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We Are All Inflation Lab Rats Now

Politics / Inflation Mar 12, 2014 - 02:02 PM GMT

By: Fred_Sheehan

Politics

"They sit there across the Pond, and sometimes I think they feel like they're in a lab and they're running experiments on rats and not understanding the consequences of what they are doing," the Russian president said at a press conference." ~ Russian President Vladimir Putin, March 4, 2014

Adam Posen, co-author with Ben S. Bernanke of Inflation Targeting: Lessons from the International Experience gave a thumbs up to the Japan's inflation-targeting experiment in the February 25, 2014, Financial Times: "Abe Has Good Medicine but Japan Needs a Stronger Dose." The heavyweight (literally) economist opens: "Japan's recovery program is showing promising early results." Results include the falling currency that has led a creditor country (Japan has been a net lender since 1981) to post whopping trade deficits in recent months, of increasing size.


This is a direct result of "Abenomics": the effort to devalue the yen and inflate prices. This ludicrous avenue to self-destruction comes from aping Posen's inflation-targeting gimmick. He is not the sole progenitor, of course, but he is flagrantly dishonest in such assertions as: "Too often, economic reform programmes fail to deliver. Some get the analysis wrong and end up driving the economy further into the ditch. [Exactly what Posen has done to the U.S., U.K., and Japan. - FJS] This was the case in the 1990s when policy makers failed to recognize the risk of persistent deflation. Arguably, it has been the case with U.S. fiscal policy since the 2009 stimulus." In other words, Bernanke - and now Yellen - have not created electronic, dollar credits fast enough to pump U.S. inflation to an appropriate rate. "Appropriate" for Posen will be revealed below.

When sitting before politicians, Ben Bernanke closed discussions of his money-printing policy by stating the Fed needed to target a positive inflation rate - otherwise, the U.S. would risk: (1) another Great Depression, and, (2) repeat the deflationary mistake of Japan in the 1990s.

I would like to deposit this essay into a thermonuclear-proof time capsule, to be opened in a hundred or so years. The question I would like some future researcher to probe is how Bernanke & Co. has gotten away with this. Yellen is on the same page. It will be obvious (maybe two centuries from now) the Great Depression Expert knew nothing about that period and there was no Japanese deflation in the 1990s. According to official numbers, the only years of deflation were 1995, (-0.39%) and 1999 (-1.0%), the latter year was when Asia was imploding. The Ministry of Internal Affairs and Communications publishes the annual inflation rate back to 1958. The chart shows a red squiggle (deflation) within the first year or two, then another year of prices falling in 1986 (-0.3%), then 1995 and 1999.

By the mid-1980s, economists of Posen's persuasion (very well-paid, life-time bureaucrats), but not necessarily Posen, lectured the West. It needed to emulate the Japanese or starve. The Experts were referring to one of the most extraordinary asset inflations of the 20th century, though they do not understand that. (They presumably ignore the 1986 deflation) The ballooning of stock market and property prices, along with sleight-of-hand relationships between corporations and banks, brought on a collapse that was as obvious as the impending, worldwide, bubble collapse, expected soon: probably in 2014. The Japanese stock market peaked on December 31, 1989; the subsequent asset deflation has produced consequences, but price deflation has not been among them. (Salary deflation has been daunting. Since 1997, the average, annual, Japanese salary has fallen by the equivalent of $6,700. Yet, Posen pats the Japanese on their collective heads for being such good, little inflators.)

A year into "Abenomics," this no-longer, creditor nation needs foreign capital to arrest the country's waning industrial strength. A potential overseas investor might see opportunities, but would need to weigh those against the disinvestment inclinations of the locals.

Posen claims, in the case of Japan "the economic analysis was correct: a return to inflation ["Return"? Wasn't deflation the supposed norm? - FJS] will make it easier for taxes to rise and reforms to take hold, as they must if the country is to return to a sustainable path." This inflate prices - devalue the currency - to boost business plan: overlooked the nasty fact that Japan imports almost all materials, including energy. The fall in the yen makes production more expensive (and less inviting) than, cateris paribus, in the United States.

