“May you live in interesting times.”
Living in interesting times is a curse. Uninteresting times of tranquility are more life-enhancing than are interesting chaos.
Amid sluggish global growth, many central banks, such as the Federal Reserve, the Swiss Central Bank, and the Japanese Central Bank, have engaged in unprecedented policies to lower the value of their currencies in order to stimulate their economies, improve their trade competitiveness and reduce their jobless rates.
Central banks have made temporary problems chronic. While we can moderate busts and booms, we must recognize that these fluctuations are an integral part of capitalism.
Pot calling kettle black?
On Friday, the U.S. Treasury Department warned Japan that it was watching its new economic policies of massive bond buying to ensure that they were not aimed at devaluing the yen to gain a competitive advantage in world markets. The dollar recently hovered close to a four-year high against the yen, approaching the key 100 yen level. The dollar has not risen above 100 yen since April 2009.
The Treasury report is in response to a sharp shift in economic policy in Japan under new Prime Minister Shinzo Abe. Abe put pressure on the Bank of Japan to increase its money supply massively, increasing its purchases of government bonds, corporate bonds and equities. The goal is to spur inflation to 2 percent in order to help Japan snap out of its long economic funk.
Japan faces severe fiscal problems. The ratio of public debt to Gross Domestic Product is 240 percent. This is more than double America’s debt levels. Japan is now spending two yen for every yen they take in. America is spending about 33 percent more.
Not a cure for Japan
Is it realistic that Japan’s monetary and fiscal fixes can overcome its calamitous demographic trends? The answer is no. Japan’s population is declining and aging. By 2050, Japan expects to have barely one wage-earner to support one elderly retiree. This population profile will lead to anemic GDP growth and undermine prospects for deficit reductions. These fundamentals will outweigh temporary efforts to jump-start their economy.
To date, policymakers in Japan have only paid lip service to currency complaints. They have repeatedly insisted that the yen’s sharp fall has merely been a byproduct of its stimulus policies, not a goal.
Inflating assets artificially
The problem with artificially inflating asset classes is that it is a fake. It does not instill the confidence that encourages investment. Speculators jump from one sector or region to another. We are left with inflated asset classes rather than real growth. When the bubble bursts, the fallout is painful.
Let us remember the dot.com bubble in the 1990s. The tech-heavy Nasdaq index soared from 1201 in April 1997 to 5048 in March 2000. Professional investors told us we were living in a “new economy” and to disregard traditional investing fundamentals such as earnings. We needed only to buy something with a “e-prefix or .com” suffix” to become wealthy.
Unfortunately, the Nasdaq fell back to 1114 by October 2002.
My conclusion
I am tired of living in “interesting times.”
In the fall of 2008, I decided to invest 100 percent of my life savings in equities and fixed- income assets because I believed the Treasury and Federal Reserve were taking appropriate remedial steps.
But I no longer believe that our ongoing massive fiscal deficits and easy-money policies are appropriate, given the stabilization of our economy.
I cannot abandon the economic principles that served as the foundation of my education.
Instead of just warning the Japanese that their economic policies are wayward, we should impose restraints on our own policy makers.
Originally published in the Sarasota Herald-Tribune
