Yanis Varoufakis: Macroeconomic Experiments: Abenomics Versus Euro-Austerity

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By Yanis Varoufakis, a professor of economics at the University of Athens. Originally posted at Australian Broadcast Corporation’s The Drum

In the long, unending wake of the global financial crisis, desperate governments and central banks are trying their hand at experimental economic policy mixes. Japan and the eurozone offer a glimpse of how radically different anti-crisis experiments can be.

Recently, Japan has been making the news with reports that its new leaders – the new prime minister and the new governor of the Bank of Japan (BoJ) – have joined forces to stop their nation’s so-called ‘lost decade’ from turning into three lost decades.

Shinzō Abe’s government has committed to a stimulus package (an impressive 2 per cent of national income in 2013 alone) that will attempt to rekindle the real economy. Mr Haruhiko Kuroda – Mr Abe’s choice of BoJ governor – has audaciously declared that the BoJ will fight deflation by purchasing financial titles (e.g. government bonds, mortgages) to an extent and at a pace never seen before in economic history (in fact doubling the country’s monetary base in two short years).

Quite clearly, the two men are aiming their double-barrelled shotgun at the great foe of deflationary negative growth which, like a rogue samurai, is slashing into Japan’s capacity to reproduce itself as an advanced, prosperous social economy.

What makes the escapade remarkable is not just the size of their commitment but also their starting point: Japan’s national debt is by far the highest in the civilised world, making the decision to allow the budget deficit to rise to more than 11 per cent in 2013 the boldest Keynesian move since Ronald Reagan’s expansionary fiscal policies in the early 1980s.

Similarly, the BoJ’s decision to spend $1.5 trillion in order to accomplish in two years what Ben Bernanke’s Fed did during the past six years of ‘quantitative easing’ (and without controlling the world’s reserve currency) is perhaps even more daring.

Turning to the eurozone we are faced with another audacious experiment. In an aggregate economy that is in recession, the deepest austerity is being imposed upon the fastest shrinking national economies (that make up the eurozone), while the European Central Bank (ECB) is watching idly, too neutered by Berlin, and too constrained by its charter, to follow ECB president Mario Draghi’s instincts.

Total eurozone debt is less than 100 per cent of the eurozone’s annual income (compared to Japan’s 230 per cent), the aggregate budget deficit is running below 6 per cent (about half that of Japan), while the ECB is exposed to a molehill of paper assets (when compared to BoJ’s already mountainous ones).

Clearly, of the two economies, the eurozone is the one that has significantly more room within which to accommodate expansionary fiscal and monetary policies. And yet, it is Japan that is taking the plunge, firing both its barrels at its stagnation nemesis.

One possible justification of the two diametrically opposed policy settings in Europe and in Japan might be that these two advanced economies are facing different challenges. Europe’s leaders like to imagine that, unlike Japan, Europe is not facing a long-lasting recession, let alone deflation. For them, there is no need for eurozone governments to loosen up the purse strings, or for the ECB to flood the financial markets with digital euros. What matters to them is that the crisis is utilised to force upon the eurozone’s laggards (the Club Med nations in particular) the reforms that will help them regain their ‘competitiveness’.

While the two economies are very different, their current predicaments are eerily similar. If I am right, this means that Europe’s leaders may be deluding themselves in thinking that the eurozone’s crisis is fundamentally different to Japan’s.

Japan’s and Europe’s crises began when their financial sector imploded following the burst of gigantic bubbles caused by earlier capital inflows into the money and the real estate markets. In both economies, governments tried to keep the banks afloat with injections (capital and liquidity) that failed to restore their capacity to borrow and to lend.

Both in Japan and in the eurozone, the zombification of the banking system was ‘bought’ at the cost of taxpayers and to the detriment of the real economy; the result being a fall in the incomes from which the banking losses and the public debts had to be repaid.

In both realms politicians had too cozy a relationship with bankers and did not dare expropriate them, cleanse the banks and sell them back to the private sector (as Sweden did in 1992 or South Korea in 1998). The result of these political failures, both in Japan and in the eurozone, have been a carbon copy of one another.

Put differently, Japan and the eurozone are in different phases of the same type of crisis, with Japan at a more advanced stage of this common disease courtesy of having had an earlier start.

The eurozone is unique in world economic history in that it comprises governments with no central bank (to back their economic policies) and a European Central Bank with no government to work with. In this sense, the eurozone is a very different kettle of fish, when compared to Japan.

These differences reveal deep weaknesses that the eurozone has and Japan is free of. The eurozone’s complacency in the face of stagnation means the ‘Japanese disease’, which is now spreading throughout Europe, is going to do even more damage to Europe than it did to Japan over the past two decades.

Moreover, when the time comes for Europeans to reach the same conclusions that Mr Abe and Mr Kuroda have now turned into policy, the eurozone will lack the institutions to put them into practice. The most likely result will be the eurozone’s disintegration; a development which, ironically, will undoubtedly damage Japan’s recovery – just as it will damage the rest of the global economy.

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  1. mmckinl

    The situation in Japan and the EU are both hopeless … They both failed to reconcile bad debt but further they are both dependent for over 90% of their fossil fuel energy needs.

    If Japan does in fact reduce the Yens value the food and fuel they need to import will skyrocket in price … Employees in Japan as elsewhere have no wage pricing power.

    The EU mindful of their dependence on importation of fossil fuels is trying to support the Euro to keep prices of imports in line to curtail inflation.

    The EU and Japan are not alone. The entire world is facing these limits to growth and the impending down sizing that will be necessary while managing their populations.

    The US is the reserve currency of the world and can therefore print much more money than either the EU or Japan without causing inflation especially now that it is a safe haven.

