Nov 182014
 November 18, 2014  Posted by at 8:30 am Finance Tagged with: , , , , , , , ,

Dorothea Lange Miserable poverty, Hooverville, Elm Grove, Oklahoma County, OK Aug 1936

What is it with us? Don’t we WANT to understand? Japan announced on Monday that its economy is in hopeless trouble and back in recession (as if it was ever out). And what do we see? ‘Experts’ and reporters clamoring for more stimulus. But if Japan has shown us anything over the past years, and you’re free to pick any number between 2 and 20 years, it’s that the QE-based kind of stimulus doesn’t work. Not for the real economy, that is.

The land of the setting sun has during that time thrown so much stimulus into its financial system that Krugman-esque calls for even more of the same look even more ludicrous today than they did all along. Abenomics is a depressing failure, just as we knew it would be since it started almost two years ago. It’s not complicated, and it never was.

Japan’s stimulus has achieved the following: banks get to pretend they’re healthy and stocks rise to heights that are fundamentally disconnected from underlying real values. On the flipside of that, citizens are being increasingly squeezed and ‘decide’ not to spend (not much of a decision if you have nothing to spend). Since Japan’s ‘consumer’ spending makes up about 60% of GDP, things can only possibly get worse as time passes. If ‘consumers’ don’t spend, deflation is the inevitable result – and that has nothing to do with the much discussed sales tax, it’s been going on for decades -.

Therefore, the sole thing QE stimulus has achieved is a wealth transfer from poorer to rich. And that’s not only the case in Japan. Mario Draghi yesterday hinted – again – at all the stuff he could start buying next year, including sovereign bonds, even though that would violate EU law. And whether or not Germany will let him in the end, the fact that he keeps the option alive even if only in theory, tells us plenty about the mindset at the ECB.

That is, it’s the same as in Japan. And doing the same can only lead to the same results. A poorer population, a richer toplayer and an economy that continues to shrink, which will and must lead to the same deflationary trend. The idea that an economy can be rescued by pushing public funds into its finance system and stock markets has been forever thrown out by Japan’s experiences.

Draghi said yesterday that ‘monetary policy has done a lot’, and while that may be correct, it says nothing about WHAT it has done. From where I’m sitting, Germany’s recent drift into negative territory and the ongoing record unemployment rates around the Mediterranean certainly tell us a lot about what it has NOT done. QE, no matter how big and how crazy, doesn’t heal real economies, it makes them sicker.

If consumer spending makes up 60% of GDP, as in Japan, or even 70%, as in the US, then you need to boost that spending. And you don’t do that by handing over what financial wiggle room you have left, to banks so they can pile it on to the reserves they hold at central banks.

It is accepted as gospel that it’s a good thing to give banks free money, but it would be the devil’s work to give it to consumers. Instead, the latter must be squeezed from all sides, through austerity, the loss of services, benefits, wages and jobs, in order to prop up the financial system. How and where is it not clear what that will result in? There’s only one possible outcome.

The reason why all governments and central banks keep following the failed QE stimulus path regardless lies in the relative political powers that different parts of a society have. In today’s world, saving the banks, which equals saving the rich, is not only the priority, it’s the only deliberation.

And if you might be under the impression that what is true in Japan and Europe does not hold in the US, why not start with this graph from Doug Short, and take it from there.

If and when an economy is as deep in the doldrums as all major economies today are, you can’t rescue it by taking from the poor to save the rich. It’s fundamentally impossible. You need the bottom 90%’s spending in order to generate enough GDP to stay out of deflation. Money must move through an economy for it to stay sufficiently ‘lubricated’. And the only people who can keep that money moving are the bottom 90%. It’s Catch-22.

Any stimulus must be directed at the bottom, or it must of necessity fail. Nothing commie or socialist about it, but simply the way economies work. And it’s not just some difference of ideal or insight or something, it’s very simply that an economy cannot function without its poorer 90% of citizens spending.

Anything else is simply Grand Theft Auto. Both Japan and Europe are preparing for more of it.

Home Forums Japan Is Dying And We Still Don’t Get It?!

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    Dorothea Lange Miserable poverty, Hooverville, Elm Grove, Oklahoma County, OK Aug 1936 What is it with us? Don’t we WANT to understand? Japan announce
    [See the full post at: Japan Is Dying And We Still Don’t Get It?!]


    Hah, the share markets don’t care. Good news is good news. No news is good news. Bad news is good news. German recession (effectively), Japanese recession, it’s all good. Welcome to the new reality, folks!


    “Abenomics is a depressing failure, just as we knew it would be since it started almost two years ago.”

    As you say Ilargi, despite its obvious failure Shinzo Abe want’s to implement an even bigger re-run of his failed policy, so perhaps someone should appraise him of Einstein’s words:

    “The definition of insanity is doing the same thing over and over again and expecting different results.”

    To date Angela Merkel has successfully resisted Mario Draghi’s wish to introduce a full blown European version of Abenomics, despite the fact the US has just ended their own version, which has had debatable benefit, if any, for the real US economy. Its unfortunate that mainstream economists, Central bankers and politicians don’t understand (or probably don’t even know about) the work of Sir Frederick Soddy. He clearly understood the distinction between money and wealth, with the former theoretically limitless and not subject to any physical laws, and the latter limited because we live on a finite planet, and subject to the laws of thermodynamics, in particular the 2nd law. It’s the failure by policy makers to recognise this fundamental distinction between (fiat) money or credit or debt – take your pick, and wealth created by the “real” economy that has to utilise the earths resources to create this wealth that’s at the root of the failure to restart strong economic growth. This is why current policies are doomed to fail, because as foretold by Meadows et al, “Limits to Growth” are starting to restrict the economic growth needed to pay down these debts created by massive over-expansion of credit by central banks, ultimately to detriment of future generations. Personally, I believe because these debts will never be paid off in a static/contracting economy, debt forgiveness will eventually become the de facto order of the (future) day, however I’d be interest to hear your thoughts on this possibility Ilargi.


    Entropy and Empire:

    “It takes energy to circulate the water that dissipates degraded energy. The bigger a tree gets, the more energy it can harness from sunlight but also the more degraded energy it has to get rid of. Life is a balancing act. You want lots of energy but not so much that it can’t all be exported once it’s degraded. Not just the bowels of an animal but any living system can get constipated, clogged with the waste energy accruing from prior activity. This is why all successful species limit their growth and intake of energy.”

    Entropy and Empire

    That last sentence – “all successful species limit their growth and intake of energy” – is something our world leaders are ignoring.


    Good article by Ted Dace, thanks for posting the link Raleigh. Not sure if you’ve also read the article with the same name, posted on the former Oil Drum website in 2007 by Nicole Foss.

    Also, Nicholas Georgescu-Roegen’s book “The Entropy Law and the Economic Process” is worth reading, and I like his use of the Entropy hour glass described in “Beyond Growth”, p. 29, 1996, by Herman Daly (the hour glass diagram can be opened via the embedded link) in the extract of the book entitled Entropy and Economics, link below.


    Debt Forgiveness? A Jubilee? Well, that has already happened with the Fed’s Wall Street Bailout.

    Why not Free Money for the small fry, you ask? Just wait a bit longer. It’s coming.

    It’s already starting here;

    Soon, Central Banks will issue Gift Cards and Credits along with Prepaid Charge Cards, if that’s what it takes to get devaluation going. “Whatever it Takes!”

    Golden Oxen

    Hi Professor, Was about to post the same idea until reading your post.

    Yes, Phase one was take care of the banks and the big guys.

    The Muppets are next.

    “Whatever it Takes” Isn’t fiat money just grand?

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