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Rather than pretending to a level of insight into the scale of
Japan’s problems which neither we nor anyone else truly possesses at
this stage of the disaster, we think it might be worthwhile instead to run
through some general considerations of what ramifications might be felt in
its aftermath.
Before we do, however, we cannot abstain from expressing our
utter contempt for the many idiots who have already begun parroting the
standard Keynesian nonsense that this calamity will ultimately ‘prove
positive for GDP ’, or that the rebuilding efforts can only redound to
the nation’s well-being to the extent that they shake it out of its
ongoing ’deflation’.
As is their wont, such imbecile Cargo Culters are once again
making a fetish of a coarse-grained statistic which is supposed —
however imperfectly — to offer a rough measure of material progress
being made in the real economy and not the converse, leading
them to lose all focus on what is actually happening to people’s living
standards and wealth accumulation.
Japan has been stricken with a huge loss of productive capital
— as well as an appalling toll of human suffering — and this
cannot do anything other than to leave the nation discernibly poorer and, by
extension, to curtail its ability to make people across the world better off
than they otherwise would be by offering them valuable goods and services as
part of that beneficent mutual enrichment which is the international division
of labour, conducted under conditions of free(ish) exchange.
Contrary to popular belief, the Japanese have not, in fact,
been trapped in a deflationary slough of stagnation these past two decades as
both the real and nominal supply of money have risen throughout his period
(with the exception of the worst months of the GFC itself), while real per
capita national income has also increased modestly, especially on a PPP, or
TWI-adjusted basis. Granted, the consumer price basket has trended
lower at a rate of less than 1% a year, but this is something which is
presumably no more than a reflection of ongoing productivity gains —
ones delivered, to boot, in a country formerly marvelled at for the extreme
levels of its domestic pricing.
But, even were we to subscribe to this myth of secular slump,
the idea that to eradicate a large quantum of people’s possessions or
to evaporate a sizeable fraction of their nest-eggs would be to contribute to
their prosperity is to reckon that in futilely striving to heft his rock up
the hill for all eternity, Sisyphus was the most tireless ‘engine of
growth’ for Hades at large.
If you go to the trouble of cooking yourself a dinner, only
for the dog to snatch it from the sill where you placed it to cool, do you
congratulate yourself on your own good fortune as you troop back to the larder
to begin again? If a sudden hailstorm strips bare the groaning ears of your
wheat crop the day before you were due to harvest it, do you cheerily go
about preparing the field for replanting, content in the knowledge that your
doubled labour is being duly recorded in the plus column by a mindless
government data-gatherer?
After all, if the awful spectacle of vast swathes of land
littered with shattered buildings and crumpled vehicles — or the
concern that they suffer the invisible hazards of radioactive contamination
— offers such grand opportunities for advancement, why stop there?
Why wait for the vagaries of the climate, or the tortured
creaking of continental plates to bring about such a ’stimulus’
to growth? Why not declare war on ourselves and unleash our titanic
arsenals of destruction on our own towns and cities, and rain down hellfire
upon our own farms and gardens, razing the first to the ground and sowing the
last with salt, until we make a self-inflicted Carthage of them, one in whose
midst we can hope to become rapidly richer than our neighbours as, shivering
and starving, we pick our way among the debris of our former civilisation to
the nearest construction site?
This is all such arrant nonsense that you should banish from
your consideration, henceforth and forever, all of the jejune
scribblings of the fool whom you once catch propounding it!
But enough of this! The real crux of the matter is to look at
the two sides of Japan, Inc. — both as a user (and end-consumer) of
certain goods and as a provider of often highly-valued and not easily
replicated material inputs to the world economy in exchange.
All else being equal, the country will be consuming some goods
(e.g., lumber, steel, copper wire, concrete, fossil fuel) far more directly
in the near future and, moreover, consuming them with little onward
production of value from their use.
The first order effect of this would be expected to push up
preferentially the prices of both the materials they will be absorbing and
those whose production by them is temporarily being reduced.
Conversely, the consumption patterns of the ordinary Japanese
will also suffer a compositional shift away from the enjoyment of certain
goods and services and, ceteris paribus, the prices of these should be
less well supported as a consequence.
Where they no longer supply goods to the market —
initially being completely unable to do so., perhaps, and, later, devoting
selectively less resources to that production as they first tackle the
problems of rebuilding — there is certainly scope for their competitors
to prosper, but also significant dangers that the partial or total absence of
such goods will disrupt production in factories and fab plants elsewhere,
too. [Incidentally, the possible fall in the external surplus this comprises
is one offset for the fabled yen ‘repatriation’ flows which the
market so fears]
In short, where Japan’s goods are competing for sales,
others may benefit at her expense: where they are complementary to
them, they will equally share in her ruin. In the counter-weighting of these
two factors will be decided the first question of whether output suffers
beyond her shores and of what impetus is given to what prices.
By confounding entrepreneurial planning, dislocating
production schedules, hampering timely onward delivery, etc., the damage
could be widespread and should certainly belie Monday’s initial market
insouciance. Given that profitable production is the only true source of
sustainable consumption and that business-to-business spending is normally a
good multiple of what is captured in the blessed GDP numbers, the
earthquake-induced fall in Japanese incomes could soon be reflected
elsewhere, too.
