The Marginal Futility of Debt

The stock market is to the 1% what food stamps are to the poor – Tyler Durden, Zero Hedge blog

house of cardsAt the end of World War II, as the world’s last remaining and therefore pre-eminent economic power, the United States was in the envious position of being able to generate nearly $1 of GDP growth for every incremental dollar of debt taken on. By 1980, the marginal utility of debt in the US had dropped to about 30¢ of growth per dollar of new debt. This decline was partly due to the oil price shocks of 1979, which took so much purchasing power out of the economy that consumers and businesses had far fewer dollars available for consumption and investment after paying for oil and meeting interest and principal obligations on existing debt. The recession of 1979-1980 also brought about a huge increase in defaults, which is the main downside of debt, and this provided a self-reinforcing austerity on an economy already dealing with a sharp cut in spending power.  (Image: ClaraDon)

Still, back then new debt produced some GDP growth. Fast forward thirty years. Somewhere around 2008 to 2010, the marginal utility of debt for the US dropped to zero. There was so much debt on the books at all levels of society (including government), eating up so much income in the form of principal and interest payments, that when the shock of widespread defaults was introduced into the economy as the result of the housing bubble collapse, it became futile to add more debt. At that point, the US entered the age of the Marginal Futility of Debt, in which it has been mired ever since.

In these economic circumstances, the response of politicians, but especially the central bankers, who are not politically beholden to anybody, is to step on the gas pedal. This is the classic response of a junkie hooked on heroin or crack; the body needs more and more of the drug to maintain equilibrium. In this case, the central banks, in tacit complicity with the politicians, find that the economy requires much more debt just to stand still.

The problem is that new debt cannot produce real growth, which comes from investment in new plants and equipment, and new products. All that new debt can do is create the illusion of economic growth, and it does so by producing asset bubbles, which are a form of inflation. If things really get out of hand, new debt can produce overt and extreme price inflation, known ever since the days of the Weimar Republic as hyperinflation. So far this has been avoided in the US, but there is no doubt the asset inflation which currently exists is a product of Fed money-printing, through its Quantitative Easing programs. Not only has such money printing created double-digit growth in a variety of markets (the US stock market finished the first quarter of 2013 up 11%), the Fed’s Zero Interest Rate Policy has telegraphed to investors a very specific message. Saving money in safe instruments is for fools; the Fed wants everyone to invest in speculative markets to earn any decent return. This is why stock markets, junk debt markets, commodities, luxury goods, and now speculative real estate, have done so well under Quantitative Easing.

Most people do not have access to the money created by Quantitative Easing. This money goes to the rentier class – the banks, financiers, hedge funds and other financial actors who make their living extracting a rent from the rest of the economy just for the privilege of using money as a medium of exchange. It is the rentier class which is raking in the profits from Quantitative Easing, while the great mass of the public watches from the sidelines and struggles to meet everyday expenses. This is very evident in the lamentations coming from Wal-Mart, which caters to the great unwashed of the economy – the poor and near-poor who increasingly suffer a Third World style of subsistence living, able to afford only basic food, heat, gasoline, and rent. Wal-Mart, which used to be a growth stock in the 1990s, has seen nearly three years of flat revenue, and has now been joined in this situation by a true growth stock of recent times – Apple. Executives of Apple are now experiencing a similar stall in growth, and this is a company which really has put money into successful new products. Apple is blaming its plateau in growth on the “frugality” of consumers, who can no longer afford the company’s pricy new products.

Apple’s assessment of the problem is quite correct. Consumers, other than the very wealthy members of the rentier class, are more and more slipping into a subsistence life-style in the US, and they are joining the millions in poverty, 50,000,000 of whom now eat only because they have access to Federal food stamps. The economic data bear this out, particularly the decline in GDP growth, which reached zero in the last quarter of 2012. The Fed, which is currently putting $85 billion into the economy every month through QE Eternity (as it is called in the markets), and which concomitantly is helping the US Treasury finance deficits of that amount, has produced absolutely no economic growth.

What’s a central banker to do in light of proof that the Marginal Futility of Debt is now the natural order of things? Print more money! We saw that this morning with the announcement out of Japan that the central bank is increasing its QE program to ¥ 5.2 trillion a month. In dollar terms this is double what the Fed is doing, and the Japanese economy compared to the US economy is considerably smaller. The new all-or-nothing approach of Prime Minister Abe in Japan to find some answer to chronic deflation is called Shock and Awe by the press – describing an attempt by the government to fatten the economy on so much debt that inflation will finally break out in the form of GDP growth.

