Following the Path of Japan and the Madness of Bernanke Fighting Just That

I have been saying for 5 years the US would follow the path of Japan. An interesting chart in the New York Times shows this is indeed what has happened.



click on chart for sharper image

Following Japan's Path, So Far

In the United States, the core consumer price index, which excludes food and energy prices, rose 0.6 percent in the 12 months through October. That was the smallest 12-month gain since government calculating the figure in the 1950's. The chart shows the 12-month changes in core CPI for the US and Japan, in the years before and after housing prices peaked in each country.

The above chart and commentary is from After the Fed�s Action, Watching Inflation�s Trajectory

Since the collapse of the housing market in the United States and the beginning of the global financial crisis, the Federal Reserve has made avoiding deflation a major priority, recalling the experience of Japan after its bubble burst in the early 1990s. The Fed has set an annual inflation target of 2 percent or a little lower, but is not getting it.

The latest figures, released this week, showed that overall inflation in consumer prices was 1.2 percent in the 12 months through October, while the core inflation rate � excluding food and energy � rose just 0.6 percent. The previous low for that index, of 0.7 percent, came in the 12 months through February 1961, when the economy was in recession.

As the accompanying chart indicates, the core inflation figures are charting a path roughly similar to one shown in Japan 15 years earlier. That has been true despite a much stronger reaction by the American central bank, which was determined not to make the same mistakes the Japanese made.

This week, a group of Republicans proposed to change the Fed�s dual legal mandate, which calls on it both to keep inflation tame and to fight unemployment. �It�s time to return the Federal Reserve to the singular mission of protecting the fundamental strength and integrity of the dollar,� said Representative Mike Pence of Indiana, a Republican and chief sponsor of the proposal.

There are times when the dual mandate seems contradictory, but this is not one of them, and it is unlikely the Fed would change course if it had a single mandate.

Major Disagreements With Times Article

Although I agree with the premise "we have been following the path of Japan", I sure disagree with the undertones that the Fed can or should do something about it.

Japan is now in debt to the tune of 200%+ of GDP. It build bridges to nowhere hoping to cure deflation. It is madness. All Japan has to show for massive fiscal stimulus is debt.

Moreover, as soon as Japanese interest rates spike to 3% or so (Something guaranteed to happen, we just don't know when), Japan's interest on its national debt will exceed all income.

This is the path the US is heading down unless we change course. Yes it will be painful, but after a world record housing party it is the height of foolishness to think there will not be a massive hangover as a huge price to pay.

It is startling that Paul Krugman and other Nobel prize winning economists cannot see the foolishness of proposing we can spend our way to prosperity. Ironically, the average 12th grader can see the foolishness of it, but the average academic professor cannot.

Unfortunately Congress (both Republicans and Democrats) have been unwilling to deal with the issue as well.

Republicans Need to Admit US Cannot Afford to be World's Policeman

Regardless of what Republicans may think, we can no longer afford to be the world's policeman.

For details please see Cost of War Since 2001; Federal outlays and revenues, 1940-2015.

Democrats Need to Admit Problem with Public Unions

States are bankrupt because of pension promises that cannot and will not be met. Public unions have destroyed states and municipalities.

State pension plans are $3 trillion in the hole. For more details, please see Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?

Thus, no matter what Democrats think, we cannot afford our love affair with public unions, union wages, and most importantly, union benefits.

Both parties need to rework the healthcare bill so that it contains provisions that will actually encourage lower costs and not damage small businesses. The bill as it sits made matters worse.

Search for Scapegoats Avoids the Truth

Somehow, some way, if you listen to Treasury Secretary Geithner and economist Paul Krugman, all of these problems are supposed to go away if only China would float the Yuan.

Well none of this will go away as long as the US looks for scapegoats instead of admitting reality. That reality is we are on the road to bankruptcy and neither Keynesian nor Monetarist stimulus will help.

Our problems are structural in nature and everyone needs to admit there will be no quick solutions and we cannot spend our way out of this mess. The only thing that can put the US back on track is fiscal prudence and sound monetary policy. Unfortunately, no one wants to hear the truth.

Madness of Bernanke

Bernanke wants prices to rise 2% a year. One problem is he does not count food, energy, or housing. Although OER (Owners Equivalent Rent) is the largest component of housing, rent and housing prices are two different things. Property taxes and sales taxes are yet another thing, and those are not factored into the CPI either.

We are clearly following the path of Japan, especially if we include an analysis of housing and equity prices including the Nasdaq. Yet to the pocketbook of the average US citizen, costs are going up, wages and benefits are going down (except of course for Wall Street and public employees).

Bernanke Doubly Wrong

Regardless of what your position is regarding measuring inflation (prices or credit-based), Bernanke is horrendously wrong.

It is sheer madness in a world of global wage arbitrage, where 14 million are unemployed, where the unemployment rate is close to 10%, to pursue a policy of attempting to force prices up, to meet some asinine idea that prices need to rise 2% a year, when to the perspective of the average consumer prices are going up much more than that, via taxes alone, let alone the grocery store and gasoline pump.

Berkanke's policies are just as mad from the perspective credit. In a fiat credit-based regime, there will be no significant sustainable hiring or economic growth when consumer and business credit is collapsing. Net credit creation has been negative for 10 quarters. Bernanke is attempting to stimulate lending, and the Fed can print all the money it wants. However, the Fed cannot force banks to lend or consumers to borrow.

For now, Bernanke's efforts have caused rising commodity prices, which is hurting small businesses that cannot pass on those price increases because consumers are tapped out. The net effect of the policies of this Fed and this administration is small businesses are getting crucified in a price squeeze.

Thus, whether you view inflation from a price perspective, or from the proper perspective of credit expansion, Bernanke is simply wrong. His policies have failed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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