Sunday, April 21, 2013

“Econogate” and Japan



How about Reinhart-Rogoff? A couple of Bozos. These two Harvard economists have set back the debate on debt/deficits and the relationship to economic performance by years.


In 2009 there was “Climategate”, where scientists who wanted to see action on reducing greenhouse gases fudged data to “prove” their point. That blew up in a spectacular way, and gave those who appose efforts to curb CO2 the smoking gun they thought was needed to debunk all of the evidence on global warming. A few scientists derailed the debate on climate. We will have to wait 20 years to find out how much damage will result. The R&R horror story is no different.


R&R have stated that they made an Excel mistake, but that is just a bullshit excuse. Harvard economists (and their staff) can’t make Excel mistakes – this stuff isn’t so hard. They fell down on the job, they look stupid today, and no one is going to accept the argument about dangerous debt levels for many years to come. We won’t have to wait 20 years to see the damage they have caused – this massive blunder will come home to roost in less than five years.


Liberal economists, led by Paul Krugman have been taking maximum advantage of the R&R induced “Econogate”. Krugman has no less than 8 articles out since the revelation of the R&R “error”. Any talk about debt levels in the USA are now a moot issue. R&R have dealt folks like Krugman all the cards they need to push their agenda of “More Debt is Better”.


For what it’s worth, I always thought the R&R study was flawed (debt>90% is a drag on growth). To include data from the 1950s from New Zealand was not relevant. R&R did not need to fudge the data, they just needed to focus on the industrial countries in the modern economy to look for evidence of the toxic affects of excess and rapidly growing debt.


Japan is all that the economists need to look for the evidence of the failure of More Debt is Better. For 20 years, Japan has been piling on debt with no evidence of success. Japan now has a debt load of 220% of GDP, an insanely high level.


Can more debt help Japan dig out of its hole? Not a chance. The efforts being undertaken in Japan today may buy a period of time of phony improvement, but it will backfire. Because Japan is now going super-nova with its monetary policies, I think the country is in for a very big fall. The question for Japan, and many of the other industrial countries, is whether growth through debt creation can offset structural issues. I say that monetary policy can only mask the structural issues.


Japan’s problem is population decline. An economy has no natural growth engine when population is in decline. There is no amount of money printing that can offset a low birth rate. Some data points from The Japanese National Institute of Population (Link):



Japan has been experiencing a natural population decrease since 2007.


In 2011, the total fertility rate — the average number of babies a woman gives birth to during her life — was 1.39. A total fertility rate of 2.07 is required to maintain population levels.


In 2010, there were no prefectures where the percentage of people aged 65 or older exceeded 30 percent, but in 2040 all prefectures will be like that.


In Hokkaido and 39 other prefectures, people aged 75 or older will account for more than 20 percent of the population.


In 2040, the populations in 1,603 municipalities or 95.2 percent of the total, will be less than in 2010.


Those are some of the data points about Japan’s population, some thoughts on what the numbers mean:


The population decrease means that the nation’s total tax revenues will decline.


Cases in which road bridges have been closed to traffic because of a lack of funds for maintenance and a drop in the number of users are increasing.


Forests exist whose owners are now unknown. The number of vacant houses are increasing.


As the population grays more and more elderly people will be unable to drive, making it difficult for them to buy food and other essentials or to receive medical care.


It’s the older population that produces the food Japan consumes. As the society ages, there will be less farmers to produce that food.


It will also become necessary for local governments to reactivate local industries such as agriculture, fisheries and tourism.


Japan is aware that it has a population disaster in the making. But in classic Japanese style they believe that the problem can be overcome if only the “right” choices are made. The conclusion in the report on population tells it all:


To overcome the difficulties caused by a graying and shrinking population, it will be vital to cultivate people who can come up with creative ideas



Japan Inc. believes that it can “cultivate” the people who will provide the leadership to lead the country out of the box. It still believes that “creative ideas” are all that is necessary to right a sinking ship. We are witnessing an example of those creative ideas in real time. The scope of the QE policies now being implemented have no precedent.  There is zero consideration being given to the risks that Japan is creating for itself. Japan is making an “All In” bet.  Japan has crossed over to Uber money printing. This “creative solution” imposes huge risks.