Critics of this program suggest that the only thing Japan is going to achieve with its debt sugar bomb is a diabetic coma. This is a country, however, that has lived through two decades of deflation, relieved only by periods of intermittent returns to zero growth. This is also a country that is in an existential crisis of capitalism. Its population has now begun to shrink, because its birth rate is so low that deaths now outnumber births, and the country does not allow immigration to make up the difference. This is inimical to capitalism, which depends on population growth for its very existence.

If capitalism is ceasing to deliver the goods in Japan, you would expect to see that reflected in a stagnant to declining rate of economic growth, precisely the conditions Japan is experiencing and which it hopes to reverse with monetary Shock and Awe. The US has already shown, however, that nothing good will come of this but asset inflation or worse. This was exactly the market’s response last night to Shock and Awe – the Tokyo Stock Exchange increased about 2%, and the yen, which has already declined 20% in recent months against major currencies, fell a little bit more. The FX markets recognize that Shock and Awe has as one of its goals the depreciation of the yen as a means of stimulating export growth. Unfortunately all QE programs have the same effect, and now the major currencies, except perhaps the euro, are in a state of combat to determine which currency will depreciate the most. This is nothing more than a modern version of the Beggar thy Neighbor trade war that took place in the 1930s, the last time the world had to deal with global deflation and declines in growth.

The quite odd if not cynical thing about these asset inflations is that everyone knows their point of origin, and the money printing which fuels these bubbles. This is why the recent all-time record highs in the Dow Jones and S&P 500 indexes have been met with so much shoulder-shrugging from financial analysts. Almost to a man they agree investors have to be in the stock market; it is the only game in town in a world of zero percent interest rates. They themselves, however, with the possible exception of their computer algorithms that are programmed to follow all trends until the trend dies, would prefer not to be in the stock market. The commentary from analysts almost always mentions the underlying phoniness of these record highs, spirited as they are by money printing, but they end up nonetheless concluding that investors have no choice but to stay long the stock market.

This is reminiscent of the statement from Citibank CEO (at the time) Charles Prince, who at the height of the housing bubble said the bank had no choice but to continue dancing “until the music stops”. That didn’t work out very well for Citibank (Mr. Prince on the other hand retired with tens of millions of dollars of compensation for his trouble). Wall Street at the moment stands almost fully invested in the stock market. Mutual and hedge funds have only around 2% of their assets invested in cash, near an all-time low, just as the market is at all-time highs. This is one of those contra-indicators which tell us the market is dangerously exposed to a setback, since record low cash levels always accompany stock market peaks, and are definitely not a prelude to the sustained bull market many analysts are now predicting.

If the market is indeed at a peak, very much like we saw in 2000 during the NASDAQ bubble and 2008 at the height of the housing bubble, it will be necessary to burst the fantasy sustaining today’s lofty prices for equities. That fantasy is born of Quantitative Easing, and is resting on the myth that the Federal Reserve is all-powerful and has endless resources to prop up the stock market. That it does not have endless resources can be proven by a simple mental experiment, imagining that the Fed balance sheet was allowed to grow from its existing $3 trillion to $30 trillion. This amount would be twice the size of the US economy, and would expose the Fed, which has hardly any capital, to massive, trillion dollar costs if interest rates veered just a smidgen from where they are now on the ten, twenty or thirty year Treasury bond. Because the Fed has no capital, it would house of cards2have to turn to the Treasury for a capital injection. Where, however, would the Treasury get the money? It would have to borrow it, since the US tax base is less than $2 trillion annually. This means the Fed would have to print more money to fund the debt necessary to sustain itself as an organization in trouble due to previous money printing. This type of existential contradiction can only wind up in a vicious implosion of the Fed, at great cost to the economy.

We already have at hand a real-world example of where excessive money printing leads, in this case with Japan, which has been engaged in this game for 20 years and has pursued a policy of zero interest rates for that long. Rates at zero percent are essential to continue the game of endless money printing, because interest payments at traditional market rates would otherwise bankrupt the government. As it is, interest payments on Japanese government debt are costing the government 25% of all of its existing revenue, and that is with interest rates on the debt already very close to zero percent. Imagine what would happen to Japan if the bond market starting dumping Japanese government bonds and pushing up long term rates by 2%. Interest payments would consume the entirety of the government’s budget, drowning out all domestic and military spending.

