the questions that urgently need to be debated, the issues that urgently have to be faced - not avoided like the plague.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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