    The US also produces 60% of its’ oil and over 80% of its natural gas right now saving valuable reserves. How much longer the US can stay in this game is unknown. What is known is that the US is in the best position.

    1. lolcar

      The EU as a whole achieves a balanced trade outcome with the rest of the world using half the energy per capita that the US does to achieve a massive trade deficit. The energy intensity (i.e. energy/$GDP) of the German and Japanese economies is some 25/30% less than the US. Europe as a whole, and Japan, are in a position to pay for their energy imports with goods and services.

      1. mmckinl

        As I said before Germany and Japan rely on imports of natural resources. If their currencies devalue those inputs become hugely expensive …

        Germany does most of its trade within the EU. More expensive goods means loss of profits and market share for Germany. Already we are seeing Germany roll over into recession…

        “Germany, which accounts for nearly 30% of eurozone output, has avoided falling back into recession since the depths of the financial crisis in 2008-2009. GDP shrank in the fourth quarter of 2012 but economists expect a return to weak growth in the first quarter of this year. The German government forecasts growth of 0.4% in 2013.”


        Japan is quickly losing its trade surplus …

        “In the fiscal year ended March 31, imports exceeded exports by a margin of 8.17 trillion yen, or $83.4 billion at current exchange rates, the Ministry of Finance said. That was almost twice as large as the previous year’s deficit, also a record, and the largest shortfall since the ministry started keeping such data in 1979.”


        No matter how you look at it when recession hits industrial countries get hit the hardest … As the world continues its economic slide affordability of those big ticket items falls.

        And of course for Japan there is Fukushima … Fukushima itself will cost Japan trillions of dollars in abatement and lost productivity.

        1. lolcar

          If their currency devalues 10% then raw material imports cost 10% more as compared to their competitors which may or may not be offset by the fact that domestic imputs now cost 10% less as compared to their competitors. Sure the terms of trade are worse but if it’s a matter of hiring enough people to run the production lines 10% harder then most of the locals are going to say the economy is better not worse. Anyway, if we genuinely plan to burn all the hydrocarbons on Earth then we’ve got a long way to go and no imminent shortage but a pretty bleak future climate-wise. If we’re not going to burn all the hydrocarbons then the whole issue of energy imports becomes moot within the next couple of decades.

          P.S. An 8 trillion yen a year trade deficit is hardly a big deal (even if were to continue for some time – and it might if they go off nuclear for good) when you already have a net international asset position north of 200 trillion yen.

          1. mmckinl

            Currency devaluations will hurt the domestic markets in both Germany and Japan … as international markets slow as well.

            In Germany’s case their primary market is the EU therefore this devaluation will not only hurt Germany’s domestic market but their market in the rest of the EU.

            What we are seeing are the spasms of the end of growth. Peak oil production and climate destruction are upon the world and going forward it is a less than zero sum game …

            The “powers that be” are clearly managing an economic ramp-down that accommodates their wealth retention … I don’t see how they pull it off without totalitarianism.

          2. lolcar

            Which is why Westerners need to look at the example of Japan and accept that this is what late-stage growth-free capitalism looks like. Profits will no longer be reinvested sufficiently to deliver anything close to full-employment even at the lowest interest rates. Savings rates over and above the economy-wide depreciation rate are surplus to requirements and should earn no return. Massive government deficits should be expected. Better pay it out in a citizen’s dividend than buying concrete Japanese-style but the principle’s the same. In the absence of the expectation of growth there is no longer any way to entice accumulated idle wealth into productive investment. So if you want to keep capitalism but don’t want feudalism, idle dollars are going to have to be inflated away.

          3. mmckinl

            “So if you want to keep capitalism but don’t want feudalism, idle dollars are going to have to be inflated away.” lolcar

            Not true … What we need is Public Banking whereby the needs of the country take precedence over conspicuous consumption.

            As far as idle capital there is no such thing … as we see $10 trillion stashed overseas …

            Pre Reagan tax rates, real tax reform (no loopholes, charitable or otherwise) and confiscation of undeclared capital are the way to go …

          4. from Mexico

            @ lolcar

            I too tire of hearing peak oil being invoked to justify austerity.

            It seems like the labor-hater and peak oiler is virtually always a twin-headed creature, spewing anti-labor policy out one side and energy doom and gloom out the other. The energy defeatist provides intellectual and moral cover for the labor-hater and the destruction of aggregate demand.

            This certainly was the case with Jimmy Carter when he ushered in his anti-labor jihad with his “Crisis of Confidence” speech in July, 1979 and his appointment of Paul Volcker as Fed chairman in August, 1979.

            In his Crisis of Confidence speech Carter warned the nation that the energy crisis was merely a symptom of a far greater crisis. Although Carter expressed confidence that the United States could one day regain its energy independence, he assured that in the short run “there [was] simply no way to avoid sacrifice.” “[T]oo many of us now tend to worship self-indulgence and consumption,” he sermonized.

            It was Volcker, however, and not the energy crisis that made Carter’s ascetic theology a this-worldly reality. As Christian Parenti explains:

            Regardless of the exact etiology of the [corporate] profit slump, one thing was sure, the solution to the crisis was, as we shall see, to attack labor….

            The crisis…was finally dealt with in 1979 when Carter appointed Paul Volcker as Chairman of the Federal Reserve; it was the opening salvo of a “new class war.” Late in 1979 Volcker dramatically tightened the money supply by boosting interest rates, thus cutting borrowing power and buying power, and diminishing economc activity in general. This monetarist squeeze accelerated when Reagan took office, until interest rates, which had been 7.9 percent in 1979, reached 16.4 percent in 1981. As a direct result, the US economy plunged into its most severe recession since the Great Depression.