Where do you think the new Shock and Awe program is going to lead? It is going to worsen Japan’s dependence on zero interest rates and expose the nation to massive losses on its central bank balance sheet even from minor changes in market rates. This is the fate destined to engulf the Federal Reserve if it stays on its current path. There is, as the old dictum says, no free lunch. The Fed does not have the ability to print money endlessly and balloon its balance sheet to grotesque size.

A few professionals in the stock market already know this, and have kept their money out of equities. They prefer to stay in safe cash investments even if the interest return is zero. As another old saying goes, sometimes it is better to worry about a return of your investment rather than the return on your investment. These professionals are few and far between. If they speak up at all, they are drowned out by the chorus of cheerleaders encouraging everyone to dump everything they own into the stock market. That is the current situation in the US stock market, as reflected by so many technical indicators: volume is low because everybody is already “all-in”, option call volume vastly exceeds put volume because everyone expects the market to go only up, investor sentiment is once again extremely bullish just as we saw in 2000 and 2008 at the previous peaks, and breadth is worsening, meaning many more stocks are failing to achieve new individual highs despite the market’s record performance.

This is a recipe for yet another crash as we saw in 2008, only worse, because now the crash will be caused by a loss of confidence in the rescuer of last resort – the Federal Reserve and the US government. Once that prop is removed from the market, there is no other hero around who is able to pull the market back from a slump. A natural bottom will have to reached where selling exhausts itself, and the last time we saw that phenomenon, the Dow was at 6,600.

There are many different scenarios that come to mind to cause disillusion in the Fed’s omnipotence. Europe can continue to be engulfed by widening deflation, and nothing by the way is more deflationary than the government confiscating consumer deposits in banks. This is why the Cyprus situation is so worrisome – it shows the EU government being forced to do something highly deflationary, which is completely contrary to what the government is hoping to achieve. The US could easily be forced into a similar need to confiscate deposits, because none of the TBTF banks is entirely healthy, and all of them are exposed to a systemic crisis from Europe due to their interlocking derivative portfolios. The link among these portfolios are the collateral clauses that exist in every derivative contract, and which call for the seller to pony up liquid collateral in the event the financial product in the contract suffers a price drop in the market. Credit derivatives were the source of just such a problem back in 2008, and the problem hasn’t gone away. We learned in the MF Global collapse that the big banks “rehypothecate” their collateral, meaning they pledge the same piece of collateral over and over to different banks. The world is already facing a collateral shortage – this was very evident during the Cyprus crisis when the EU announced the banks in Cyprus no longer had enough high-quality collateral to be able to borrow from the European Central Bank. Where has all the collateral gone? Straight to the Federal Reserve, which has been vacuuming up Treasuries every time it does Quantitative Easing.

You can see the daisy chain of disasters that has been created here. A surprise bankruptcy of a medium size bank or of a hedge fund, leads to a repricing downwards of all credit derivatives. The issuers of these derivatives, which are almost entirely the large TBTF American banks, face unprecedented demand for more collateral in the form of Treasuries. The Fed, however, has been buying up over 75% of all new Treasuries for two years now, and does not dare sell them back into the market for fear of tanking the economy. One or more TBTF banks can’t meet their collateral obligations, and like AIG they are nationalized overnight by the federal government. And from there, all it takes is one individual in the government to hint that the solution to the shortage of liquidity can be found in the Cyprus crisis – in other words, it is time to confiscate deposits in the nationalized bank.

This is the point where panic steps in since everyone realizes their wealth is now in jeopardy. The banking system can no longer function due to the outpouring of liquidity by customers. We are right back to 1933 when a bank holiday had to be declared and everyone found themselves much poorer.

It is easy in this scenario to imagine the stock market at 6,600 Dow or much lower. You don’t need a financial crisis to get there, however. Any exogenous shock will do, considering how much the stock market is floating on nothing but thin air. Dear Leader Kim Jong-un, for example, might not be the rational, though puerile and petulant, actor everyone thinks he is. He may simply be a crazy person who gets his military to do his bidding by having any objectors shot. Let us hope, then, that the US Department of Defense has done some game-playing and is prepared to react to some form of complete lunacy out of North Korea, such as Kim deciding to drop one of his six nuclear bombs on Seoul, Tokyo, or even Beijing, which whom he is no longer on good terms.

It is always, always a feature of market tops that investors become extremely complacent about the risks they face. Risk always escalates when the market pushes higher based on the illusion of safety and security. Often the illusion consists of the belief that major market players are sound credits, or that the collateral that underlies so many transactions can never go down in price. An even worse illusion is the belief that government will always ride to the rescue. The worst illusion of all is underestimating the uncertainty that exists in the geopolitical realm, and overestimating the rational behavior of key players in that realm.

