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Why 95% of Traders Fail

Time Decay And No Escape For Abenomics

Economics / Economic Theory Aug 17, 2014 - 03:21 PM GMT

By: Andrew_McKillop

Economics

Abenomics Does Not Work
So-called Abenomics is also (so) called Pure Keynesian. Two physics-related analogies help explain why neither Abenomics nor Keynesian economics will work. There is the concept of escape velocity – that is escape from recession - and the time rate of decay of plenty of things, for example of prices if deflation sets in. As we know, economists like to dress up their works on what is a subject that can never be scientific – economics – using mathematical formulae purporting to show neat functional relationships between “key aggregates”, but in several science domains, from astrophysics to subatomic physics firstly these terms have a real meaning. Secondly, ambiguity has to be allowed into the party. Multiple outcomes are perfectly possible.


The Keynesian-Abenomics approach will not admit this, so it always gets further away from the real world as the sure-fire, quick-fix policies are applied. And the process ends in total failure.

The ragged Keynesian excuse is that everything will be well in Japan once the rise in the consumption tax from 5% to 8% is fully digested. For starters any new tax will tend to cut consumption, so there is an immediate consumer economic psychology factor in play. Consumer resistance to higher prices has to decay. How much time does that take?

In almost certain fashion Japan will have to engage an endless march upward of its tax burdens to close the yawning budget gap remaining after the current round of tax increases, and finance its growing army of retired persons. What in fact is Neo Keynesian logic, and even worse than the original, demands that inflation is maintained or increased to force consumer spending and business investment, despite and alongside higher state taxation. This Neo Keynesian approach then imagines that “escape velocity” from recession will be attained, as the economy starts growing again. Neo Keynesian folly goes on to gaily imagine all kinds of things are possible on the back of future – not present – growth. For example tax cuts following the tax hikes and big increases in State spending on “key sectors” like the armed forces and weapons spending!

The Opposite of Escape
The Keynesian trap is well known, well described and has several versions. Possibly the worst trap is the “fiscal trap” of deliberately increasing budget deficits by government spending, in the belief this will stimulate growth – in the future. Not the present.

Former Reagan-era Director of the Budget, David Stockman writing this week on ContraCorner Blog explains how in 1981 a high level delegation from the Japanese Ministry of Finance visited the White House to learn about Reagan's “radical fiscal plan”. They were flabbergasted to hear this plan set out to double the defense budget while cutting all income taxes by 30% which would and could only cause a near-instant surge of economic growth! It was sure and certain.

Japan soon applied the same mumbo-jumbo and as economic growth steadily petered out, continued doubling the fiscal bets. Today its national debt has grown five-fold, from 50% of annual GDP in the early1980s, to close to 250% of present annual GDP, which itself is currently contracting at an unprecedented rate. Japanese debt has very slightly fallen, recently, but all the betting is that the debt will have to start growing again.

The basic reason is that escape velocity as used in the sciences has a defined meaning and the fundamentals of this include the mass of the object being escaped from. The speed of escape – when it is possible – can be of several types, ranging from well known exponential functions, through step-type escape, linear escape and even Weibull-type escape functions. In brief and when it is possible, escape will be at a large possible range of rates. However, the bigger the mass of the object being escaped from – national debt - the less it is possible that there will be any escape.

The Black Hole analogy can be given. Nothing escapes. Inside the black hole there is a supermass object or objects. This is rather easy to compare to runaway growth of national debt and budget deficits in a slow-growing, stagnating or contracting economy. Increasing the mass of State spending to be financed by future growth – if it happens – is a senseless gamble. It is not scientific!

Reagan made a senseless gamble in the early 1980s, grouping together several Neo Keynesian strands. These for example included the then-recent start of QE (then given a different name), by Nixon and Kissinger in 1973-1974 with their Version 1.0 of Petrodollar Recycling which was set up with Saudi Arabia and the US Treasury dept. Everything and anything was good for increasing government spending – while income taxes were slashed!