            In the eyes of Paul Volcker this was a good thing. For the economic stagnation and low profits of the seventies to be vanquished the American people would have to learn how to work harder for less; Reagan’s plan was to cut taxes for the rich, gut welfare, and attack labor. As Volcker told the New York Times: “The standard of living of the average American has to decline… I don’t think you can escape that.”

            In 1981 as the recession was reaching new depths and many in Congress were calling for relief, Volcker again explained the utility of his artificial disaster: “in an economy like ours with wages and salaries accounting for two-thirds of all costs, sustaining progress will need to be reflected in moderation of growth of nominal wages. The general indexes of worker compensation still show relatively little improvement, and prices of many services with high labor content continue to show high rates of increase.” The chairman’s goal was labor discipline….

            Not until the behemoth First Illinois Bank collapsed under the weight of its bad loans and Mexico seriously threatened to default on its $90 billion foreign debt did Volcker relent and open the Fed’s spigots, easing interest rates and making credit available throughout the economy, thus stimulating economic activity. But according to Harrison and Bluestone,

            the deep recession did precisely what it was designed to do. With more than ten million people unemployed in 1982 it was impossible for organized labor to maintain wage standards let alone raise them. Reductions in wages rippled from one industry to the next and from the center of the country outward. The real average weekly wage fell more than 8 percent between 1979 and 1982, and failed to recover in the next five years. Essentially, with wage growth arrested by unemployment, what growth occurred during the Reagan period rebounded mostly to the profits side of the capital-labor ledger.

            –CHRISTIAN PARENTI, Lockdown America: Police and Prisons in the Age of Crisis

          5. from Mexico

            @ lolcar

            I’m in your corner on this one.

            Imagine the extraordinary efforts and resources expended over the last 30 years by policymakers to bail out and prop up morbid and dysfunctional financial and energy sectors. Then imagine what our economies could look like if these enormous resources and energies had instead been invested to promote energy efficiency and find sustainable energy solutions.

          6. mmckinl

            @from Mexico :

            “imagine what our economies could look like if these enormous resources and energies had instead been invested to promote energy efficiency and find sustainable energy solutions.”

            Exactly what Public Banking would have done … Instead of creating our money through consumption we would be creating our money to tackle all these problems first and foremost.

          7. lolcar

            I’m all for euthanizing the rentiers but I think Japan shows that you’re still left with the structural problem – a no-growth capitalist economy won’t organically sustain full employment.

          8. from Mexico

            @ mmckinl

            The difference between your stance and mine is that I am not convinced that the “energy crisis” necessarily must cause declining consumpiton and decreasing aggregate demand.

            If energy efficiency can be improved and sustainable energy sources found, the assumption that consumption and aggregate demand must decline is not true. Therefore, in my opinion, your vision is too deterministic.

          9. mmckinl

            lolcar ~ “a no-growth capitalist economy won’t organically sustain full employment.”

            What is full employment? 40 hours a week? … 30 hours a week? …

            With a Public Bank capital is allocated to the common good first and foremost … individual demand will take care of the secondary demand of the consumer markets …

            With a Public Bank you would have a mixed economy, as we do now, except that the profit and prerogative of currency and credit creation would benefit the public.

          10. lolcar

            Full-employment is pretty simple really. Everyone who wants to work 30 hours a week can find 30 hours of work a week. Likewise everyone who wants 40. Add up the hours, multiple by the average nominal wage, and there you have the total amount of nominal spending from all sources you’re going to need to hit full-employment. Your spending turns into my income. If I don’t spend all my income then your income takes a hit. And on it goes. Profits have to be reinvested to sustain the cycle. And there’s the rub. Without the expectation of growth where’s the motivation for the individual to take that risk. Better to stay in cash and bonds.

            I like the idea of public banking for the same reason I like public roads – the government provides something with enormous positive externalities to everyone – reducing transaction costs generally and encouraging trade. For personal banking in particular, I think public banks are a great idea – ATMs and mortgages provided at cost for example. But when it comes to allocating capital for the common good – that’s what on-budget spending is for. Take it to an election then put it in the budget.

            Also, I don’t see how public banking is any different to private banking when it comes to the broad macroeconomy and the business cycle. Sure the government can task them to try and increase their quota of small business loans, but come the downturn, they’re going to have as much trouble finding customers both in a financial position to, and willing to take the risk of borrowing money, as the private banks.

          11. financial matters

            “”Savings rates over and above the economy-wide depreciation rate are surplus to requirements and should earn no return.””

            This is an interesting consequence of debt deflation and threatens the stability of money market funds.

            “”So if you want to keep capitalism but don’t want feudalism, idle dollars are going to have to be inflated away.””

            This is not a situation which is leading to inflation.


            I think Stephanie Kelton makes some great points.. http://neweconomicperspectives.org/2013/05/the-laymans-case-against-austerity.html

            1. When we allow our economy to operate below full employment (as now), we are sacrificing trillions of dollars in lost output and income each year. We can never go back and recover it. It is gone forever. You’ve seen the debt clock? Here’s the lost output clock. http://lostoutputclock.com/

            8. We have a serious infrastructure problem in this country. The American Society of Civil Engineers just released its 2013 Report Card (http://www.infrastructurereportcard.org/a/#p/home), and it is ugly. Our ports, roads, waterways, etc. are in serious disrepair. This makes it more expensive for businesses to produce/ship goods, which raises U.S. prices and reduces our global competitiveness. Meanwhile, we have millions of out-of-work construction workers and manufacturing workers — the people with exactly the kinds of skills that are needed to repair and rebuild our national infrastructure. So we have useful work that needs to be done, millions of people who want to contribute and policymakers with no plan to connect the two.

