We heard the "surprising" news last week that the Japanese economy shrank
at an alarming 6.8 percent annualized rate in the three months through June,
its biggest quarterly contraction since the 2011 earth quake and tsunami. Proving
Japan's greatest national disaster, Abenomics, has failed and the Japanese
economy has fallen victim to the scam called Keynesian economics. Defined as
the belief that a country can tax, spend, devalue and inflate its way to prosperity.
Since the popping of the BOJ- induced bubble in 1989, Japan has been the most
faithful adherent of Keynesian principals. At the onset of the crisis they
immediately began on their misguided path with large doses of deficit spending.
Instead of allowing the economy to rid itself of bad investments and heal,
they continued to prop-up failed business models--creating Zombie banks and
an equally Zombie-like economy.
As one lost decade turned into two, in the year 2000, they coupled their fruitless
spending efforts with massive amounts of money printing. And despite two decades
of low growth, the nation stubbornly held on to the popular Keynesian excuse
of "if only"...If only our stimulus was larger, if only we weakened our currency
more, if only we kept interest rates lower for longer; economic nirvana would
be achieved. Keynesians love to use this counterfactual argument because they
believe it cannot be proven wrong--that is until now!
In 2012, Prime Minister Shinzo Abe had a master plan to pull the world's third-biggest
economy out of its stagnation. His plan was to deploy, in massive and unprecedented
fashion, the strategies of central bank credit creation, currency destruction
and debt accumulation. The Japanese doubled down on the great Keynesian experiment,
as if Paul Krugman himself was running the economy, they placed the economy
on Keynesian steroids. Now, we are beginning to see what an economy looks like
when the Keynesian playbook is utilized to its fullest extent.
With a first half economic contraction in the books, many economists are now
warning that Japan is poised for yet another recession. Back In June, I warned
the reported 6.1 percent GDP growth in Q1 will prove to be temporary because
businesses frontloaded capital spending in a move to avoid April's well-anticipated
and substantial increase in the consumption tax from 5% to 8%. And because
of the asinine belief that growth comes from inflation, Japan's lethargic economy--whose
inactivity had previously been blamed on falling prices--slowed dramatically
right after prices went up.
Household consumption plummeted at an annualized pace of 19.2 percent from
the previous quarter, while private investment sank 9.7 percent. And because
of the Japanese battle against deflation, real wages dropped 3.8% year on year
in May. Those mismanaging the Japanese economy believe consumption will surge
if they can achieve a substantial increase in the CPI. The misguided logic
being the Japanese consumer will only spend if they are running in perpetual
fear of rising prices.
One of the cornerstones of Abenomics was destroying your currency with the
hopes of boosting exports. Ironically, last week the central bank warned over
a worsening export and factory output picture. In fact, June showed the worst
trade deficit ever in Japan, and a 57 percent rise in the trade deficit for
the first half of the year.
And today with a near 250% debt to GDP ratio, it's difficult to argue Japan
didn't engage in enough deficit spending. Over the past three years, interest
rates on the JGB 10-year note went from 1.5% to .52%. Under its own brand of
quantitative easing policy put in place last April, the BOJ now buys 70 percent
of all new government bonds issued in markets, as well as other more risky
assets. With the JGB market on virtual life support courtesy of the BOJ, it
is impossible to argue rates aren't low enough or that the BOJ hasn't monetized
enough. They spent, they printed, they taxed; but the Japanese economy is out
of gas, and the Keynesians who own this plan are now out of excuses.
The truth is Japan is a perfect example to the counterfactual argument that
anemic U.S. growth is the result of a Keynesian plan that was launched half-heartedly.
The United States should heed Japan's economic woes as a warning sign, and
a reason to change course while we still have a chance. With U.S. debt to GDP
at 105 percent and household debt at over 80 percent, the aggregate amount
of our nation's debt is at an all-time high. But unlike Japan we have the overwhelming
privilege and responsibility of holding the world's reserve currency.
Obliging other nations to trade and hold U.S. dollars is not written anywhere
in the bible. These nations have, for the time being, decided to maintain a
holding that is equal to 50 percent of our publicly traded Treasury debt. Losing
their confidence in our credit and currency would be devastating to our economy.
Japan has no such worries about keeping foreign investors happy because they
finance 90 percent of their debt internally.
We have become a country that habitually over-consumes and under-produces.
Debt levels have skyrocketed while our demographic and labor force participation
conditions are quickly approaching critical mass.
We have to abandon these failed Keynesian policies while there is still time.
We must boost our employment to population ratio, deregulate the economy, simplify
the tax code, balance the budget, cut expenditures, end the Fed's runaway printing
press and allow the free market to set interest rates and asset prices. Only
by doing this do we stand a chance of not falling further into Japan's stagflationary
nightmare. But if we persist in following the Keynesian counterfactual, our
fate will be worse than that of Japan, as the deluge of debt being dumped by
our foreign creditors causes the dollar to be dethroned, interest rates to
soar and inflation to skyrocket.
