The Global Economy Is 'Stimulus' Weary

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When QQE was first announced on April 4, 2013, it immediately stoked fears of retaliation across Asia. In the orthodox view, such unprecedented "money printing" would surely lead to devaluation in the yen and therefore induce a competitive advantage for Japanese exporters. In fact, the Bank of Japan was counting on it, leaving no uncertainty about what it felt would be the primary channel for "stimulating" recovery. As Reuters wrote that day more than three years ago, "Unprecedented easing may also provoke a currency war as other Asian exporters try to stay competitive with a weaker yen."

Japan's economy did not follow that path; not even close. It has been instead consistent and constant wreckage. Exports did rise but only in nominal terms as the changed yen exchange rate boosted exporting receipts but little else. Total exports in the twelve month period prior to the announcement and start of QQE were ¥64.2 trillion, and ¥64.1 trillion in the twelve months leading up to and including November 2012 when the yen first started its descent in anticipation of this part of Abenomics. In the last twelve months, through March 2016, total exports were about ¥74.1 trillion, a gain of about 16%.

On the surface it seems as if QQE and its yen effect had worked, though the degree to which that might be the case already raises questions given the larger scale or comparison of the yen's devaluation. On the import side, however, traditional "stimulus" theory supposes that benefits of "competitive devaluation" are supposed to be received on both sides of the foreign trade equation. Just as "weaker" currency "should" deliver more competitive exports on global markets, it is also supposed to counteract imports by making them relatively more expensive domestically. The trade balance, especially for a situation where the devaluation is large, should swing radically in favor of the "stimulus."

The Japanese trade situation had already turned after the disaster of the earthquake and tsunami in 2011. What once had been a seemingly permanent trade surplus left over from the remnants of Japan Inc., the once mighty and seemingly unstoppable force of Japanese industrial power last seen in the 1980's, had turned to deficit largely on the need for importing energy. Total imports in the twelve months before QQE's inauguration were ¥72.7 trillion but were ¥75.2 trillion over the last year. That however, masks the currency "betrayal" as total imports in 2014 were an astounding ¥85.9 trillion; it has only been the economic re-recession (or continuation of a single, uneven recessionary condition overall) in 2015 that pushed trade back in Japan's favor.

While energy was a part of that "unexpected" surge in Japan's imports, ballooning its merchandise trade deficit to what used to be unthinkable proportions, that wasn't the marginal effort. Total imports from China into Japan, for example, have only continued to increase even in 2015 where imports overall collapsed back. In the twelve months through April 2013, imports from China totaled ¥15.1 trillion; in the latest twelve months ¥19.3 trillion, for a 28% increase despite heavy devaluation. QQE did not resurrect Japan Inc., it greatly amplified Japan Offshore Inc.

The monetary "stimulus" continues to be described that way even though its effects are the opposite of that; BoJ monetary interference did not create conditions for final recovery it greatly impoverished the Japanese economy. The fact that it didn't work and never would should have been apparent (to policymakers and economists) in late October 2014 when the Bank of Japan was "forced" to do even more. Even the Wall Street Journal, never a media organ to turn down or scoff at "stimulus", at that time understood what was really going on in Japan while still deferring to the idea of "stimulus" as a generic concept:

"The weak yen gives a quick boost to inflation, by raising the cost of imported goods, and is more broadly seen as helping the economy by making Japanese-made products cheaper on world markets and lifting exports. But the sharp yen devaluation that took place last year after Mr. Kuroda's first big easing failed to have that effect, as many Japanese manufacturers had shifted production offshore during the country's period of slow growth."

You can actually see the erosion in Japan's economy through its broader labor market statistics. The mainstream focuses almost exclusively on the unemployment rate, but as inappropriate as that is here it is more so in Japan. Despite the fact that the unemployment rate, already low, got only lower, that obscures the real economic circumstance with regard to the most fundamental element of any economy. Total hours worked in manufacturing, according to Japan's Ministry of Health, Labour and Welfare, was slightly less in 2015 than 2012. For all the gains in nominal export sales, it didn't translate at all into even the slimmest gain in productive activity in the very sector that should have been, according to the idea of "stimulus", booming all along. In wholesale and retail trade, total hours were 1.5% less in 2015 than 2012. And for the Japanese economy overall, there were an estimated 1.6% fewer total hours worked in 2015 than 2012.