          12. mookie

            This is a great little thread. Thanks to everyone for the cool-headed disagreement and discussion. We’re all on the same team.
            I agree with mmckinl that public banking would be an improvement in that it would remove an enormous leech sitting on top of all of us sucking up ~8 percent of everything we make and giving it to a very few entitled and blind assholes who imagine themselves the key to the whole system, who in turn use it to create a puppet government. Running banks as a utility could be a vast improvement.
            I agree with lolcar that there’s no need for gloom and doom. We make enough for everyone to have it easy and for everyone to contribute.
            A decent society is one which does not humiliate or debase its citizens. We in the US live in a country where the mass media whispers to the working class that the government and other members of the working class are to blame for their problems, and that in order for everyone to succeed we must allow the richest, the “job creators”, everything, and that greed is the key to everything working. A braindead megaphone, in george saunder’s formulation, dominating the conversation and making each of us a little dumber in the process.
            …enough rambling. I appreciate your contributions to this site and am smarter for having read them.

  2. Elliot

    OK, maybe I am old and tired and unfashionable, but WHY did everyone let the bankers steal all that money? (I assume that is where it went? They did not burn it or shred it, right?) It went somewhere.

    And if it’s been spent on whatever bankers spend money on, and cannot be clawed back (isn’t the term ‘disgorge’ for ill-gotten gains?), surely dismembering and selling the banks off, and the houses and yachts of the crooks in charge, would have been cheaper for all concerned, and less dangerous for the other 99% of the populations?
    Real live humans are starving, and committing suicide. It’s not an abstract problem. “it’s not [just money] you’re talking about, it’s men’s lives.”

    People need to grow spines before the bankers/Presidents decide to grind us up to feed their dogs.

    1. banger

      Actually that is another one of those fundamental questions that have to be addressed. Why has the massive crime spree of the 00’s not been dealt with. We could say that a significant minority of the banking, investment and real-estate sector sector (maybe 30% of it), were knowingly committing systematic fraud at one time or another at that time. These people got away with it and the feds are not going to prosecute them.


      Because they found out how to game the system. Because the American people, as a whole, have an affection for white-collar crime, con games, salesmanship–movies that feature lovable con artists are abundant–movies that show those who fight for justice are not so abundant. We are a nation of hustlers–we always have been but now the scale is so collosal that the creativity of the hustler is now becoming destructive for a number of structural reasons.

      But mainly the reason is that the left decided to abandon the struggle so politically the Democratic Party is substantially to the right of Nixon and the Republican is hovering between a kind of all-encompassing destructive nihilism and fascism. People believe that being liberal means supporting a fundamenatally conservative Democrat because they are afraid of the right. There’s your key word–“afrais.” The American intellectual left is, like most of the American public, cowardly and will not act only complain vigorously and loudly year in and year out in blogs like DKOS. While people are exploited around the world while money flows to the top of the social pyramid the left does nothing that is truly effective and requires anyone to put their asses on the line. Now why that is–well why bother writing? My experience is that no one wants to know.

  3. salvo

    I don’t think you can really compare Japan, a sovereign national economy, to the EU, which essentially has turned into an institutional framework to impose german interests on the other countries. Whereas Japan acts as a sovereign national state, the eu is simply implementing a policy set to destroy what germany views as being part of its competitors.

    1. Lafayette

      which essentially has turned into an institutional framework to impose german interests on the other countries.

      It would be nice were this tiresome refrain retired.

      It does not in the least reflect the truth in the matter. Germany is not alone in wanting the soft, southern underbelly of the EuroZone understand it has been getting a free-ride on the Euro.

      And though “austerity” is now a naughty-word in the EU (officially), “budget consolidation” has taken its place.

      There is, otherwise, no change in overall fiscal policy. All countries in the EU “must”, meaning not “should”, get their financial houses in order.

      The 3%-rule (of deficit to GDP ratio )is the Golden Rule of responsible EU budgeting across the board. It was the Golden Rule written into the original Maastricht Treaty signed in 1992 and all new addition countries since to the EuroZone were required to adopt it.

      Anything persistently larger is “irresponsible” national budget management and damaging to the EU as a whole, because it can lead to destruction of the Euro.

      ‘Nuff said … ?

      1. from Mexico

        @ Lafayette says:

        So the “soft, southern underbelly of the EuroZone” has been “getting a free-ride on the Euro”?

        What an unbelievably one-eyed view of the situation!

        The German oligarchs chose the neoliberal export model that they implemented.

        The first step in implementing this model was to murder German domestic labor with “reforms,” which stunted internal demand in Germany. This created a surfeit of German-produced goods that the German oligarchs then exported to your “soft, southern underbelly of the EuroZone.”

        The goods were sold on credit. Free trade, free capital flows, banking deregulation, the liberalization and declining lending standards that invariably accompany banking deregulation, and the currency peg are all neoliberal prescriptons which caused the blowing of the debt bubbles in the “soft, southern underbelly of the EuroZone.”

        And we’re to believe that Germany had nothing to do with the promulgation of these policies?

        1. Lafayette

          The first step in implementing this model was to murder German domestic labor with “reforms,” which stunted internal demand in Germany. This created a surfeit of German-produced goods that the German oligarchs then exported to your “soft, southern underbelly of the EuroZone.”

          Which is about as far from the truth as one can get.

          When Schroeder was about to leave office, Germany was in the pits. He “murdered” German labor by making it more competitive, unleashing it from stupid, anti-commercial regulations that “supposedly protected jobs”.

          His “Agenda 2010” program was key to reforming Germany into the export powerhouse it is today and a direct consequence is the low unemployment rates in Germany today.

          It this is inane notion that has stripped European labor of its competitiveness and led Europeans to believe that, after all that hard work reconstructing Europe in the post-war years, they could now sleep on their laurels.

          Nothing could be further from the truth, especially with the advent of China to the World Trade Arena.

          And this lesson has still to be learned in too many EuroZone countries, like France, Italy and Spain. Portugal’s announcement his week of labor regulation changes are in the right direction, but certainly do not go far enough.

