‘Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output…’
Nobel Prize winning monetary economist Milton Friedman
Exactly how much is a more rapid increase in the quantity of money?
Would doubling the monetary base qualify?
From The Guardian, 4 April 2013 (emphasis mine):
‘Japan’s central bank has promised to unleash a massive programme of quantitative easing [QE] — worth $1.4tn (£923bn) that will double the country’s money supply — in a drastic bid to restore the economy to health and banish the deflation that has dogged the country for more than a decade.
‘As part of a new set of policies known as Abenomics, formulated by Japan’s new prime minister Shinzo Abe, the Bank of Japan will buy ¥7tn yen (£46bn) of government bonds each month using electronically created money, with the aim of rekindling demand and pushing up prices and wages.
‘Haruhiko Kuroda, the Bank of Japan’s new governor, described its stance as “monetary easing in an entirely new dimension”.
‘He promised to target a doubling in the size of the “monetary base” — the amount of cash circulating in the economy, plus the reserves held by financial institutions at the central bank — in the hope of stoking inflation of 2% within two years.’
The Bank of Japan [BOJ] governor has more than delivered on his promise. Over the past four years, Japan’s ‘monetary base’ has increased 2.5-times.
But what about ‘stoking inflation of 2% within two years’?
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Things got off to a promising start. The monetary sugar-hit did the trick. After 2013, inflation spiked above 2%…for a little while.
Alas, it has again fallen back into the zone it has become all too familiar with over the past 20 years…the range slightly above and below the zero line.
Central bankers lack many things (real life experience and common sense, to name just two), but confidence is not one of them.
Imagine the ego stroke that comes with the power of being able to print money at will…
Somehow, it’s failed to register with them that a trained (or even untrained) chimp could press the money-printing button.
Their overblown egos obscure objectivity. The continued failure of their ill-fated stimulus strategies is invariably met with the following defense: It’s not my fault. We just need more QE and even lower rates.
Therefore, it came as no surprise when The Australian published this headline on 20 July 2017:
‘Amazon stymies BOJ’s deflation busting plans’
Bloody Amazon. How dare they crash Kuroda-san’s inflation party?
According to the article:
‘Japan thought it was on track to beat deflation. Then came the Amazon effect.
‘The country’s retailers have been cutting prices in response to the rise of online rivals like Amazon.com, disrupting what had seemed like perfect conditions for Japan to get the stable dose of inflation it has long been looking for.
‘Japan isn’t alone in its surprise at the slow response of prices to improved economic strength. Policymakers, economists and central bankers in the US and Europe are also scratching their heads about why prices around the world can move so little while economic growth gathers momentum.
‘Aeon, which operates Wal-Mart-like superstores that sell food and general merchandise, cut prices on milk, shampoo and more than 250 other products in April and is planning to do so again next month.
‘Aeon president Motoya Okada said in April that consumer trends, including the low prices offered by internet retailers, left Japan unable to return to inflation after nearly 20 years in which prices have often been in decline.
‘“The end of deflation was a great illusion,” Mr Okada said.’
E-commerce accounts for only 6% of retail sales in Japan, yet it’s painted as the villain in this deflationary saga.
Personally, I’d have thought a national debt load in excess of 600% of GDP and an ageing population who are less inclined to indulge in debt-funded consumption would have been the root causes. No, it’s that pesky Jeff Bezos who’s to blame…
And, according to the article, those clever people at the BOJ think that, possibly, maybe, there could be something else afoot (emphasis mine):
‘Another theory gaining ground at the BoJ is that Japanese companies are investing in automation to improve productivity and offset the higher costs of labour and raw materials.
‘This could help them avoid pushing up the prices they charge customers.’
Seriously, investing in automation to remain competitive is a ‘theory’?
Let’s hope the good folks at the BOJ don’t give up their day job to become private detectives…they’ll starve.
However, in fairness, the BOJ has only been carrying out the mandate of Prime Minister Shinzo Abe.
Remember Abe, of ‘Abenomics’ fame?
