“Econogate” and Japan – Bruce Krasting




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.




This is a syndicated post, which originally appeared at Bruce KrastingView original post.

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