All these illusions are present in today’s market. The only thing that is absolutely certain in today’s market is that these illusions will at some point burst. We don’t know when, but it will happen. When it does, most everyone will be dancing while Mr. Market has been quietly removing all the chairs from the room, leaving no place to rest when the music stops.

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Numerian is a devoted author and poster on The Agonist, specializing in business, finance, the global economy, and politics. In real life he goes by the non-nom de plume of Garrett Glass and hides out in Oak Park, IL, where he spends time writing novels on early Christianity (and an occasional tract on God and religion). You can follow his writing career on his website,

39 CommentsLeave a comment

  • Support this on Reddit

    Great article. Here are some of my favorite passages:

    This is nothing more than a modern version of the Beggar thy Neighbor trade war that took place in the 1930s, the last time the world had to deal with global deflation and declines in growth.

    Most people do not have access to the money created by Quantitative Easing. This money goes to the rentier class – the banks, financiers, hedge funds and other financial actors who make their living extracting a rent from the rest of the economy just for the privilege of using money as a medium of exchange. It is the rentier class which is raking in the profits from Quantitative Easing, while the great mass of the public watches from the sidelines and struggles to meet everyday expenses.

    This is a recipe for yet another crash as we saw in 2008, only worse, because now the crash will be caused by a loss of confidence in the rescuer of last resort – the Federal Reserve and the US government.

    This is the point where panic steps in since everyone realizes their wealth is now in jeopardy. The banking system can no longer function due to the outpouring of liquidity by customers. We are right back to 1933 when a bank holiday had to be declared and everyone found themselves much poorer.

  • To respectfully differ, although an extensively as well as a competently written essay, it conflates economic investment in economic production with financial (wealth ownership) investment requiring ROI as having an equal economic standing. The argument given is based upon an accounting structure prevalent and useful at the time Bretton-Woods was germane and has not been adjusted since that economic regime ended. This accounting structure is what the neoliberal establishment uses for intellectual justification of austerity. The hidden danger to the economy is in exposing the developed trust in fiat money to erroneous and unnecessary question of its substance. Once that trust is eroded, the edifice developed by experience over millennium becomes inoperative as a system with the result the economy, the ecology, the culture itself collapses. This is exactly where the leadership of Germany, the EMU, ECB and the IMF are steering Europe. If the same effort was made as your essay required in clearing the fogs of economic idolatry – ideology that surround the public discourse, your opus would have been greatly enhanced. As it is, it is indistinguishable from the arguments given by those imposing austerity upon the public.

  • lack of demand is the problem. not enough money at the bottom of the economy. the top has too much and too much of that is being sloshed around in casino stock markets.

    the problem is not a resource supply one at the moment. that’s why there’s the lack of consumer inflation even with qe money printing. again it’s demand problem. money stuck circling around the top not even trickling down much less flowing down as needed.

    and there is no reason this cannot go on for a very long time. at least where countries are willing and able to keep printing money. europe is refusing to do both. it will not print money and it will not fund the real economy of the people at the bottom.

    so i think your picture is unclear or wrong. your expressed views of debt are not helpful to understanding the current economic situation. at least they don’t help me.

    • The problem is that juicing demand will also juice demand for carbon based energy, which is why current real expansion of the money supply (sans the stuff at the top) is restrained to the increase in carbon energy from fracking and increases in efficiency, along with some contributions from drops in solar power. This means that the underlying problem is “lack of investment supply.” There aren’t lines of business that will pay the cost of money, which is the op cost against sucking off of QE.

      We have the brake attached to the accelerator.

      • That’s why I said “at the moment” the problem is not a resource supply one. I thought that the cost of money at the moment was effectively zero? So yes there is a “lack of investment supply” but because of the lack of the ability of the bottom consumerists to demand it.

        By “drops in solar” I assume that you mean the “dribs and drabs” of the solar contribution to current energy consumption and yes it is currently small but rising exponentially. I don’t have access to the real numbers, neither physically nor conceptually, but my feelings! say we are nearing a tipping point where dirty energy becomes uncompetitive.

        • Solar has just turned a corner – PV panels are now producing more energy than it takes to manufacture them. If some significant part of that excess energy were devoted to production, PV could rise exponentially.