Where business planning (and the structure of financial
exposures which embody this) has been too casual in its concern for such
upsets (however unforeseeable the particulars of this one were), such
frictions can rapidly mount to the point where they strip the drive-train of
all further functionality and the firm finds itself staring failure in the face.
In this context, we again must draw attention to the alarming
upsurge in pestilential credit practices — such as cov-lite, loans, PIK
notes, PE dividend-stripping, and buoyant junk financing in general —
which so exacerbated the last bust and which have been allowed to re-infect
the economic corpus with the active cheer-leading of its central banks,
especially the one housed in the Mariner Eccles building.
Furthermore, financial markets have entered this crisis having
only grudgingly tempered their inordinate, Fed-fostered levels of bullishness
(that, as a result of the Arab unrest) and with leverage, carry–trades,
and crowding therefore all notably elevated.
A narrow replay of the kind of crash which followed the San
Francisco earthquake and fire of 1907 are perhaps not to be looked for in the
absence of a hard money kernel to the pyramid of credit, but that is not to
say that ‘contagion’ and the forced liquidation concomitant with
it cannot course through other financial channels instead, especially since
people are all too aware of the continued fragility of the associated
plumbing, even here, on the third anniversary of the Bear, Stearns bail out.
One obvious fracture plane could be the finances of Japan
itself, a legacy of two decades of failed New Deals whose eventual
unravelling has been exciting the attention of the bears for some good while
since. The usual defence is that Japan ‘owes much of the debt to
itself’ – a macro-accounting identity which an Austrian is
willing to concede while questioning its practical validity.
That some elements of Japanese society have debts greatly in
excess of assets (principally, the state) while others (mainly in the private
sector) are in the opposite condition is only a comfort inasmuch as it
reduces the nation’s exposure to the vicissitudes of the forex market
or to the vagaries of offshore investor sentiment.
Thus, while it may provide a convenient smokescreen under the
cover of which today’s hard-won savings are funnelled to
Leviathan, there to plug the holes left by the squandering of yesterday’s
savings, as well as to disburse the doles from which a good percentage of tomorrow’s
savings are, in turn, generated, this quadrillion yen round-robin cannot
permanently disguise the chronic nature and mind-stretching scale of the
capital consumption it entails.
The circling financial vultures are therefore looking forward
to the moment when domestic Japanese investment is no more sufficient to
absorb all the government’s issues, (without perhaps contemplating the
drain on the other improvidents when the giant, state-owned — or
state-cajoled — institutions sell their USTs and kangaroo bonds, and
realise their Nasdaq holdings and Eurobank CoCos in the effort to plug this
gap).
What they now anticipate is that the costs likely to arise in
the course of rebuilding the nation cannot fail to have advanced the date of
that long-awaited morrow when the piper must be paid and JGB yields start to
soar in consequence (even though, were we consistent, the Keynesian theory of
fruitful holocaust would suggest ‘growth’ could, meanwhile,
repair the finances painlessly).
In this, they may even be right, yet their positioning may
well not survive to see the great denouement, for the route to a complete
breakdown in the Japanese fiscal position surely lies through the Nihonbashi
and the unbridled monetization powers of the BOJ.
Indeed, the additional threat posed to the economy — not
just of Japan, but to those of all of its foreign trading partners — is
not so much that the government runs out of cash, but that the whole country
comes to drown in the stuff.
Indeed, while recognising the short-term, emergency need to
reassure people that they will continue to have access to a medium of
exchange and a functioning payments system, it is more than a little
worrisome that the Bank has doubled its long-term QE programme, citing a
desire to ’pre-empt a deterioration in business sentiment…
from adversely affecting economic activity’ and to ‘…make
contributions…’ in order to ‘…overcome
deflation…’
As we wrote of a New Zealand whose own affliction has been
swiftly forgotten in this larger tragedy, no good can come of a policy which
can only serve to add to the confusion and bewilderment already occasioned by
the violence of the tectonic shift in trying to suppress — by means of
a crude resort to the printing press — the all-too evident fact that
Japan is less well endowed with capital than it was and thus, that
interest rates should naturally rise to reflect this inescapable verity.
It is not Yen that Japan now finds itself short of, but
potable water, medical supplies, bridging materials, constructional steel,
and electric power. The BOJ cannot help deliver these more readily or more
efficiently by debauching the currency via its attempt to divorce financial
asset prices from the diminished earning potential they incorporate.
Similarly perilous is the incitement this will give to the
pump-primers elsewhere in maintaining — or even extending — their
own easing programmes. Nor will they be consistent in this for, if they
conveniently ignore the rise in food and energy prices, they will just
as conveniently point to any liquidation-induced falls in these
groupings to confirm the accuracy of their interpretation. On top of this,
the many extant doves will be only too happy to protract their tenure as
supposed saviours of the universe by enacting extra easing measures should
Japan’s woes conspire to slow the upward momentum in the local recovery
Do not write-off QE-III just yet.
Sean Corrigan
Copyright ©
2006 - Copyright © Diapason Commodities Management - Sean Corrigan
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