Lord Circumference then goes on to dictate some lab-rat experiments of minuscule importance compared to the damage wrought by inflation targeting. Abenomics was supposed to boost business. Instead, manufacturing is getting out of Japan as quickly as possible. Nissan, Honda, and Mazda will open new manufacturing plants in Mexico. Andy Lees writes: "With 17% of Japan's manufacturing base overseas, it is easy to imagine production being brought back home with major consequences for economies in which Japanese companies invest, yet Credit Suisse expect exactly the opposite. They forecast overseas production to grow to 21% of Japan's production base over the next few years. Ideally the weak yen would bring production back home, but for the moment that is not happening. Mexico will eclipse Japan as the second largest exporter of autos to the U.S. in 2014.... For the first time ever, the United States is turning a net exporter of one of the Japanese car brands - the Honda - which is investing heavily in the US." (Andy Lees, "Japanese Futility," February 17, 2014)

The 2013 Car of the year in Japan was the Volkswagen Golf. There is more to the recent, box-office success of "Eien no Zero" (the celebration of a kamikaze pilot) than a spat with China.

One reason for lethargy in business is Posen's inflation: "90% of auto labor union confederation members to demand pay hike," reported Kyoto News on March 3, 2014. This trend does not appeal to foreign investment, in a country where the capital stock has aged from 9-1/2 years in 2000 to 14-1/4 years today (Andy Lees, "Japanese Futility," February 17, 2014). Nor does the barmy sales-tax hike, from 5% to 8%, planned for April 2014.("When Japan last hiked the sales tax from 3 percent to 5 percent in 1997, consumer spending tumbled by 13 percent in the quarter after the higher tax went into effect. That was followed by a recession." - Reuters, August 31, 2013) This, in a country where zero-inflation rates are entering their second generation, the population is constantly threatened with Inflation Targeting of 2%, and where nearly half the population is entering retirement. A large public-works, building program is at the center of Abenomics, but government-funded construction slowed fast in the fourth quarter of 2013. Reuters reports the number of construction workers has shrunk by one-third since 1997, and 20% of all construction workers are over 60 years old.

The contradictions grow worse, yet, American economists are still permitted to use Japan as a laboratory. To look at one of Posen's sweeping, grandiose, Trotskyite reforms: "Increasing female labour force participation is the right priority for structural reform. At least three million women who could work are neither in employment nor looking for a job. A few million more are squandering their capabilities in limited roles....[T]he government should be creating as many as 400,000 new nursery places [whether that is children or teachers is not clear]... instead of providing [just] 150,000 new" nursery places. How any of this will help Japan is unfathomable since the government (in Posen's proposal) will pay for it. They are raising the sales tax to pay for this.

Where does he come up with this stuff? What if they don't want to work? What if those "squandering" their capabilities are content? What if the women don't want to send their children to nursery-school, boot-camp? Slave labor is the solution. In fact, Posen's type of mind favors such plans since they put both the three million new workers and the children in the nursery into the taxable economy. (Imagine the state of the U.S. Treasury today if women had not started working en masse in the 1970s, with the attendant day-care costs and meals at McDonald's. Can't imagine it? Neither can I.)

Posen is now at the Peterson Institute in Washington. This think-tank is funded by Pete Peterson, who is now elderly. The people and ideas wobbling through the corridors of the Peterson Institute are anti-ethical to Peterson's principles. Lord Circumference and his cronies are living high while kicking Peterson in the proverbial teeth.

Posen believes inflation rates of "4, 5, or 6 percent a year, say, will [not] hurt growth. [Remember: these rates are above the interest rate that can be earned. - FJS] It is just not there in the data." Posen can be trusted with the data as much as Al Capone could be counted upon to berate Prohibition. He went on to say (in Challenge, July/August 2008) that researchers have found once "you get to an annual inflation rate of 10 percent - some would say 8 percent, some people would say 12 percent," you "begin to see significant negative effects on growth." With that contribution to inflating the world's debt away, Posen served on the Monetary Policy Committee at the Bank of England. Why? He's American; so is Stanley Fischer; one of Ben Bernanke's MIT thesis advisers. Fischer recently served a hitch running the central bank of Israel. Fischer's efforts to inflate world asset prices included regular purchases by the Israeli central bank of U.S. stocks. Fischer will soon be voted into the vice-chairmanship of the Federal Reserve Board. He will be the glue of conformity to forestall attempts at nixing QE 5, 6, and 7. Sending American economists to foreign command posts ensures other central banks remember who is in charge.

The executioners will protract their experiment, in Russia, Tokyo, or in the worst American sub-prime sewer pit, as long as they possibly can.

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

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 advisors.

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