In what I consider to be a very important development, this weekend the G-20  fully endorsed the Japanese policies to endlessly print. Japan now has a global Green Light to QE itself into oblivion. Any suggestion that Japan’s effort to blow itself up will have no consequences to other areas of the world is just silly. The Japanese Finance ministers are saying that that their domestic monetary policies are not driven to weaken the Yen. That’s a lie.


The USDJPN is going to cruise through 100 in the next few days. It’s on the way to 110, and as I’ve maintained, there is a risk that things get out of control, and a move to 120 is now realistic possibility. There is nothing to stop further Yen weakness at this point. We are now in a full-fledged currency war that has been sanctioned by the G-20. The currency war will morph into a trade war before the end of the year.


Who believes that China and Korea are going to sit back and let Japan devalue themselves to short-term prosperity? Germany is not going to let Japan wreck its automobile export base. It will not be long before Detroit starts screaming foul. The US will be at economic odds with a strategic ally. It was just one week ago that Treasury Secretary Lew said that Japan should:


refrain from competitive devaluation and targeting its exchange rate for competitive purposes.


What the hell happened in the last week to cause this turn around?


Is there a connection between the R&R screw-up and the conclusion by the industrial countries to applaud Japan’s jump into the deep end of the pool with its monetary policy? I think so. At a minimum, the voices that would normally criticize such extreme measures have been silenced. Consider Paul Krugman’s opinion on this from today:

My vague, unquantifiable sense is that the (R&R) debacle is changing the conversation quite a lot, even among the guys in suits.
The point is that the next time Olli Rehn, or George Osborne, or Paul Ryan declares, sententiously, that we must have austerity because serious economists tell us that debt is a terrible thing, people in the audience will snicker.


R&R’s failure functionally legitimizes debt levels that are measured in multiples of GDP. I think they should be stripped of their credentials. Talk about a legacy.





  1. “they thought was needed to debunk all of the evidence on global warming.”
    Bruce, I don’t know anyone who denied global warming. What is questioned is CAGW. And climategate is only apart of it. The climate scientists were caught fudging the numbers again. On top of that, we are now in a cooling phase. Couple that with the recent (2 years ago) all-time low temp in Oklahoma, which is purely a function of radiative cooling, and you observe serious problems with climate science. If you are interested google “upside down tiljander” and you’ll see how utterly screwed up climate science is.

  2. Bruce, what is your opinion of the carry trade going forward? Seems like you would borrow Yen, convert to dollars, and buy the US market. Also, what is end game here? Seems like as long as the BOJ can buy bonds, Japan keeps on keeping on. It sounds like an hyperinflation end game. I have not been in the hyperinflation crowd up to this point, and to be honest, I’m still leery of predicting it. But at this point Japan must print.

    The interesting scenario is what is actually happening: all countries print, BOJ, Fed, BOE, and ECB. China also. In that case, I don’t know if you see an hyperinflation. More like a wealth transfer from the masses to the finance and government class. People don’t starve, but you end up with massive stagnation. I guess what I am getting at is that my focus is on Europe, as the PIIGS can’t print. That’s a big problem for them. Your thoughts?

  3. Austerity Is A Consequence, Not A Punishment…This is the title of John Mauldin’s most recent weekly web newsletter commentary. He presents a well reasoned treatise on our current economic state, including an interesting take on the Reinhoff – Rogart fiasco (explaining why they are not to be totally discredited). Now…if only the politicians and wall streeters will listen.

    • I wonder if QE is also a consequence rather than a cause – so much bad debt that there’s no capacity to even replenish it. The more they push the money supply the more futile it becomes?

    • Austerity is a marketing slogan, not reality. Spending more than you earn is not austerity — running 4% deficits (instead of 7% deficits) is merely living a little less beyond your means. It is still living beyond one’s means.

      No countries are experiencing austerity. The term has been misused by brainwashed media pundits who have always leaned heavily socialist. They object to the notion that arrogant politicians should not be allowed to spend without restraint — and they ignore the inter-temporal costs of their actions.

      Stealing from babies is wrong — chronic deficit spending is immoral.

      (someone is going to have to pay for this debt binging, and if today’s spenders do not pay, guess who will get stuck with their bill?)

  4. So did R & R purposely put out a bad study?

  5. Kreditanstalt says:

    I can’t buy that “population” is Japan’s problem. It has to be deeper than just that…after all, people can, should they wish, (or have to) work until they drop and do so quite effectively at a that…

    The problem is slowing productivity. But there must be more to it than simply population dynamics.