In nominal terms, Japan appeared to be moving forward especially in exports but in reality QQE hollowed out the actual economic base even more than it already had been. Some Japanese corporations have seen record nominal profits, but the Japanese labor force participates less and less - no matter what the unemployment rate says.

There has been growing debate and really resentment over the current conception of free trade. In the US, it has become highly contentious. Free trade is undoubtedly a universal benefit to both sides of the endeavor. The problem is, as we see in Japan, what "we" have been doing for a very long time does not actually qualify as actual free trade. If basic, manufacturing jobs move to lower wage domains and are replaced by high value jobs domestically, free trade is undoubtedly a net benefit to both. That just hasn't happened; the imbalanced trade in the US, meaning systemic economic impoverishment of just the sort that we see in Japan during QQE, leaves no doubt that American workers have been totally and completely screwed over.

This point is as close to inarguable as anything might be in the realm of economics. Like the Japanese Ministry of Health, Labour and Welfare, the US Bureau of Labor Statistics keeps track of total hours worked in the US economy. The change in labor utilization in the aggregate, in direct contrast to what the unemployment rate suggests, is so severe and obvious that the data series could appropriately be retitled as the US Index of Screwing Over American Workers.

Economists will argue that the US has been experiencing a recovery, and even a rapid one of late. According to the BLS, total hours worked do seem to point in that direction in the narrow view of an assumed business cycle. Through Q4 2015, total hours have increased by 12.8% since the trough of the Great Recession. The level that positive trend attained by the end of last year, however, is only 2% more than what the BLS estimates for the US economy at the peak (Q2 2000) just before the dot-com recession. In other words, there is barely more labor activity now at the end of 2015 than at the start of this century.

In the 15 years (minus one quarter) before that early 2000 peak, by contrast, the BLS figures that total labor output advanced by just more than 30%. Where the economy through productive labor utilization grew by a third in the last decade and a half of the 20th century, it has done nothing (NOTHING) in all of the 21st so far.

The enormity of that decay is almost incomprehensible, especially when factoring population. The BLS in its other estimates tells us that the civilian non-institutional population, the aggregate pool of all potential laborers, expanded by nearly 41 million in those fifteen years. That means the raw count of potential workers grew by 19% while total labor output added just 2%.

If there is such an economic imbalance to this degree, how can it appear that the US economy is moving forward and has been all this time? Nominal GDP in Q4 2015 was $18.2 trillion compared to just $10.3 trillion in Q2 2000, so where is the discrepancy? The answer is obvious to anyone not comatose or faithfully committed to orthodox economics this whole time.

Where actual productive labor and earned income formed the backbone and greatest proportion of marginal economic expansion before 2000, meaning that economic growth was "funded" and really sustained by labor income, the gap as labor utilization declined in the 21st century was "filled" (poorly) by the intense expansion of credit and credit-based asset bubbles (with some added consumer "inflation"). In short, jobs were shipped overseas and the products that we used to make were bought back on the eurodollar. There is no question there were some positive aspects to the trend but only in the narrow sense of cheaper goods. What good are cheaper goods if Americans can't afford to buy them except through only further monetary expansion?

This is not, to reiterate and reemphasize, "free trade" but financialism or even corporatism. Those that are most exposed to the monetary expansion, especially this bastardized form of banking, are those that have benefited the most during this period. The populist political support of Bernie Sanders' candidacy focuses almost exclusively, from what I can tell, on this disparity between productive labor doing nothing and what they define as "capital" benefiting only its owners. Thus, they view "inequality" as the problem when in reality it is immobility that plagues the economy. The money sector visibly demonstrates mobility while American workers hope only for less destruction.

The gains in the corporate and financial sectors, as in Japan, have not "trickled" to the rest of either of those economies. That leaves anyone outside of the monetary arrangement quite justified in his or her general resentment. The problem is that such fervent dissatisfaction is almost always misplaced - the Sanders group view it as a problem of "capitalism" as if this trade imbalance and its credit base were "free markets." The Trump end of the growing populist spectrum demonizes "free trade" for the same reasons (its results). Because economists and central bankers have co-opted both free trade and free markets under their banner of central planning, with the media and political establishments fully complicit, it is difficult to blame either end of this political movement for their misconceptions.