          If much of European labor is incarcerate in unemployment it is due to their ridiculous regulations that “protect jobs”. If they actually did accomplish that, there would not be such high unemployment rates in the EU.

          1. from Mexico

            @ Lafayette

            You may choose to live in your fact-free world, but don’t expect the rest of us to do the same.

            German labor has taken it up the wazoo over the last couple of decades:

            • In West Germany real wages have been on a overall downward trend since the beginning of the 1990s, with declines accelerating in recent years (see Figure 3).3

            • For employers, wages—or, more precisely, compensation of employees—represent a cost.

            • [R]eal compensation of employees on a per employee basis fell by 9% in Germany in 2000-2008. No other EU-15 member state experienced worse wage declines over this period (see Figure 9).

            • The fact that Germany has taken a step backwards in terms of wages is also reflected in labor costs per hour worked (see Table 4). When compared to other countries for which data are available, Germany lands in last place. Only Belgium has had similarly weak wage growth, but the wage levels in Belgium are higher than they are in Germany.

            • The weak wage growth of recent years has without a doubt strengthened the international competitiveness of German companies and encouraged exports.

            • [T]he distribution of income in Germany has increasingly shifted in favor of the recipients of investment proceeds and the self-employed.

            • In Germany’s last expansionary phase there was a surprising constellation of trends: employment increased, the unemployment rate dropped considerably for the first time in many years, and GDP growth was impressive—these were all factors that should serve to strengthen the bargaining position of employees and their representatives. Nevertheless, employees were forced to accept significant declines in real net wages over several years, declines of an order of magnitude never witnessed in the history of the Federal Republic of Germany.


    2. Susan the other

      @ salvo – Germany is in between a rock and a hard place too. I get the feeling that altho’ th EU has plenty of big international bankers and banking interests, they are fighting being swallowed by the vigilantes. They are doing triage. Their position is bad until they reach political union. Until then I’m hoping they enjoy a vibrant black market. The European continent is made for it.

  4. OpenThePodBayDoorHAL

    For a problem singularly and obviously caused by too much debt, at least the European approach (trying to get governments to borrow less) has a slight whiff of reason about it. The Japanese, by contrast, have concluded that what has not worked for the last 20 years will work if only they do more of it. I find myself finishing that thought with “…or else Japan will sink beneath the waves while trying”. Would not be the first time that country has committed national suicide. Banzai!

    1. lolcar

      Japan has the largest net international investment position in dollar terms of any country in the world. A position that was still growing up until the end of 2011. (It may have fallen since Fukushima but is still somewhere between 200 and 300 trillion yen.) As a percentage of GDP it’s about 8th at around +55%. It’s mysterious to me how anyone could portray that as economic failure. If the Bank of Japan printed up and just handed out 1.5 trillion yen, and the Japanese blew the lot on cheap, imported Chinese tat, Japan Inc. would still be one of the world’s biggest creditors. Let’s talk about national suicide again in twenty years when and if their net position hits -25% of GDP like the UK or the US or -100% like Greece, Ireland and Portugal.

      1. from Mexico

        Certainly, as Thorstein Veblen noted in the years immediately after WWI, “The imperialist polices of the Great Powers, including America,…look to the maintenance and extension of absentee ownership as the major and abiding purpose of all their political traffic.” The “security of property rights has become virtually the sole concern of the constituted authorities,” he continued, and the world would “be made safe for that Democracy of Property Rights” at “any cost, without regard to international law.”


        Veblen describes the politics which has been singularly pursued from when Veblen wrote his paper up until the present. However, I wonder, with the net international investment position of the US and UK now at -25% and deteriorating rapidly, just how long will it be to the advantage of the US and the UK to continue with the status quo politics?

        1. lolcar

          As long as there are 10 US carrier groups roaming the world’s oceans and not a single one belonging to another country, I don’t think they really have to worry about other countries refusing to accept their little green pieces of paper. Plenty of indigenous natural resources, too.

          The UK, on the other hand, you have to wonder about. A 25% depreciation in sterling since 2007 and no real improvement in the trade deficit. Do they have anything going on there besides financial speculation these days?

      2. OpenThePodBayDoorHAL

        And constantly declining GDP the entire time…so the enviable net global investment position is with institutions and corporations, certainly not available to the people as standard of living. I’m glad Dai Ichi Insurance is so flush…they will need it when there are no young people left to enter the workforce, and unlimited retirees who need supporting.

    2. looselyhuman

      The Reinhart-Rogoff debt myth lives on.

      Even though they themselves are now back peddling.

      1. OpenThePodBayDoorHAL

        Reinhart myth? Oh the one that says that unlimited borrowing is not the path to prosperity?
        Throughout mankind’s history a substitute for hard work and savings has always been sought. Yes by all means let’s just print enough money and we’ll all be billionaires. Unfortunately the percentage of times in history when this has been tried and failed spectacularly = 100.
        Where R&R went wrong: what was the debt used for? Their analysis goes back to 1946 for most countries. Well most countries borrowing large amounts in 1946 were probably building roads, bridges, hospitals, ports, & factories. Yes, productive assets. Today the debt binge fuels consumption, social programs, and interest payments…

  5. Lafayette

    YV: Similarly, the BoJ’s decision to spend $1.5 trillion in order to accomplish in two years what Ben Bernanke’s Fed did during the past six years of ‘quantitative easing’ (and without controlling the world’s reserve currency) is perhaps even more daring.

    Which will presumably have the same impact upon the Japanese economy that Bernake’s QE has had upon the American economy.

    That is: Nada, nichts, rien, niente, zip, tipota

    The key to kick-starting the Japanese economy is the same as in the US. It requires a return to consumer mentality of the Feel-Good-Factor. That is, the notion that their jobs may not be going down the drain because of the state of the economy. Consumers thus retrench their spending.