    I suspect ‘financialization’ of their economy, too-high living standards reducing their competitiveness, resource scarcity (measured in higher prices?), public sector cost burden, or something…

    • I suspect you are right. I’m no expert to be sure, but looking at a macro view it seems to me that living standards are going to take a significant hit in places like the US and Japan. You can’t take consumption economies, reduce the amount of money people have in their pockets, and expect growth. If you look at the bottom 50% of the citizenry, inflation and housing costs have reduced their ability to keep the consumption engine going.

      Look at the declines coming out of discount retailers everywhere. Costco is thriving (upper/middle class customer base) while Walmart and other discount retailers are contracting. There are no new jobs coming that pay wages at a level that support increasing living standards for the lower-skill sectors of our economy. That’s the death knell for a consumption economy. Wages and jobs tell you the story and it’s not a feel good bedtime story.

      Financialization and austerity are going to be very good for some sectors and devastating for others. It your skill set lies in a tradeable sector and there’s someone with lower living standards who can do your job, you’re fairly well screwed. I’ve been watching more and more of our clients demanding cuts to wages paid to contractors. “There’s a lot of people out of work, can’t you get someone to do it cheaper?” Of course, they also want the same quality level, but for a lot less. This is not going to end well.

      • There should be a positive flip side to Japan’s population reduction. Won’t young adults have relatively more job opportunities as labor scarcity increases? At some point the financiers and rentiers who cannot perpetuate the consumption growth ponzi scheme could be the losers.

        • I doubt the rentier class will care. They’ve got several more years worth of revenue to extract before it all blows up in their faces (again.) By the time it melts down they’ll have stashed a nice retirement fund off-shore and be well out of the country.

          It would be nice to assume that the young adults will have more job opportunities, but I don’t see that happening at the rate technology is eliminating jobs at all skill levels. I know a lot of graphic and design freelancers who’ve exited the middle class because of Freelancer.com where customers can get work done for a fraction of what a US based designer needs to charge to keep the bills paid. Programmers are getting hit by oDesk. If your skills are in a tradeable sector and can be done remotely, you’re in trouble.

          The backside of global labor arbitrage was supposed to be that the wealthier population would create new products and services once they were freed from the wage slavery of traditional work, but in reality the new wealth being created is concentrated in a few sectors and amongst fewer recipients. The new currency of wealth is Ideas, but how many people do you know who are sitting at the Big Idea table and creating wealth? Now juxtapose that with how many people you know who are out of work and hanging on by a thread. Desperate people do desperate things and we’re creating a larger and larger underclass of desperate people who can’t feed their families.

  6. This wasn’t the first time some arrogant academics tried to pass off their personal political opinions as academic “truth”. Global warming was already mentioned as another academic scam. The contention that “no one doubts global warming theory” is a third — given that hundreds of scientists doubted the theory and put their doubts in writing.

    The Russian Science Federation openly called global warming a joke, but since the Kyoto Accord would essentially force western Europe to buy more Russian natural gas — the joke was on western Europe.

    Lets talk about the arrogance of CAPM theory. Lets mention all the patently false assumptions behind the Black Scholes option theory. Lets talk about the idea that human beings (and markets) are rational — but lets not mention love or hate or war or other things that are not exactly rational. Telling humans that they are rational strokes their ego and makes them more willing to pay high tuition rates. Its called salesmanship people!

    It was established “fact” for centuries that the Earth was flat. Leonardo Da Vinci and others were branded heratics because “global warming / flat earth is universally accepted”. Or more to the point, any doctoral candidate that dares to challenge the arrogant faculty council will never be granted a PhD. No one would even consider sponsoring Christopher Columbus’ voyage for many many years because it would offend the faculty council.

    The atom is labeled the atom because academics established, “beyond any doubt”, that there was no smaller unit. A century later came protons and neutrons and electrons. Now it is established ‘truth” that quarks are the smallest unit — but don’t ask too many questions about dark matter or stuff the know-it-alls don’t really understand.

    Global warming theory (not fact) is based on a simple linear interpolation of about four decades of history (1950-1990). If the theory was valid, temps would be 5 degrees warmer today than is actually being observed. The theory has been disproven by actual experience. The exact same error as when technical analysts linearly interpolated AOL stock prices to infinity based on a limited price history.

