Japan ordered to abandon their QE program

Democrats beholden to the interests of Wall Street are not new.  The most notorious was Grover Cleveland whose "accomplishments" included crushing the Pullman Strike of 1894 and a commitment to "sound money" that ruined the lives of thousands of farmers.  His reactionary politics ruined the Democratic Party for at least a generation.  In fact, the first Democratic President in my lifetime to think there was anything admirable about Cleveland was another Wall Street toady—Bill Clinton.

Mike Whitney is the house "economist" over at Counterpunch—a site that is usually pretty good on many issues.  But Whitney is the sort of "sound money" Democrat who would make Cleveland smile.  He frets about inflation LONG after inflation has ceased to be a meaningful concern.  And he can mount his high horse over the subject of Quantitative Easing—which is the program that permits central banks to conjure up money from thin air to cover the losses the banking business incurred from the crash of the real estate bubble.  And while using the the bank's monetary creation function to bail out the slime that crashed the global economy is hardly the best use of QE, the idea that central banks should have the power to relieve the pressures caused by excessive debt is a very good one indeed.  And so while I am opposed to QE aimed at bad banks and crooked bankers, I could see considerable virtue in a QE program targeting struggling homeowners.

The really interesting story here concerns Japan.  Prime minister Abe ran for election in 2012 on the promise to do something about the over-valued Yen and the underperforming economy.  To hear the screams of the orthodox money boys, you would have thought Abe was advocating goat-raping.  But Abe was elected and his pro-development economist was appointed to head the Bank of Japan.  Not surprisingly, Abe's program has not been much of a success—even though in theory it should have worked.  The reasons are clear—Japan is really not the sort of society to fight the global conventional wisdom so Abe's new economics were only partially tried.  And now the word is out—the USA and the G-20 countries are demanding that even Abe's partial experiment should be ended.

And Whitney thinks this is a good idea.  In Cleveland's day, Whitney would have been called a "Bourbon Democrat."  Since no one seems to know what that means any longer, we will have to call him something more appropriate—"NPR totebagger," perhaps.

Japan's post-Fukushima energy plan

Of course, no one could have seen THIS coming.  Japan has 48 nuclear reactors that were producing power until shut down in the wake of the Fukushima meltdown.  The shut-down was a result of this burst of never-again idealism that postulated that Japan could get along on electricity provided by a combination of fossil-fuel plants and renewables.  But fossil fuels are polluting and expensive—which led to rare-for-Japan trade deficits, while renewables are still mostly in the design stages.  And there aren't a lot of obvious choices for renewables. For example, off-shore wind turbines will be very expensive because the waters get deep very quickly of her coasts.

So there they are with these power plants that were working not so very long ago combined with bad choices for replacement.  I'm surprised they didn't restart them sooner.  And IF this shutdown time has been used to maintain and bring all these plants up to some shiny new standards, a second Fukushima will be very unlikely.  Industrial progress has always depended on learning from your mistakes.  And even IF Japan has some crafty scheme for going to renewables, building the new infrastructure will require power.  Besides, a nuclear power plant that is operating is probably no more dangerous than one sitting idle with a skeleton crew.

Fukushima cores melted down

The reactor cores of Fukushima Daiichi 1-3 suffered a catastrophic meltdown.  TEPCO has been denying this since the original disaster.  No one I knew believed them. Last Friday they finally came clean.

The only good news is that core meltdowns do not trigger the "China Syndrome."  The rest of the news is just terrible.  And as nearly as I can tell, no one has any idea of what to do next.  The Japanese government has asked for international help.  No one has stepped forward.

Japan and wind power

This is one of those stories that makes you wonder, "Whatever took them so long?"  Actually the answer is pretty simple—windpower isn't an obvious choice for the Japanese like it is say, for the folks in North Dakota.  Land for wind turbines on those crowded islands is extremely scarce and offshore, the water gets deep very rapidly so they cannot build in shallow waters like, for example, the Danes.  Then there was the fact that their nuclear power proved safe and reliable (until Fukushima.) Nuclear power needs a maintenance culture and the Japanese have that in spades.