  • The only problem libertarians have with fiat money is that they aren’t making, anyone who goes ZOMG! FIAT MONEY! is just upset he wasn’t born at the right moment to get his con in place. All currency is fiat currency – gold, dollars, bitcoins, because it all comes out of the willingness of people to play whatever game it is a token in.

    The problem Numerian is pointing to is that there is an incompatibility between a governmental system that says it is based on the consent of the governed, which is so transparently run by and for the benefit of a very small group of people. For about a generation people bought the idea that great titans of industry were making more social value than they were extracting, as the faith in this erodes, so to does the faith in the current system.

    Right now, more and more of the public knows this is a scam designed to give certain people permission to fly around in helicopters, and for everyone else to scrub along, basically serving as raw material for extraction of a few resources, and as clinical trial dummies for life extending medical procedures. As a result, the more self-aware members of the proletariat are trying to make scams based, instead of on oil, on other forms of consumption, such as prostitution, gambling, child sex tourism, drugs and so on. Since the present system is now entirely based on the trouble of moving off of it, eventually the two lines will get close enough that enough people will decide that a violent upheaval will give them a chance to impose their preferred scamconomy, and they can fly around in helicopters.

    The rest, from most quarters, is just PR as to why some particular scam is more moral than the others.

    • “[O]ther forms of consumption, such as prostitution, gambling, child sex tourism, drugs and so on” is also known as culture and except for the child sex tourism, are legitimate forms of culture except where morality Nazis step in. And cultural production is quite appropriate in economies where robots do more and more of the physical production work. Of course, when the, pardon the Marxist sound of it, means of production are concentrated in a plutocratic governing class, the so-called proletariat, do not have the time to create culture.

      So where production becomes resource constrained then yes it should be shifted to cultural production in order to juice the economy.

    • I was trying to think how to respond to Arnie, but I believe this quote says it better than I could:

      All currency is fiat currency – gold, dollars, bitcoins, because it all comes out of the willingness of people to play whatever game it is a token in.

      As much as I can understand someone’s nostalgia for the gold standard, history shows it had its own limitations that ultimately contributed to the 1930s Depression. As much as I agree that fiat money isn’t worth the paper it is printed on, it has brought about phenomenal prosperity from 1945 to at least 1970 for most people in the OECD. Of course there were other complex economic, social and political factors which contributed to that prosperity, but it does seem that a fiat currency with some link to gold or a commodity basket or some similar real-asset grounding would force the central banks to rein in spending and growth when price or asset inflation threatened to get out of control.

      • Just to bring attention to two points.
        First: It is erroneous that all currencies are fiat, at least in my reading of historical economics. Fiat currencies were contemporaneous with metallic currency. Precious metal currency solved the problem of forgery of the currency making counterfeiting too expensive. Users soon conflated the precious metal with the nominal economic value of the coin. Modern (16th century) currency developed about metallic currency augmented by printed (fiat) currency convertible into metallic (gold standard). Bretton Woods allowed the removal of the gold standard for currencies and replaced the gold standard with the dollar having gold convertibility as the replacement reserve once occupied by gold. When Bretton Woods was negated, all currencies became de facto fiat, and with almost no exception without ill effect. Fiat IS that link to a commodity basket.

        Second: Conflating nostalgia for the gold standard with my comments above is specious and will not lead to a rational discussion of economic problems. The danger is when language meanings become fungible, rational discussion becomes impossible e.g. current political discourse. I will not even go into the morass conflation of opinion and knowledge leads.

  • There is a movie that will be available on iTunes, the English title is “Pieta” it connects with how the current economic system functions from a bottom end perspective.

  • Here we go.

    Japan Stimulus will start currency war, say Chinese Economists 4/5
    South China Morning Post

    Many of China’s top economists are livid at what they view as an effective currency devaluation by Japan and are calling on the People’s Bank of China to retaliate by weakening the yuan to defend itself in what they see as a new currency war.

    These economists, including Tsinghua University professor Li Daokui and ANZ Bank’s Liu Ligang, see Japan’s plan to double its monetary base within two years as “blackmail” and have criticised the Japanese central bank’s decision to open the liquidity floodgates to bump up the economy.

    • Krugman thinks Japan needs expansionary policies to get itself out of its 15 year slump. Thinks that policy makers (read China in this case) have misplaced fears.

      OK, people have been asking me where I stand on the “currency war” issue. My answer is that it’s all a misconception, and it would be a very bad thing if policy makers take it seriously.