    Only then will consumer net-disposable-income reignite Demand for goods/services in a manner that will grow an economy. In fact, that is happening today in the US economy.

    But economies are like fruit for purposes of comparison. That is apples are apples and oranges are oranges and berries are berries – all are edible, but the resemblance ends there.

    In this Brave New World of globalized economies, the magic ingredient that spurs further growth and which is badly needed is a great step forward in World Trade. With the American economy expanding, that could happen. But with demand in the EU stagnant, it remains a drag on World Trade – with each nation thinking that exports are the way to kick-start their economy.

    Meaning they are all waiting for some other economy to get them out of the Deep, Deep Doodoo. Were all of the larger economic entities doing what Japan is doing, the entire effort might be successful due to a World Trade effect.

    But such is not happening. So?

    So Japan is “whistling Dixie” …

    1. diptherio

      What do you mean “no effect on the American economy?” The Dow’s headed for 15,000, baby…

      Also, retirees who depend on returns from savings are getting screwed. There’s another effect…granted, not salutary effects, but effects all the same.

    2. from Mexico

      @ Lafayette

      The “BoJ’s decision to spend $1.5 trillion” is a bad choice of words on the part of Varoufakis, because “purchasing financial titles (e.g. government bonds, mortgages)” does not consitute fiscal policy, but monetary policy. It is not “spending” in the true sense of the word, but trading government money for another type of government money or, in the case of mortgages, non-government money. This requires no fiscal appropriation.

      Shinzō Abe’s government’s committment “to a stimulus package (an impressive 2 per cent of national income in 2013 alone),” on the other hand, does constitute fiscal policy. It is spending and requires a fiscal appropriation.

      Both US and Euro-area policy currently consists solely of monetary policy. The new Japanese policy proposal, on the other hand, consists of both monetary and fiscal policy.

      When you say that the policy direction set out by the BoJ and Abe will “have the same impact upon the Japanese economy that Bernake’s QE has had upon the American economy. That is: Nada, nichts, rien, niente, zip, tipota,” I therefore think you are going to be proven wrong.

      You claim that the “return to consumer mentality of the Feel-Good-Factor” is what will kick-start the Japanese and US economies. However, consumer confidence has little room to influence consumer behavior when consumers are borrowed up. If consumers don’t have the income and they can’t borrow, they sure to heck can’t spend. The confidence fairy therefore can’t work her magic when private debt is too high relative to private income.

      The only way to increase consumer spending is therefore by giving consumers greater income. The government can achieve this through fiscal policy, and that’s what Abe plans to do.

      1. from Mexico

        That last paragraph should read:

        The only way to increase consumer spending, when interest rates are already near zero and without declaring a default or holiday on private debt, is therefore by giving consumers greater income. The government can achieve this through fiscal policy, and that’s what Abe plans to do.

        1. tiebie66

          It is true that higher incomes have been associated with more spending, but higher incomes merely -enable- higher spending. IMO, there is no causation. Someone does not have to spend their higher income. Demand is not caused by income, but by needs, wants, etc.

        2. H. Alexander Ivey

          from Mexico

          The last paragraph should read:

          The only way to increase consumer spending, when interest rates are already near zero and without declaring a default or holiday on private debt, is therefore by giving consumers greater income [and by giving them the belief that their future is secure and not liable to go up in smoke (else wise they save, not consume) HAI]. The government can achieve this through fiscal policy [and by punishing those who took away the consumer’s confidence in their future HAI], and that’s what Abe plans to do [NOT! HAI].

          1. from Mexico

            I really can’t disagree with that.

            The point I was trying to make is that having money is a pre-condition to spending money. If one doesn’t have any money, one can “return to consumer mentality of the Feel-Good-Factor” and it’s not going to increase one’s spending an iota.

            And in regards to the thing about punishing the perps, I am in complete agreement with that also. Without punishment, the enforecement of moral standards is impossible.

    3. banger

      No, you are wrong–the stimulus and Bernanke’s actions have kept the economy from falling into a depression and that is certain and been explained elsewhere. We were in the period of the crash in a positive feedback loop that would have crashed the world economy. Some people decided to do something about it. Now I don’t agree with the politics of Obama or Bernanke because they believe in trickle down but at least most Americans are doing fairly well today. It won’t last because of structural problems but it’s something.

      1. diptherio

        …but at least most Americans are doing fairly well today.

        I guess it all depends on who you know, since most people I know are just barely making ends meet…

          1. banger

            Well, I guess because I’ve been to third world countries so it seems pretty prosperous materially ’round here.

          2. Synopticist

            You’re doing a heck of a lot better than people on this side of the pond

      2. Lambert Strether

        It could be worse. But to me and to the people I know, it’s a long grinding depression, a new normal. Then again in Maine, the joke is “We’ve always been depressed.”

    4. Susan the other

      The greatest “consumer” demand out there is for clean everything. Environment. Water. Air. Food. Chemicals. Applied Science and Technology. Transportation. Whatever.

  6. EenAnderGeluid

    Both, Euro-EU and Japan, start from the wrong analysis. As long as the governments and central bankers fail to recognize this, there is no solution – only dilemma.
    It’s either “stimulating” until the debt collapses, or “austerity” which leads to early (social) collapse.

    This crisis is structural, it’s a systemic crisis, and the logical outcome of neoliberal growth model.
    Direct or indirect income from labour have been sacrificed for capital accumulation, causing a growing demand problem. This was partially neutralised by credit – especially in housing. Until the debt proved unsustainable.
    Long before this financial crisis there was already a lack of profitable productive investment opportunities – with the exception of displacement of production to Asia. This shortage of opportunities combined with an ocean of free floating capital caused the spectacular tsunami of speculation and the gigantic growth of de FIRE-sector.