But with their nukes shut down, they are scrambling find a substitute because upping their fossil fuel consumption is both very expensive and tends to piss off the climate change crowd.  As the wind industry rumbles to life in Japan, we see the sorts of organizational behavior that allowed them to dominate the automotive world.  They are organizing their efforts around a trading house named Marubeni and they are talking in brave terms about a new export industry.  Mostly, however, this effort will play to their incredible strengths in building world-class machinery.  So even though the challenges of building deep-water wind turbines will be daunting, I for one do not doubt they can produce Nikon / Lexus / bullet train quality goods.  And yes, I am quite certain that they will have satisfied customers before long.

I wish them luck!

The mess that is Fukushima

While some serious scientists are telling us that it would be a good idea to start building nuclear power plants again because of the threat of climate change, the Fukushima disaster keeps reminding everyone just how dangerous such an idea really is.  Yes, it required a freak set of circumstances to bring down the Fukushima complex.  Yes, TEPCO has been so inept at handling the disaster that recently, Prime Minister Abe did the unthinkable—he actually asked for outside assistance.  (Notice that idea has gone nowhere fast!).  But even so, it is extremely difficult to argue that that such a set of freak occurrences cannot happen elsewhere.

So now TEPCO is about to embark on a very dangerous operation they have known was necessary since the big tsunami—they have to move the spent fuel rods off-site.  Moving fuel rods is a normal operation of a nuke, but the automated systems for this operation have been damaged so this must be done manually.  There are 1500 rods that are both heavy and fragile.  The money quote is “There is more radioactivity in that fuel pool than in all the bombs than in all the bombs that were fired in above ground testing. So we have the equivalent of 700 nuclear bombs worth of material in that fuel pool. These [the fuel rods] are not going to pull out easily and the fear is, is that they might snap and release the radiation that’s inside them.”

Keep in mind here that Fukushima is close enough to Tokyo and its 30 million inhabitants that even a slight mishap would put all those folks in an exclusion zone.  TEPCO estimates this operation will take 18 months.  And then the hard part begins—removing the damaged reactor cores.

Fukushima: Japan sends aid call to the world community

Yesterday, I started getting a large (for me) number of hits from a site in Germany about Fukushima.  Turns out that they were coming from a very sober site dedicated to economics.  This worried me a bit because I haven't been following Fukushima as closely as the subject deserves.  Worse, the post they were linking to was from March 28, 2012 a year and a half ago.  When I looked at my post again, it made perfect sense because I had embedded a German-language (with captioning) documentary clip about a Fukushima engineer who was trying his best every day to figure out what to do next.  He was doing this even though his work is killing him with radiation poisoning.

This is different—the Japanese are calling out for help.  The folks who can build Lexus and bullet trains are admitting they cannot solve this problem by themselves.  The Japanese are famously proud of their self-sufficiency.  They would't be asking for help unless they were utterly overwhelmed.  This, folks, is scary stuff.  And surprise, surprise, some of this disaster has been caused by Tepco trying to fix things on the cheap.  Well, Mr. Abe, you wanted to stimulate your economy—here's a good reason to spend a LOT of money.

Anyway, the site that sent me those page views has a compelling story to tell.  I am extremely flattered to be mentioned in association with such important journalism.  Here it is, translated by Google (which does a damn fine job with German.)

Japan's solar market grows up

Back in 1989 when I wrote Elegant Technology, I was quite certain that Japan would become a leader in green technologies—mostly because they COULD become a leader.  It has taken awhile, but it looks like this prediction will come true.  Go Japan!

Watching Japan

Japan's economic experiment is barely under way and already the self-annointed experts are passing judgement.  Part of the problem is that for those steeped in the conventional wisdom, no country would actually TRY to drive down the exchange value of its currency.  Must be to please their exporters, muse the wags.

Yes, the declining Yen has made a lot of currency dealers rich—with no risk because the Bank of Japan told everyone what they intended to do well ahead of time.  Yes, I am sure that the exporters are delighted the Yen is back above 100 to the dollar.  And yes, the Nikkei is back above 15,000 so those who believe this is the only metric worth taking seriously are happy.  But as I see it, this is merely the sideshow to the big event—Japan intends to get into the business of massive infrastructure upgrades and they intend to issue the funds rather than issuing new debt.  The spirits of Edison and Ford are dancing with delight.  Yes!  Precisely!

And in the meantime, just the suggestion that Japan has changed course is spilling over into the economic debates in Europe.  Stay tuned—this could get very interesting.