    Actual weather forecasters have a tough time predicting the weather for next week — only a fool would believe a prediction decades in advance. A prediction made famous by a second generation Congressman (yep, Al Gore’s daddy was a useless politician too).

    Academics are great at teaching theories and helping to create models to guide discussions … but these people don’t live in the real world. There is a huge difference between what works in theory or in a lab — versus what works out in the real world.

    And will someone please tell me where this alleged “austerity” is happening? Anywhere? There is no G7 country operating at a surplus — not one. None are breaking even. Sorry folks, but spending 3% more than we earn is hardly austerity. Austerity is when one makes sacrifices now in hopes of a better future (or to pay back past indulgences)… there is no country practicing austerity. Not one. What the media is mislabeling austerity is in fact massive deficit spending — albeit a slightly smaller deficit than what politicans planned.

    Austerity is not happening. That is the real scam. Stealing money from babies is immoral and hardly deserving of anyone who earned a doctorate degree.

    There is no such thing as a free lunch. Either we pay now, or our children pay later.

    • if you’re so angry about the future, do something in the present like stop paying your taxes and encourage others to do the same.

      • We need to slash spending, not increase taxes. Don’t make a fool of yourself and claim government employees have even average productivity levels. It takes too many lazy government employees too many hours to accomplish practically nothing.

        As a result, government spending has grown almost 4x faster than GDP — costs are growing 4x faster than revenue.

        Only a government failure would suggest this problem could be solved with 12% GDP growth — 4x faster than the historical 3% trend. Expecting 12% GDP growth is just a fantasy.

        Ergo, out of control spending by corrupt government agencies needs to get trimmed way way back.

  7. What is the difference in the world for USDJPY at 110-120 in 2007 and in the future other than they created more debt?

    • As you say, they created a LOT more debt… although I question whether “debt” is the right label since these people have zero intention of ever paying it back. More like not yet realized (in an accounting sense) theft from future generations.

      Mostly, the cowards avoided having to make tough decisions.

  8. It is a national embarrassment that anyone is still foolish enough to be discussing global warming fraud. The theory may have sounded good on paper, but like many things it fell flat in the light of day.

    Here is yet another article (there are hundreds now) where left wing extremists try to explain why their idiot models should be believed instead of real world observations:

    Climate scientists struggle to explain warming slowdown

    If you look on a map and it says to cross a bridge, but you look in front of you and it is obvious the bridge is not there …. the answer is equally obvious: the map is wrong.

    If you have a theoretical model that says global temperatures are going to get much warmer by 2010, and temps do not … the answer is equally obvious: the theory is wrong.

    If the guy who made the map with the non-existent bridge has a PhD, or he screwed up an Excel formula or you voted with him in the last election … the bridge is not there, and the map is still wrong.

    The guys who invented global warming have a very obvious hatred toward oil companies, and they wanted to find an excuse to tax / regulate them. Their hatred was so strong they saw patterns in the data that simply are not there.

    This politicization of so-called research has become very widespread — and it is very damaging. I’d bet one could find a PhD to testify that the moon is made of green cheese or any other hair brained theory. It just means that politics have trumped the scientific process.

    And as several other commenters have pointed out: whether the situation gets worse at 90% GDP or 80% or 200% … none of that changes one simple fact: debt is growing faster than the economy.

  9. backwardsevolution says:

    Greg said: “No countries are experiencing austerity. The term has been misused by brainwashed media pundits who have always leaned heavily socialist. They object to the notion that arrogant politicians should not be allowed to spend without restraint — and they ignore the inter-temporal costs of their actions.”

    Don’t for a minute think that media pundits (like Krugman) are brainwashed. He’s a tool, just like QE. You don’t get a pseudo-Nobel Prize, no matter how good (or bad, in this case) you are, unless the elite like what you have to say, unless it benefits them.

    It doesn’t matter what country (U.S., U.K., Japan, China, Eurozone), these guys are trying to save THEIR asses and save THEIR system, the system that has allowed the biggest looting operation mankind has ever seen. Do you think they’re worried about the general population? Hahahahaha.

    E said: “So did R & R purposely put out a bad study?” Now you’re talking! Another tool to be used at the appropriate moment. You don’t get into Harvard unless you have a certain ideology, and you certainly don’t become a professor there unless you play the game.

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