    The elephant in the room becomes now clearly visible : inequality. It’s the flipside of the investment vs demand problem. It’s the thing you really need to adress to solve this crisis : the world needs fundamental redistribution (combined with massive debt restructuring).
    Stimulating in USA or Japan, and austerity in Europe make the inequality even greater, restrict demand even more, and cause even more rampant speculation.

  7. banger

    I hate to stereotype East Asians but they think more in terms of a collective than we do. The ruling elite in Japan have come to the conclusion that they have a fundamental responsibility to find a way to benefit the entire population and a large stimulus is their choice because they know austerity does not work. They are looking for a short-term boost to the economy to spur investment in new techniques and technology. This will make Japanese industry more competitive particularly in what is right now the most important industry we have–robotics where Japan still has a lead in technology. That is where the future is. Austericrats will have their way in the West and we will suffer from it because we are only interested in gaming systems and we, as a whole, do not care about our fellow man only for our own personal comforts and short-term interests because we, unlike the Asians, live in the culture of narcissism.

    The future belongs to those who have a collective identity–individuals will be eaten up by corporations who will make them what they are becoming–debt peons unless we wake up.

  8. allcoppedout

    I don’t see how we can bottom any of this nonsense. In the UK our up-and-coming “new politics” s UKIP. This outfit is marshaling the anti-EU and anti-immigration vote. Our general politics is so dire even I am tempted to vote UKIP in impotent protest at the paucity of the Establishment. We have reached the position of a tribe I once studied who treated leadership with derision and contempt.
    Economics is utter drivel – I wish there was a way of saying this differently. People write endlessly on our neglect of accumulated money as power – but while this goes on our politics has been increasingly captured and domesticated to new imperialism. People in the Dundee of 1924 unseated Churchill in favour of E D Morel, a Frenchman advocating democratic foreign policy. The alternative now is Nigel Farage, a man not afraid to be seen quaffing a pint and advocating a repeal of the smoking ban. He’s actually not a bad stand-up, like Grillo without the science. He is, for instance, married to a woman from Hamburg as thus knows the dangers of a German dominated household.
    We lack the confidence to modernise our societies along scientific lines and peaceful coexistence. I appreciate what Yanis is saying and tend to interpret most anti-neoliberal work as exposing the madness of money as the means of social control.
    Austerity is not an economic concept – we had the parable of the grasshopper and ant centuries before. Pulling in summer belts to hoard for a tough winter is very old – squirrels do it. A better human concept is rationing to get through hard times.
    Underlying economics is perpetual scarcity and an ideology that allows us to treat other humans as the ant the grasshopper. Following natural disasters (how “natural” are they?)that collapse traditional work – farming land is unusable say – the austerity is not rationing and redeployment to work useful in building a better future – but death by starvation. The rich, being good ants, have their protective and unshared hoards. Labour “benefits” from the cull, making it scarce in a future most of it won’t make it to. The “it” is typical economic notation of tough love for others.
    Why are all our “alternatives” based on the prayer-wheel of money printing? What is wrong with project jobs (that aren’t building bullet trains to nowhere) and rationing? Why don’t we know how much work it is reasonable to expect an individual to do? What is this growth we must have – the path to paradise or an ugly tumour – 57 channels and nothing to watch? Who had the brilliant idea of labour saving machines and a society of more and more work for humans to be motivated by more and more need for jobs to get the basics made by machines? Economics is the ideology of the Undead. We’d be better off organising a vampire hunt.

    1. NotTimothyGeithner

      “Economics is utter drivel – I wish there was a way of saying this differently.”

      I tend to think of economists as the modern priesthood, not to be confused with local parish priest/rabbis/spiritual healer-types. We sacrifice a bull for their “wisdom.” In exchange for paying them, they will issue forth a chant about how wonderful the person who paid them is and how everyone else needs to sacrifice. They themselves won’t sacrifice because they need to demonstrate some kind of ideal for others to aspire to.

      I use to think economists were latter day alchemists, but alchemists often produced useful products and possessed an ignorance based on just not having enough information available to them for a variety of reasons.

      1. allcoppedout

        Alchemy had a bad press – a number of recent books show the methods were more or less the practical aspect of science today. There’s a big literature on how social science has been institutionally corrupted to neo-liberalism and critique as opposed to critical practice. Many are pointing to a ‘Darkness At Noon’ for laissez-faire capitalism. Sensible answers are all impossible because of “economics”. Most of it makes as much sense as signing one’s savings away to the Scientologists and boarding the wooden space-ship for a new life on Venus with Elvis.
        If the social sciences do have any good ideas we have to convince politicians of them – given we don’t agree after decades of research, what hope of convincing the political mediocrity?

  9. Yancey Ward

    Clearly, of the two economies, the eurozone is the one that has significantly more room within which to accommodate expansionary fiscal and monetary policies. And yet, it is Japan that is taking the plunge, firing both its barrels at its stagnation nemesis.

    So, tell me, please, how Japan got to where it is today?

    1. Calgacus

      By go & stop fiscal policy. By repeatedly snatching defeat out of the jaws of victory, because innumerate, illogical economic beliefs made enough afraid of innocuous deficits and national debts. With all the infrastructure spending, the concrete buying that they did, and were often ridiculed for, it wasn’t enough to defend a Fukushima size disaster. Both their financial system, their economy & their real physical country could have used more and better infrastructure spending.

      1. Yancey Ward

        Hilarious. And when the Abenomics fails, you stimulus freaks will again claim it was because it wasn’t enough.