Stiglitz on Abenomics

Stiglitz thinks the Japanese economic experiments are likely to succeed.  I could not agree more. And I especially agree with his reasoning.

The Populist experiment starts

The ghosts of Jacob Coxey, Ignatius Donnelly, William Jennings Bryan, L. Frank Baum, A. C. Townley, Edison and Ford are grinning from ear to ear.  Me too!  Most people forget that Populism (the real thing) was about economics and more specifically, the kind of economics that allowed the Producer Classes to thrive.  This was the economics of economic development needed by folks trying to claw out a living from the virgin soils of the frontier.  Now we find an economic development specialist at the head of the central bank of Asia's (still) most interesting economy.  I would rate his chance of success at near 100%.  Strategies like Kuroda's have an astonishing track record.

Abenomics—the MOST interesting economic experiment going

Whenever Japan's new expansionary monetary policies are discussed online, some clown will inevitably write that Zimbabwe tried this and the result was runaway inflation.  Well Japan is NOT Zimbabwe.  Progressive monetary theory postulates that while the value of money is determined in part by value of the natural resources and energy an economy can access, the BIG determinant of value is what the society does with those resources.  Since Japan has never had many natural resources, she has long concentrated on the what-do-you-do-with-those resources part of the equation—to the point where she is perhaps the best in the world at these things.  In order to meaningfully compare Japan and Zimbabwe economically, you must imagine Zimbabwe building a Lexus.

Because the Japanese have so many world-class industrial skills, an expansionary monetary policy will be like taking a kink out of the oxygen hose.  This solution has been so obvious for so long, one wonders why they have not tried it earlier.  I actually have no idea but I would imagine the answer is some sort of peer pressure.  The central bankers of the world tend to believe many of the same things and for at least a generation, they have believed a country's industrial sector is just another economic resource to exploit.  This is a terrible idea in any country—but it really stinks up the joint in Japan where her very survival depends on industrial excellence.  A lot of good things have happened to the Japanese economy because they were willing to learn from outside—this was NOT one of those times.  Even so, it takes a lot of intellectual courage to tell the rest of the world's central bankers they are wrong.

But now they have done it.  Japan has appointed three new BoJ Governors who seem to quite passionately believe that the rest of the world's central bankers ARE wrong.  They are going to change directions.  Marriner Eccles has gone to Washington Tokyo.

But here is what I find so amazing.  Japan is going to do VERY well with her new monetary policy.  She will attract imitators.  But they will not do so well.  Why?  When you print a lot of money, the outcome can easily BE inflationary.  The only time it isn't is when the money is used to finance necessary internal improvements.  You expand the money supply—you expand the wealth of your nation. Now Japan can do this.  Lots of countries cannot.

When Toyota decided to re-invent the idea of quality control, she didn't keep her methods secret.  Your local library can probably get their hands on 25 good books on how Toyota did it.  And yet, year after year, the ratings of build quality are published and some Toyota product will be on top—usually a Lexus.  Turns out while methods are important, it helps if you believe they will work.  Japan is almost certain to pull off this economic turnaround—she has too many strengths not to.  But we must be careful to learn the right lessons from their experiment and remember, they can build a sustainable society that runs as smoothly as a Lexus mostly because they already know how to build a Lexus.  This is a country that simply must play to its strengths—something that usually happens or how did they become strengths in the first place?

Easier money

The signs that the crushing monetary policies of the past 35 years may be ending seem to be found in many places.  But are we to believe them?—after all, it is still possible to get nicked for 30% on your Mastercard and up to 10% for your student loans.  Since 2.5% real interest is often enough to kill activity in the real economy, the idea that we have somehow landed in a low-interest rate environment depends largely on who you are.  The big banks are getting loans from the Fed at essentially 0%.

Now IF interest rates were to fall for consumer loans, the economy would perk up almost overnight. But that's not what's been happening—$85 Billion per month is being pumped into the big lenders which sounds like a bunch of money (federal Hurricane Sandy relief was $60 Billion) but that barely covers the bad banksters bets.  The bailout continues.

But the Bank of Japan has promised a new day.  Prosperity is back on their agenda.  If BoJ pulls this off, everyone else will be forced to copy them.

Currency wars chip away at the neoliberal consensus

This could get seriously interesting / ugly.  After almost two decades of futzing around, Japan announces it is going to get serious about stimulating its economy.  Prime Minister Abe wants the Yen to depreciate and deflation to end.  He has many tools to accomplish this task but notice, he has used NONE of them so far.  All he had to do was talk about a cheaper Yen and the currency markets were happy to drive it down.