      First of all, what people think they know about past currency wars isn’t actually true. Everyone uses some combination phrase like “protectionism and competitive devaluation” to describe the supposed vicious circle of the 1930s, but as Barry Eichengreen has pointed out many times, these really don’t go together. If country A and country B engage in a tit-for-tat of tariffs, the end result is restricted trade; if they each try to push their currency down, the end result is at worst to leave everyone back where they started.

      And in reality the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930s this was because countries threw off their golden fetters — they left the gold standard and this freed them to pursue expansionary monetary policies. Today that’s not the issue; but what Japan, the US, and the UK are doing is in fact trying to pursue expansionary monetary policy, with currency depreciation as a byproduct. Expansionary policy is what the world needs, so why is this a bad thing?

    • I’m trying to understand this response by China. I get the hypocrisy of it; the world is flooded with more hyprocrisy from its politicians and media than it is by liquidity generated through Quantitative Easing. But is China’s export machine that threatened from Japan’s devaluation of its currency? Japan only competes at the high end of technological products, and China is for the most part at the opposite end of the export spectrum. Where is the competition between the two exporters? Maybe the Chinese are worried that their exports of cheap goods to Japan is threatened by a yen devaluation, but if so, China wasn’t worried at all about those exports during the Spratly Island fracas.

    • Thanks Don. While Arnie has a point that you are a Renaissance man with a variety of intellectual interests, your connection to the earth and the work necessary to produce something of value through agriculture puts you far more in touch than I will ever be with what has been greatest challenge for the common man throughout our history.

  • First: When you a commoner Don Henry, I’ll start believing in flat earths. A little humility is in order, anyone who can track and account for: seasons, crops, animal husbandry, finances, banking, markets and weather, let alone politics has an intellectual plate full.

    Second: A small notice in today’s El País informs the taxes imposed upon Portugal by the troika (EU, ECB and IMF) are unconstitutional. Looks like a number of constitutional changes are in order in the EU (and elsewhere).

  • This is all well and good (I guess??), but how do I fight the AHIC (asshole in charge) who insists to fuck me, the little guy.
    Point in case; Obama (the head asshole) has just put the chained CPI on the chopping block!
    I’m retired and on SS; who gave him the right to fuck with my retirement compensation?
    By what right does he decide who lives and dies?
    All of this lofty economic stuff fails utterly to address the pragmatic realities of us retires who are on the block!
    This is the worst of the worst and really hit’s home.
    What’s the reason Americans just sit idly by as the president sells them down the river for big business?
    If that can’t be addressed and dealt with then all this economic bullshit is just intellectual masturbating.
    Get down and dirty about solutions!
    Who cares about the futility of debt? That’s the bloody reality of most Americans!!!!
    Geez, get real!

  • Hey Numerian…,

    Always look forward to…, and enjoy…, your contributions. This one is no exception. Right on partner…, write on.

    The job numbers report kind of took some steam out of this one that features the Japan situation…, but I have been interested in that since TJFXH was saying that the US was heading down the road to a fate like Japan. I remember commenting that maybe that wouldn’t be so bad a fate as some others that might develop. All the headlines this week have screamed, “After 20 Years of Deflation, Japan…”. But as Janet Yellen said in a Bloomberg piece, “Nominal income, nominal GDP in Japan is slightly lower than it was 20 years ago,” she said. “That’s really remarkable and it’s resulted in all kinds of problems for Japan.” The way I see the Japan picture is that…, yeah they had a bubble burst, they didn’t panic, they spent what they had to to keep from descending into a deadly deflationary spiral, but they didn’t inflate another bubble either. Maybe after 20 years of (do I dare say it?) austerity…, maybe a dose of Keynesian stimulus might be appropriate at this time?

    Oh…, one more quote that I found that I really liked, “It’s worth pointing out here that macroeconomic models have been consistently wrong about almost everything for the past six years. Even before that, economics did not predict and can’t explain the tech bubble at the end of the 1990s, the real estate bubble, the credit bubble, the 2007 credit crunch, or anything that’s happened since then, and they don’t have a clue what’s going to happen in 2013.”

    Anyway…, once again…, right on partner…, write on.