        1. skippy

          True… but… stimulating what[?] and on the other hand… the austerity mob want to play… dragon hiding in a pit of gold… no matter how burn the landscape is for leagues around said pit of hard moneys joy!

          skippy… value ascribed of numeracy or expectations banked is a hollow though… maybe we should try… continuity of attention… cough… “whatever succeeds for the finite, also succeeds for the infinite” – Law of Continuity – Leibniz based on earlier work by Nicholas of Cusa and Johannes Kepler.

        2. Calgacus

          The point is that “stimulus” (better thought of as “not strangling your own economy”) repeatedly succeeded in Japan. And more stimulus, especially directed towards solving real world problems of Japan, would work even better.

          But it was repeatedly aborted by numerology, superstition and illogic. All Japan had and has to do is pragmatically keep doing what works. That was all FDR ever did. Mirabile dictu, pragmatic behavior often works!

          1. Yancey Ward

            Basically, I am right, the stimulus never ends, or you will claim it wasn’t enough.

          2. Calgacus

            Just drive the economy like you drive a car on a highway. Don’t floor it and then slam on the brakes, which is what Japan repeatedly did. Nothing wrong with a constant low level of stimulus. That’s what the US and the rest of the world did during the postwar era. It results in much SMALLER deficits and debt than the crazy stop and go of the neoliberal era culminating in the GFC or Japan’s lost decades – which really were not so bad – a lot better than Europe now.

            During the Keynesian postwar era, societies were roughly guided by economics that made sense, that had something to do with the real world. For the last few decades, absurd, innumerate, illogical nonsense (re)captured the economics profession, and worse, the beliefs of many/most non-economists.

          3. They didn't leave me a choice

            >Basically, I am right, the stimulus never ends, or you will claim it wasn’t enough.
            And this is a problem because….? Look, capitalism is an inherently flawed system, and the only way to keep it functioning is to continuously tweak it. Call it stimulus or whatever, but it still has to happen. Your idealised perfect system does not exist. Muddy solutions are the norm.

  10. steve from virginia

    Time will tell but evidence points to the hat being out of rabbits.

    Abenomics = desperate last-chance banzai charge. What comes next is not success in any conventional sense but collapse … in the conventional sense.

    See, “Greece” a country done in by its energy consumption-slash-waste funded with external loans. How did the Greeks believe they would retire these loans? Obviously, they did not believe they would ever be called upon to retire anything! They would roll-over and increase their borrowings as do all the other ‘modern’ nations. They would waste like Americans do currently … far into the distant future!

    The Greeks never realized they were competing with the Americans for fuel; that Greek credit was easily throttled by Wall Street criminals bond vigilantes. As Greek fuel consumption collapses, it is exportable to the United States … which can gin up whatever amounts of credit it needs on demand.

    Japan has not been a slouch w/ regards to government borrowing and spending since 1990. Meanwhile, the worth of money is determined by millions of motorists trading theirs for gasoline every single day around the world. Priced in fuel, currencies have worth … this tends to be inelastic: when prices rise => less driving and less buying of gasoline => fuel prices decline. There are also business difficulties => credit impairment. The fuel-money relationship undermines the efforts of the central bankers.

    At all times, the weight of effect lies with the motorists rather than the central banks.

    It is unlikely the BoJ will succeed now … when it has failed with similar endeavors in the past. At the same time, the bank must be wary of extending unsecured loans. Leverage has rendered the Japanese commercial bank sector insolvent, leverage will instantly do the same to the Bank of Japan.

    Keep in mind: Japan collapse = austerity squared = inescapable. The country has 54+ high-powered nuclear reactors, four of them are blown up and leaking. Japan is a small, already-bankrupt island nation that cannot afford its precious — monstrous — toys … it cannot afford to escape from them, either. To paraphrase Friedrich Wilhelm von Mellenthin, Japan …

    “is in the position of a man who has seized a wolf by the ears and dare not let him go.”

    1. psychohistorian

      I agree.

      Japan is just waiting for “the other shoe to drop” or maybe more clearly for the evolving reality of Fukushima to become public…..can’t bury this one, its going to be a roman candle spewing toxic shit for some time.

      Either Fukushima will show enough pollution internationally in a year and/or the truth will be out of what a clusterf%#*k the ongoing scene really is…..and what it really means for that little island and all it citizens…..to say nothing of the rest of us.

  11. tiebie66

    I wish Yanis had addressed the issue of structural reforms and their interactions with the chosen economic policies more. As I read his post, I conclude that Japan is increasing the intensity of a policy that has, so far, had disappointing results. No structural reforms planned. The post implies that Japan is structurally sound (then why the lack of results so far?). The EZ, in contrast, is engaging in some structural reforms (those imposed on the periphery and maybe others) but, by implication, not those deemed necessary by the author.

    I also wish that the nature (size, duration, ultimate effects, etc.) of transient effects could get more attention. Sacrifice now for a significant later benefit is acceptable to me (and I’ve been there several times myself). I’m in the “austerity with structural reform” camp and somewhat in the “deficit with structural reform camp”, but definitely not in the “austerity without structural reform” or “deficit without structural reform” camps. In both the latter cases, those with vested interests are simply the major beneficiaries.

    1. EenAnderGeluid

      What do you mean with “structural reforms” ?
      If you mean making labour “more flexible” (= more destruction of labour rights), scaling down social security and pensions (= even less demand and more accumulating wealth in the hands of a few), then it’s just a new form of implementing the neoliberal politics which brought us into this crisis in the first place !

      I know that the EU-Eurogroup is slowly moving from austerity-with-reforms to temporarily-deficit-with-reforms.
      Both policies are wrong, because they just prolong the existence false neoliberal evangely and aggravate the structural crisis.
      The keyword to any solution is : redistribution.
      This happens to overlap with “social justice”.

  12. Archie

    Thanks in favor of sharing such a pleasant thinking,
    paragraph is pleasant, thats why i have read it completely

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