In 2012, Abe promised to return Japan’s economy to its glory days. The electorate was convinced Abe’s ‘three arrows’ policy was the answer to the country’s economic malaise. The Economist magazine described Abe’s 2012 electoral victory as ‘Sumo-sized’.
Proving yet again the wisdom of: ‘You can fool all of the people some of the time…’
This is from the Financial Times on 10 July 2017:
‘Shinzo Abe’s popularity has slipped to a record low, casting doubt over the durability of the Japanese prime minister’s administration and its economic reforms.
‘According to a poll for the Yomiuri newspaper, only 36 per cent of the Japanese public supported the prime minister’s administration while 52 per cent opposed it — the worst figures since Mr Abe returned to office in 2012.
‘The figures suggest that a stream of scandals and unpopular laws, combined with slow progress on the economy, have tarnished the leader who has dominated Japanese politics for the past five years.
‘Bad polling raises the odds that Mr Abe will pull back from economic stimulus in an attempt to regain popularity — or that he will be pushed out by a new leader of his Liberal Democratic party who abandons it altogether.’
Abe just couldn’t fool all the people all the time.
So what’s Abe’s next ploy to retain power?
Putting a fourth arrow through the heart of the very policy he once touted was the path to economic nirvana.
And the ruling class wonder why the word ‘opportunist’ is used as an adjective alongside ‘politician’.
Kuroda-san actually had an all-too-brief moment of clarity a couple of years ago.
On 20 March 2015, he delivered a speech titled ‘Quantitative and Qualitative Monetary Easing: Theory and Practice’ at the Foreign Correspondents’ Club of Japan (emphasis is mine):
‘…a key problem that arose is that, as prices continued to fall due to these factors for a prolonged period, a deflationary mindset took hold among the public — that is, the belief became entrenched that prices would not increase but continue to steadily decline.
‘Once this deflationary mindset had taken hold, people engaged in economic activity assuming that deflation would continue. As a result, the economy fell into a vicious cycle of a decline in prices, a decline in sales and profits, stagnant wages and consumption, and a further decline in prices. Moreover, under deflation, the real value of cash and deposits increases with the decline in prices. Therefore, hoarding cash and deposits becomes a relatively better investment strategy than actual investment, discouraging firms from taking risks and investing in business facilities and in research and development to launch new businesses. In this way, deflation in Japan perpetuated itself in a self-fulfilling manner and the growth potential continued to decline.’
When you’re weighed down by debt-servicing costs, or are receiving next to nothing on your retirement capital, you become a bargain hunter. Looking for discounts to make your yen, dollar or euro go that little bit further.
Retailers responded to this challenge, driving costs lower with technology, wage suppression, a more flexible workforce, and negotiating tougher deals with suppliers. It all feeds into a vicious cycle.
A cycle Kuroda was determined to break with Quantitative and Qualitative Monetary Easing (QQE). Create inflation, push up prices, and people would buy today and not wait until tomorrow.
Kuroda delivered this speech when inflation peaked in 2015. Which is why he ‘puffed out his chest’ and proudly declared to the assembled audience (emphasis mine)…
‘As I have explained, QQE has been exerting its intended effects and it seems safe to say that QQE works both in theory and practice. The Bank believes that it can achieve the price stability target of 2 percent by continuing to steadily pursue QQE going forward.’
Clearly, poor old Kuroda suffered from a case of premature speculation.
QQE produced a moment of fleeting economic ecstasy, but that was it.
In true central banker inflated-ego style, it’s not his fault.
It’s Amazon, or the theory of automation, or even the Easter Bunny for making chocolate eggs too cheap.
Central bankers built an economic growth model — one based on bringing forward future consumption with cheap debt — that was unsustainable.
That flawed model created an unrealistic expectation of inflation being ‘always and everywhere’. But every yin has a yang. The equal and opposite effect to decades of inflation is a prolonged period of deflation.
And Kuroda-san (for once) was on the money when he said ‘…under deflation, the real value of cash and deposits increases with the decline in prices.’
Cash is the most unloved asset class at present. Which is precisely why it should be the most valuable one in your portfolio.
Editor, Markets & Money