Time Decay
This again has hard-edged meanings in the sciences. It does exist. What we can say is that there is zero possibility that Abenomics will result in “escape velocity”, Japan style, for reasons that are stark, straight and simple, as well as more complicated. The stark reasons hardly need to be listed, but they feature peak debt, soaring retirement spending, a shrinking tax base and taxes which will rise “forever”. More complicated ones include the decay rate of Shinzo Abe's increasingly frenzied attempts to throw government cash at the symbols-only of growth on one hand, and the symptoms-only of increased State spending on the other.

Exactly the same way as Keynes himself foolishly imagined that the industrial model and theory of growth was “timeless”, Japan thought that massive borrowing (mostly from itself) and State spending could restore the post-war Economic Miracle of Japan. Like the other “mature postindustrial” countries Japan forgot all about the real world. Previously, the Japanese economy, like Germany's, soared upward for three straight decades fueled by a massive spree of public and private investment – and by its deliberate but never-admitted mercantilist trade strategy. This promoted exports, held down imports, and operated a Cheap Yen monetary policy to favour exports. In addition, a then much younger average-aged population had extreme high household savings. It was a one-time convergence of pro-growth factors and it decayed with time.

Exactly as Keynes never admitted, this could only oversize the industrial base of Japan's economy, which is now inevitably downsizing. As we know, the USA was the first to act to cut Japan back to size, with the September 1985 Plaza Accords, to radically increase the Yen's value. To be sure Japan was already a model Keynesian pupil, so its reaction, from 1986, was to slash borrowing costs in Japan to nearly zero – which is where they still are, today. The foolish belief was that more industrial investment “could only” solve the problem. Even worse, the industrial takeoff of China was already under way, and the other Asian Tigers such as South Korea already had massive industrial capacities of steel, shipbuilding, petrochemicals, consumer electronics, car making and so on.

The Japanese industrial-model economy had been oversized in drastic fashion, and not very surprisingly, exactly as in the other “mature postindustrial economies”, the country shifted to a delirious round of speculation in real estate in its chase for growth. After the industrial growth bubble, the real estate bubble - each with their own specific time decay function.

The Paradox of the Growth Economy
David Stockman in his Contra Corner Blog gives a highly detailed analysis of why it is very nearly sure and certain things will go on getting worse for “Abenomics”. Japan however and in fact is the model and “canary in a coal mine” for all other western, mature, postindustrial economies or whatever other terms are used for them – such as “the knowledge-based economy”. Japan has a 30-year track record of failure trying to resuscitate the growth economy. Is that long enough?

The lesson from the real sciences – not economics – is that perpetual growth is not possible.

Whether it concerns cancers which will grow and continue to grow, until the victim dies, or stars that grow and move into Red Giant status, and then explode, the growth phase is time-limited. Economics of the Keynesian sort, and others, talks its way around that reality - not a “problem” - by pretending that when there are problems of present growth these are opportunities for future growth. This logic will not accept that opportunities become problems, also.

Japan's economic growth was self-limiting by any logical yardstick. The longer the growth continued, the more sure and certain it would decline. It was only a time-decay function. Keynes, with his well-known cynicism brushed that aside with “In the long run we are all dead”. Sure. But people have children, Mr Keynes.

They will be alive in your long term even if you are dead. Japan in “classic” terms has no way out of its present endgame, and will soldier along like a World War I trench rat. Keynes, again in his cynical way of defending utterly stupid economic polices told the USA's FDR, at the start of the Great Depression of the 1930s, that burying dollar bills in bottles and “inviting” people to dig them up would be one way to restore economic growth. Mutated into Keynesian newspeak, this is a program to liberate entrepreneurial initiative – founding mining companies to dig up the bottles – and to fill them, open-ended monetary expansion is obligatory. 

The growth economy becomes the decline economy.

By Andrew McKillop

Contact: xtran9@gmail.com

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.

© 2014 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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