    The Quillayute Cowboy

    • Hi Scott,

      I hinted that there was something existential about Japan’s 20 year fight with deflation, zero interest rates, and zero growth. Japan has been challenged by something that is like anti-matter to capitalism: population decline. Theoretically an economy like Japan’s, with highly-skilled labor and an ability to invent new products, could have fought deflation by grabbing market share from others. That it didn’t do so might be a reflection of the rise of competition from China and others. It might also have been that the economy was forced to focus more and more resources on the non-productive elderly, starving the innovative sectors for resources. Even if Japan had been able to maintain growth through innovation despite a shrinking population, other major countries were beginning to face the same demographic problem in Europe and North America. A global economy with every nation doing the same thing is a zero-sum game, and that is Japan’s lesson for the rest of us. Europe and now North America have reached or are reaching that magic point where births no longer exceed deaths, and only immigration can keep the population overall growing. The entire world can’t avoid deflation if every major producing/exporting country is fighting for market share. Capitalism may not be unique in having no answer to this problem, if that is what it is, but capitalism seems especially mated to incessant growth in market share, revenue, net income, stock prices, and so on. This is the core objective of any public corporation. For corporations to survive in this market, they have to keep their net income growing by sucking resources out of the economy through some other means than selling products. In the US, it means corporations have been forced to become leeches, extracting equity from the private sector as well as government, and reducing their own tax burden at the same time. This game seems to be coming to an end, with only the government left to try to keep the wheels spinning, by issuing massive amounts of debt.

      I don’t see how macroeconomic modeling can grapple with phenomena like these. The economic profession needs a different set of tools, but first it has to think differently about the economy. Classic market-driven capitalism seems to be going out of existence, at least for the time being. The old models don’t work any more. Add to that the points Stirling has been making about resource depletion and climate change, and no wonder economists feel like polar bears at sea with no place to land.

      • Robots. Robots are artificial people when it comes to production. But when it comes to creative ideas, ideas that appeal to people then robots are worse than useless. Capitalism has always been driven by a pool of unemployed people to keep wages low. Another skill that robots can’t mimic I suppose.

        But an economy driven by the needs of people is the real shortcoming of classical capitalism. So yes we are talking here about the end of capitalism, even if we refuse to say so. The reason we refuse to say so is that the conversation inevitably asks the question of if not capitalism then what. And for that we need a new precise set of economic concepts that do not yet have a name in aggregate even as it is a combination of existing concepts that do have names.

        • Don’t take this the wrong way, but in around 20 years that view of robotics is going to look really wrong. The stuff that’s just starting to come online with fabbing is probably best interpreted as something very akin to robotics and it’s going to result some very, very interesting changes. Major question in my mind is whether it’s going to physically scale to large items and what the cost is going to be – if it goes large and we’re able to keep costs accessible, that will be very interesting. Manipulation of large, mechanically useful materials by a significant fraction of the population would be a big change (think now about how many people can put together a bicycle frame for example, or make furniture – each of those requires a significant and unique infrastructure, but if the infrastructure for each were to become the same and the skills required not comparatively esoteric…).

          • No doubt. When I look at my views of 20 years ago, I was quite naive about a lot of things. If I understand you correctly then you are suggesting an intersection of creativity and the means of production. You are suggesting the transfer of the means of production and its ownership downward. Marx envisioned the transfer to happen at a class level of ownership and you are suggesting an individual level of ownership. Of course there is still the question of can the productive robots make themselves? So will the ability to make productive robots still be controlled by a small class of wealthy owners?

      • Hey Numerian…,

        Mike Whitney over at CounterPunch posted a great analysis of the Japan situation, The BoJ’s Kuroda Wheels Out the Heavy Artillery Here are a couple of snips:

        Media Wants it Under the Wraps

        The BoJ’s Kuroda Wheels Out the Heavy Artillery

        by MIKE WHITNEY

        “Almost the entire rich world is stuck in a zero interest rate liquidity trap situation, and I think everybody is haunted by the possibility that there’s no way out of it. If Japan shows a way out of that, it will be very encouraging.” – Greg Ip, U.S. editor of the Economist

        This is big, really big. In fact, according to the analysts at Nomura, the Bank of Japan’s (BoJ) aggressive bond buying program will be 5-times larger than the Fed’s QE as a percentage of GDP. And, while the Fed has purchased a mere 25 percent of gross government bond supply (US Treasuries), newly-appointed BoJ chief Haruhiko Kuroda plans to buy an eye-watering 72.9 percent.

        Wow. Kuroda is really wheeling out the heavy artillery for this one. But will it work? Will the BoJ really be able to hit its inflation target of 2 percent without cracking the bond market and reducing the yen to a smoldering pile of rubble?

