Japan has been at the forefront of weakening GDP/wages/growth, deteriorating demographics, elevated sovereign debt and extreme monetary policy. Of all the major economies, given its existing debt burden and aging population, Japan is arguably the closest to Helicopter money.
Post 2012, policy (Abenomics) aimed at stimulating demand, generating wage growth and inflation has failed with respect to the specific objectives set. But then again, what is an optimal level of consumption in a declining demographic paradigm? Perhaps in the modern world it is one which drives growth to the point that current debt levels become manageable, or where risky assets provide returns commensurate with the consumption liabilities expected to be provided by them. In this context, global Central Banks have been consciously attempting to manufacture growth for at least a decade. Helicopter Money would however break this intercession, acknowledging that only more money supply and more debt relative to growth can support the expenditure/infrastructure side of the balance sheet: it is difficult to comprehend just how the asset side of the balance sheet would evolve in such circumstances. I suspect that there would need to be an adjustment, a reset, but even that would be only half the story. That said, on to Japan:
Japanese real GDP growth has been sliding heavily since the bursting of its own asset bubble starting in 1990:
China did not end up with its current imbalances as part of a natural process and therefore the transition itself is unlikely to be natural.
China is both the here and now and the future, it has untold potential, a growing debt problem (here, here, here, here, here and more in the links below) and a “government” still “seemingly” capable of pissing great distances into the wind. But working out China for many is tougher than working out the meaning of life itself.
I have concerns over the ease and the speed with which many believe China can rebalance itself from an export led/debt financed investment growth model to a debt financed services and consumption growth led model. That is how China can transform itself from a manufacturer of goods to the world and builder of infrastructure, to a perfect model of advanced western capitalism? Odd really given that neither model appears to be stable or perfect in its entirety, both representing forms of economic extremism, excess and various levels of maturity/immaturity.
The issue is not debt alone, but the rate at which it has recently accumulated, especially post 2008 and the imbalanced nature of the economy upon which it rests. Just because an economy has potential, just because compared to more mature developed country metrics China has some way to go in absolute terms, does not mean that the current force exerted at the turning point is inconsequential.
If you have been “watching” you will have noticed a fairly sharp deceleration in global economic activity since the middle of 2014. World trade volume growth in particular has been heading into recession type territory:
I had prepared some Japanese charts at the time of the Q3 GDP announcement and for one reason or another failed to complete the analysis. Well here are the charts I was working on:
In my previous post I posted a graph of key US labour market dynamics…the growth in US employment (based on high water mark analysis). We know that there has been a slowdown in labour growth dynamics at the same time as we have had an increase in debt, increasing market volatility and a slowdown in economic growth. But did the financial shock and the long term impact of the unwinding on debt lead to weakening labour market dynamics or did weakening labour market dynamics leverage the impact of the shock and the debt?
Investment is key to maintaining production, growing production, increasing the productivity of employees, in allowing goods to be transported quickly and efficiently, in providing better health care and education and all types of infrastructure key to allowing an economy’s resources to be used efficiently. Growing investment typically leads to growing output and incomes, but capital investment also requires return, and a good part of that return is private consumption expenditure.
So why should we be concerned over the most recent quarter’s large capital investment component of current Chinese GDP? Much too large an investment component, a much smaller private consumption component and a decline in net exports.
Paul Weller: “I stood as tall as a mountain; I never really thought about the drop; I trod over rocks to get there; Just so I could stand on top; Clumsy and blind I stumbled;…I didn’t stop to think about the consequences; As it came to pieces in my hands.”
The 2008 crisis told us that there was a mismatch between asset values and debt, asset values and future return, and debt and economic growth as well as some rather large structural economic imbalances.
We have tried to delay the eventuality implied by the difference in the hope that the “true” magical economic growth rate should return. Have we built up a bigger monster, and if so, how do we slay the beast?
Are we heading for a short sharp boom and a terrific final bust or a bust without a terrific boom, because there can be no middle ground? Or is Japan the Jack in the Box, a latent growth powerhouse ready to spring back from the dead?
I briefly read the HSBC China Manufacturing PMI, and while it showed a positive reading, I am not so sure how this can be viewed as immediately positive. It is a mild uptick from a long run of negative readings, and well within the range of movement that is just as likely to signify continued weakness as recovery. But, the bigger picture at the moment is the more important picture and all short term data is meaningless without its context.
Brazil, Russia, China and India are meant to represent an engine of growth for the global economy and an “out” for the debt strapped major developed economies of the world. But growth has not been so strong of late and current PMIs confirm the overall weakness.
Flash PMI data for Europe shows a worsening of conditions in manufacturing and weakness in service sector growth amidst gathering austerity and further deterioration of sovereign debt dynamics in Portugal, Italy and Spain. Continue reading →
If there was ever an economy so mind bogglingly difficult to analyse it is Japan: low unemployment, low wage growth, low GDP growth, weak consumer demand, manufacturing and export dependent with very important overseas supply chain networks, an aging population, low birth rates, the most indebted developed nation and recently beset with apocalyptical natural and man made catastrophes. Continue reading →
Taiwan industrial production fell 8.15% in the year to December and by 0.25% over the month. Export orders fell by 0.8% in December and have registered no growth over the last six months. Declines in export orders were registered in the top 4 export categories representing 63% of export orders. Continue reading →
The Bank of Japan bought shares from banks (shares for cash) in 2002 and 2009/2010 in an attempt to inject liquidity and avert a credit crunch in the economy. Planned sales of those shares have been put on hold, a sign that central banks in the US and Europe may have difficulty contracting their balance sheets in the years to come. Continue reading →
“Since pre-crisis global imbalances largely involved industrial country trade deficits, a shrinking of such imbalances will almost certainly require a decline in these deficits. In principle such deficits could decline through greater industrialized-country export growth without a fall in import growth. However, add to this the near certainty that slow industrialized-country income growth will cause demand from these countries to grow at a slower rate and we get the implication that Asian exports to industrialized countries are likely to decelerate which, in light of our main finding, is a cause for concern. Put differently, the fact that subsidies for domestic tradable production and removal of penalties on domestic consumption may not be good substitutes for exports to industrialized countries magnifies the challenges facing sustained Asian growth in the coming years”
Japan is standard bearer for a long term deleveraging economy. Its consumers have been reducing debt since the onset of their own lost decades some 20 years ago – chart source data the Cabinet Office. Continue reading →