Japan's problems have opened up a breathing space that has allowed countries like Korea and China to grab market share in various endeavors.  Not surprisingly, it is these two countries that are squawking the loudest about Japan's new economic policies.

Bank of Japan is serious about ending deflation

PM Abe is serious about his plans to end Japan's economic woes.  After all, any country that works as hard as the Japanese and produce so much excellence SHOULD be prosperous.  If they are not, it is obvious that something is gumming up the works.  The idea that the "something" is medieval thinking over at the central bank is likely to be spot on.  And why should we believe that prosperity will return with a more enlightened central bank? 1) Historical examples—when progressives like Marriner Eccles and folks like him ran central banks, things got better.  2) We have been experimenting with reactionary neoliberalism since the glory days of Thatcher and company.  Whether you call it neoliberalism or voodoo economics, it is a failure by any objective measure.  We gave it a 35+ year shot—time to try something else.

The most efficient way to change the economic game—by FAR—is reform at the central banks.  We are literally destroying lives AND the planet because we live in societies that select for one of its most important occupations—central banker—people who are profoundly ignorant about how the real economy works, devoted to crazy religious ideas with the fervor of monks, and more arrogant than the Pope's red Prada loafers.

Now IF we can replace the ignorant-devoted-arrogant crowd with folks who understand the problems of nation-building, the rest of us can go back to work and leading our lives.  I mean, we COULD have a revolution or some other civic upheaval but if that revolution doesn't lead to more enlightened monetary policies, it's pretty much a waste of time.  So why not just jump ahead to a better central banker?  And since most of the folks employed by central banks are good sycophants anyway, a change in leadership at such institutions actually makes a big difference.

Getting a new central banker with a different worldview is what Abe intends to do in Japan.  I predict this move will be wildly successful.  There is AMPLE evidence to support this view.  It's good to bet on plans that are supported by both theory and a track record.  I drive a 17 year old Lexus that is still nearly perfect so I get a regular demonstration of what the Japanese believe to be possible.  This is a nation of Lexus-builders—they DESERVE a central banker who understands this.

And it looks like they may be getting one.

Oh the anxiety over a cheaper Yen

A cheaper Yen (up to a point) will certainly benefit the Japanese real economy.  Not so much some of her competitors who have made rapid gains during Japan's recent strong-yen period—such as the Korean automobile industry.

The question will be, "How will Korea act now that the won is destined for a period of over-valuation?"  After all, lots of people will believe an expensive won is an indication of Korea's economic virtue—many of them Koreans.  But as the exporters begin to howl in economic pain, the pressure to do something about the high-priced won will intensify.  We could easily see a period of competitive currency devaluations in Asia.

We intend to follow this story.

BoJ caves!

Tha austerity ghouls took it on the chin today.  In one of the more encouraging developments, the Bank of Japan actually honored a request by a democratically elected official.  As NOTHING so makes a mockery of democracy as central bank "independence" (arrogance? totalitarianism?) this is very good news indeed.

Note of at the end of this first article, some German toady warns of the dangers posed by government "disturbing abuses" in the affairs of the central banks.

Japan's attack on economic orthodoxy

The politics of Shinzo Abe continue to fascinate.  It is actually quite amazing that Japan has been so conventionally orthodox when it comes to macroeconomic policy.  Japan hasn't deviated from conventional thinking all that often in the post WW II period but when she has—such as when MITI organized the rise of her automobile industry through central planning and cartels—she has been astonishing successful.  Given such a track record, Japan should be much more daring and even arrogant in her economic thinking.  Yet she has just spent over two decades allowing her economy to be hollowed out in the name of the global conventional wisdom.  Yeah, I don't get it either.  So along comes Abe who is quite the nationalist and one of the manifestations of that nationalism is that he is refusing to follow the economic norms.

Krugman, who is about as surprised at this move from orthodoxy as I, takes the story from here.  All I can say is, Go Japan!  The conventional wisdom is literally killing us so it is refreshing to see someone try something new.