        Economist Joseph Stiglitz thinks so. Here’s what he said in a recent post at Project Syndicate:

        “Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive program entailing monetary, fiscal, and structural policies…..There is every reason to believe that Japan’s strategy for rejuvenating its economy will succeed.” (“The Promise of Abenomics”, Joseph Stiglitz, Project Syndicate)

        There’s only one reason to be optimistic about Japan’s new economic policy, and that’s because it includes a sizable fiscal component that will rev-up spending, push up wages, lower unemployment, increase growth and end deflation. The rest of the plan is just more of the same bond buying lunacy.

        But don’t expect to read about the fiscal part of Abe’s plan in the MSM, because you won’t find it anywhere. You see, the big banksters and corporate honchos who control the propaganda outlets don’t want you to think that it’s okay for the federal government to spend money on public projects. That’s a big no-no. They think all the money should be diverted to privately-owned businesses so the “job creators” can rake in bigger profits and live high-on-the-hog. In any event, I managed to dig up one article on the topic on Reuters Tokyo titled “Japan’s extensive infrastructure casts doubt over targets”. The piece explains what’s going on behind the QE smokescreen:

        “Japanese Prime Minister Shinzo Abe aims to spend more than $100 billion on infrastructure in the next 15 months to help revive his country’s economy … Infrastructure spending tops Abe’s economic agenda alongside nudging the central bank into more aggressive steps to end deflation. Since he took power in December, Abe has earmarked 10 trillion yen ($107 billion) for new infrastructure and upgrades over the next 15 months – half of it funded by government debt…

        (Abe) has suggested spending similar sums every year for a decade …With the private sector and local communities expected to match government investment, this would add up to 200 trillion yen ($2.16 trillion) over 10 years – or roughly 40 percent of GDP.” (“Japan’s extensive infrastructure casts doubt over targets”, TOKYO – Reuters)

        $100 billion in fiscal stimulus “every year for a decade”?

        Whoa. That’s probably enough cash to shake off the deflation bugaboo and put the economy back on the road to recovery. No wonder the media wants to keep it under wraps. It might just work!

  • I’m not so sure QE is really pushing up asset prices by keeping treasury yields low:

    * We have the problems of sluggish GDP growth and high unemployment.

    * The diminishing GDP “margins” on new debt suggest that there are big structural problems:

    A lack of low-cost money is apparently not the bottleneck that is holding the private sector back from real growth. Instead there is a demand-side problem for the goods and services we could produce more of by taking on new debt. E.g., this seems not to be a great time to be building new Wal-Mart stores or opening new blue jeans factories in the US. On the other hand this is apparently a swell time to be building new condominiums or office space in outperforming real estate markets — and then flipping them. We have a shortage of investment opportunities in things that will add to real production. This is a shortage of ideas and will.

    Extended Comment Here

    • Please keep your comments shorter. There’s a positive contribution here, I’m sure, but it is the length of a long original post. This coming week, we will have something up on the main menu for people who want to contribute articles. Thanks

        • Shit! Too long? I’m at a loss, zero comments on Tina’s thread about 11 dead children (drone strike Afghanistan); and now you’re telling a poster their comments are too long.
          Man, I thought I’d seen it all; but here? Keep it short?
          Jaysus; what do you want? The fox News Of the thoughtful, informative, The thoughtful-global-timely? Really?
          Get a grip! Fail! Big time! Most likely (for this one) bye, bye…

      • Whoa down there. Long replies are an indicator of success. That means you’re doing it right, not wrong. Done properly, this is a venue for universally asymmetric exchange (i.e., everyone gets more out of it than they put into it). Short “Yeah baby” comments might please authors, but they don’t do much more than that.

    • @ Thomas Lord April 6,2013 at 1:39
      Thank doG brevity is restricted to bumper stickers and fools! It is a shame ignorance cannot be restricted to the same. Oh, wait a mom…

      I am quite sure your slate of questions would be mostly unnecessary if your audience had a working knowledge of how economic systems operate, but alas, the times reveal only conspiracies and pipe dreams woven on the hookah fogs of ignorance.

      On the 25th anniversary of John Maynard Keynes passing, a commemorative publishing of his writing was made. From the first volume published ca. 1913 provides an education into the workings of the monetary system that illuminate yet the problems encountered today. Repeating history because the lessons were not learned has never been truer. Unfortunately, to conduct a discourse in economics requires education of the recipient in vocabulary, history as well as economic thought. Your comment has done that extremely well. do not disappear from these pages, endure the slings and arrows of flaming ignorance, and help conduct a rational discourse that all can learn from. Thanks.

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