The OECD yesterday released their interim Economic Outlook and claimed that real economic growth around the world was slowing because of a lack of spending. Correct. But then they determined that structural reforms and further fiscal contraction was required in many countries, including Japan. Incorrect. The fact that they have departed from the annual release of the Outlook (usually comes out in May each year) indicates the organisation is suffering a sort of attention deficit disorder – they just crave attention and their senior officials love pontificating in front of audiences with their charts and projections that attempt to portray gravitas. No one really questions them about how wrong their last projections were or that cutting spending is bad for an economy struggling to grow. All the participants just get sucked into their own sense of self-importance because the event generates headlines and the neo-liberal deception rolls on. The OECD needs a reality check on Japan, but it isn’t the only organisation that is pumping out nonsense this week.
A regular occurrence is the prediction of doom for Japan. Some minor upturn in Japanese government bond yields or a movement in some other irrelevant financial statistic relating to the Japanese public sector sends the financial press into apoplexy. But the Japanese economy continues to defy all these prophecies from the neo-liberal zealots and eventually they will be dismissed by the broader public as the education process continues. The latest dramas surround the massive purchases of Japanese Government Bonds (JGBs) by the Bank of Japan. The fact is that the Bank of Japan is currently exposing the myths of the mainstream position even if it would not see it that way. Our post child just keeps giving us real life examples to substantiate the views presented in Modern Monetary Theory (MMT).
A regular occurrence is the prediction of doom for Japan. Some minor upturn in Japanese government bond yields or a movement in some other irrelevant financial statistic relating to the Japanese public sector sends the financial press into apoplexy. The latest signal of impending bankruptcy being bandied about relates to the rising trend in foreign holdings of short- and longer-term Japanese government debt. This trend is explained by financial markets moving into less risky assets (in this case, Japanese government bonds) as uncertainty in other markets, for example the Eurozone, remains. However, the narrative then goes that eventually these purchasers will refrain from buying Japanese government debt and with the funding from the savings of the ageing domestic population drying up, the Japanese government will run out of money. Policy response? Cut fiscal deficits immediately through a combination of tax rises and spending cuts. All of which is nonsense and if the Japanese government follows the advice – there will be a 1997-style recession and public debt ratios will just rise faster than they are at present. It is better that we now all turn to the sport’s section of whatever news you read and relax.
The abysmal performance of the IMF in recent years has been one of the side stories of the Global Financial Crisis. They have consistently hectored nations about cutting deficits using models that were subsequently shown to be deeply flawed. They bullied nations into austerity with estimates of multipliers that showed that austerity would yield growth when subsequent analysis reveals their estimates were wrong and should have shown what we all knew anyway – that austerity kills growth. Their predictions have been consistently and systematically wrong – always understating (by significant proportions) any losses that would accompany austerity and overstating the growth gains. At times, in the face of incontrovertible evidence they have admitted their failures. But a leopard can’t change its spots. The IMF is infested with the myths of neo-liberalism and only a total change in remit and clearing out of staff could overcome that inner bias. Their latest offering – Japan: Concrete Fiscal, Growth Measures Can Help Exit Deflation – is another unbelievable reversion to form.
Humans are very habitual. In Japan as elsewhere. It seems that a regular occurrence in Japan is that some career-minded economist comes out and predicts the end. The end can come in various projected forms. Hyperinflation, government bankruptcy, bond markets vaporising before our eyes, accelerating then exploding bond yields, Mount Fuji erupting and covering the plain beneath it with hot lava, etc. In fact, the eruption of Mount Fuji is the only probable event although even that has erupted only 16 times since 781 – the last eruption being 305 years ago. That august publication (not), the Wall Street Journal gave air to the latest fanatic in the article (May 27, 2013) – Tokyo Urged to Undertake Serious Fiscal Reforms. None of the predictions in that article match the chance that Mount Fuji might erupt tomorrow. In fact, none of the predictions have any chance of being realised. And so we wait the next habitual event in the Japanese calendar which will surely come in the form of some hero in a suit from one of the corrupt ratings agencies declaring that Japan’s sovereign credit rating is in danger or has been downgraded. Like a yo-yo, the rating goes up and down when the ratings agencies need a bit of publicity. Does anything happen much in Japan when the ratings change – nought! As with all these habitual breakouts of nonsense, it is as you were Japan. Keep pumping aggregate demand and things will be fine.