Japan's experiment with stimulus

The actions of Japan's Prime Minister-elect Abe to reduce the Yen's value has the money wise guys thoroughly confused.  In their world, they cannot imagine anyone wanting to drive down the value of their own currency.  After all, they have just spent decades bullying the countries of the world with the threat of sabotaging the value of their currencies.  So how do you bully someone who wants the same outcome?

Well, you do what the financial press has done—throw up your hands in cultural horror at Japan's "unconventional" actions.  The scribblers must do SOMETHING.  After all, if Japan succeeds here—and there is a very good chance that they will—everything the purveyors of the "sound money" conventional "wisdom" have claimed over the years will have been proven wrong (again!).  Of course, merely being wrong will barely slow them down—after all, George Will and Thomas Friedman are usually wrong about something every damn day and they still have their gigs.

About those Japanese nuclear power plants

Well, that didn't take long.  On May 5, 2012, Japan turned off its last nuke.  With the election of Shinzo Abe, the zero-nuke policy is up for grabs again.

Actually, this doesn't surprise me one little bit.  Countries that have nuclear power generation take great pride in the notion that THEY are fully capable of understanding the risks and can manage them.  Even when confronted by a catastrophic failure such a Fukushima, the Japanese can say, "Well, just look at the natural disaster it required to bring down one of our plants?  You simply cannot tell me that ALL of our power plants are equally dangerous."

As so after a few months of looking at perfectly good power plants sitting idle while the nation scrambled to replace the electricity they generated, the pressure to restart a critical element of their infrastructure has become damn near overwhelming.

I think the interesting question now becomes, will Germany reconsider her zero-nuke stance?  She is under the same pressures as Japan (plus a few extras including neighbors like France who think they have gone crazy.)  The BIG difference is that Germany has a well-established Green Party that is in fact part of the current government.  There are Germans nearing retirement age who have been anti-nuke activists since they were teenagers.  As a result, reversing Germany's zero-nuke decision will encounter a great deal of organized resistance.  Even so, my Institutional Analysis is that the facts on the ground will lead to a modification of her zero-nuke policy as well.  It is just that the capitulation will be nowhere as easy or complete as in Japan.

Japan threatens the monetary cranks

This story is destined to be one of the most interesting of 2013.  Japan's new prime minister is calling for the Bank of Japan to monetize a $10 Trillion Yen stimulus package.  The ability of a central bank to monetize debt is always an option available to them but it's an option that terrifies / angers / worries the hard money boys.  And for a politician to make this a winning campaign promise has the inflation hawks in a near-state of apoplexy.

Japan has an interesting problem.  Her currency is very expensive.  Now usually an overpriced currency is a problem of the oil countries because they have something everyone wants.  When Holland was shown to have offshore oil and natural gas reserves, her currency skyrocketed.  Good for the average Dutch consumer because now all imported goods could be cheaper, bad for the Dutch worker because now his labor was priced out of the international markets.  The guys who set the price for currencies understand commodity wealth, but the wealth created by human excellence and genius is far less likely to be evaluated accurately.  For example, gold bugs often claim that fiat money is "backed by nothing" because it can't be exchanged for a rare commodity.  But Japan is one of those few exceptions—her currency is expensive because of her ability to manufacture highly desirable goods.

Japan actually would benefit from a much cheaper Yen.  For example, the Prius sells for roughly $30,000 or 2,543,700 Yen.  If the Yen were at 140 instead of 84.79, that same car could sell for $18,169 (everything else being equal.)  A lot more people could buy an $18k Prius than a $30K one.  And suddenly, Toyota and all her suppliers would have to put on an extra shift.

So our Mr. Abe has discovered that if he could push down the value of the Yen, he could bring some much needed prosperity to Japan.  And supposedly, the best way to drive down the value of his currency would be to get the Bank of Japan to print a lot of free money—to horrify the world's bond vigilantes by actually monetizing the debt.  So his plan will not only improve his trade standing, but it will pump a bunch of money into his domestic economy.  Now all he has to do is terrorize those dullards over at the BOJ into going along with his plan.  Suppose they will whine about how they are supposed to be "independent?"  Does the sun rise in the east?

The truth is, Abe can spend money like a drunken sailor and not do any lasting damage to his currency.  This is because his country knows how to convert intellectual capital into world-class production.  His is a nation that can just about validate any amount of money they can print.  In fact, if he actually puts this plan into place, he could trigger a bout of prosperity that would discredit the hard-money guys for a generation or two.