Have you ever examined the Japanese yield curve? I check it on a daily basis. At present, it looks to have a normal shape (longer-maturities with slightly higher yields) than near-term assets. It is also quite low – like really low. The short-end around 0 and the long-end not much above it. It has been that way for a long time. If I assembled a group of economists – which we might call “distinguished experts” – and let them have the yield curve data and told them that inflation in this nation was low to negative and had been for two decades, and economic growth was mostly positive – and then asked them to write a story about the evolution of budget deficits and public debt ratios over the same period what do you think they would say? Alternatively, if we started with some other facts – like – increasing and relatively large budget deficits and the highest gross central government debt to GDP in the world – what would they say about inflation, growth and bond yields? The two sets of answers would be diametrically opposed to each other. The reason: because they don’t understand what drives the data. Their textbook macroeconomic models are totally wrong and have no explanatory capacity at all. It is really simple maths – a currency-issuing government can spend up to what is available for sale in that currency; can set yields and interest rates at whatever level is desires; does not need to issue debt anyway and so the notion of a financial collapse is misguided at best; and will cause inflation if it spends too much (defined as pushing the economy beyond its real capacity to produce). Simple really. Pity our “distinguished experts” didn’t see it.
Last week (August 10, 2012) the Japanese Parliament approved a bill to double the sales tax (from 5 per cent to 10 per cent) over the next three years. It is a case of déjà vu. We have been there before. The economy suffers a major negative private spending shock. The government’s budget deficit increases as tax revenue collapses. The outstanding government debt rises more quickly than in the recent past. The rising government deficit supports a recovery in real GDP growth. The conservatives start shouting that the government will run out of money, that interest rates will soar and inflation surge and life as we know will end. The government raises the sales tax and cuts back spending. Real GDP growth collapses, tax revenue falls and the deficit and debt ratio continue to rise. We are back in Japan in 1997 – but the only problem is that we are playing out the same story in 2012. The reason – Japan thinks it is Greece but has forgotten about 1997.
I have been noticing that a new narrative is coming out of the financial journalists acting as mouthpieces for various politicians and neo-liberal think-tanks around the place – along the lines that we have got it wrong – the debate now is not about austerity versus growth – but, rather, it is about structural reform and freeing up markets. The austerity is just a re-alignment of the public-private mix. I find that offensive but also odd – given that private businesses are being undermined at a rate of knots by the austerity and capital formation is stagnant (thereby undermining future prosperity). But amidst all this reinvention you still read the same scaremongering and mis-information along the traditional lines – austerity is good and the hope that increased spending can help is a pipe dream.
Sometimes I wonder how it is that a bright person can stick to a story for so long when the evidential record is so contrary to the predictions that their story keeps forcing them to make. Then again the predictions are often couched in terms of “might” and “We don’t know what will trigger such a wave of selling” (don’t know!) and “interest rates would shoot up” (would!) and “if the number of people trying to sell them surges” (if) and “inflation would erode” (would! again). So nothing concrete – just a series of assertions. So such a person is never really confronted with the reality that they know “shite” (a word I read in a book by an Irish author I have just finished – In the Woods by Tana French – recommended). This sort of denial is an overwhelming characteristic of the mainstream of my profession. I would love to be proved wrong if private households and firms do turn out to be Ricardian and fiscal austerity leads to a boom with full employment. I would abandon my MMT leanings within a flash and get on the prosperity bandwagon. Why is it that the mainstream, which has the dominant influence on policy makers – and therefore get to see their theories applied in the real world – not adopt a similar position. The predictive capacity of their paradigm is next to zero!