Politicians and the media defer in total to orthodox economists. Economists, rather than confront the obvious fact that American workers are actually reasonable in their increasing revolt, instead turn to platitudes about ideal free trade as if that was what they are offering. They cannot admit the obvious about the US labor situation because that would only bring blame squarely where it belongs - upon economists. That is why they have come up with increasingly ridiculous and absurd "explanations" as to the clear evidence that the US and global economy continues to only falter. It is far more likely to find drastically shrunken labor utilization as the cause of both systemic economic deficiency and the quite justified anger of a very large portion of what should be the labor force than some unspecified, amorphous academic projection of "secular stagnation."

When the US turned from agrarian to industrial in the 19th century, there was the rise of industry to take up those displaced by actual advancement in technology in agriculture. The mechanization and increased productivity of farms (including factory farms) meant lower prices for food pushing higher cost farm producers (often family farms) out of business. This was not an unsympathetic dilemma even though overall it was a hugely beneficial systemic transformation.

They found their voice by the end of the 19th century in the form of Democratic populism, especially William Jennings Bryan. He delivered his "cross of gold" speech really as a blind strike against actual capitalism and beneficial improvement. Fortunately, he did not win either an election nor any further influence, as "free silver" in today's terms would have meant policies like QE and central bank manipulation (in the form of the Treasury Department then).

There are those (especially economists) that charge that either Trump or Sanders today are Bryan's resurrection, deserving only scorn and just the sort brought by elite opinion; that American workers now are just in the midst of another economic transformation not unlike that which greeted the 20th century and they should just make peace with it. This is false and, as shown above, demonstrably so. Again, displaced farm workers at that time had immense industrial opportunity waiting for them. It wasn't smooth or easy, but it was easily apparent in actual, sustained economic growth that went far beyond just numbers in GDP. We knew the economy was fruitful in its overall rise because society was visibly profiting in widespread fashion (interrupted only by periods where central bankers took more control).

Workers in the 21st century that have been displaced by financialism's version of "free trade" don't have anywhere to go - the BLS shows that conclusively. The timing of this deflection further leaves no doubt. The only options at the margins are low wage or part time work, or beyond that some form of debt and further financialism (as in the case of those Baby Boomers that have actually retired on 401k's totally enthralled to the asset bubbles themselves).

Manufacturing jobs had peaked in 1979 (during at the end of another "weak currency" period strewn with the heavy hand of economists) but were at least somewhat stable through the rest of that century. The dot-com recession itself was relatively mild, so mild it didn't register much in many economic accounts. But despite that shallowest of deviations, manufacturing jobs collapsed during and especially after it under conditions of only increasing "stimulus." There were 17.6 million manufacturing jobs in the US in early 1998, falling during the dot-com mania (financialism) to 17.2 million by the end of 2000. By the time Alan Greenspan started raising the federal funds rate in the middle of 2004, all throughout his first experiment with "ultra-low" interest rate "stimulus", manufacturing jobs bottomed out at just 14.2 million. It was so out of proportion with history that it demands some kind of reasonable explanation (in the 1990-91 recession, for example, manufacturing only shed about 1.2 million jobs). There were more manufacturing jobs lost around the dot-com recession than even the Great Recession, which stripped the economy of a further 3 million manufacturing jobs.

If this process was free trade or even like the industrial revolution, these former manufacturing workers would easily have found opportunity elsewhere, in services we are told. Some of those workers in the middle 2000's found construction as an alternative, but, obviously, that wasn't a sustainable alternative either. Jobs have moved offshore but have been replaced by nothing but "stimulus." The economy shrunk throughout the 21st century and economists expect that still more debt and credit is the answer. There is no other way to describe it; a 19% increase in potential workers but only 2% in labor output is the very definition of shrunk. All arrows, economic and now political, point there.

What the Great Recession actually was, as the financial panic that aided this disclosure, was notice of this systemic decline. It was the belated imposition of market forces, both economic and financial, of recognition of this widespread impoverishment at the very economic core. Wealth and opportunity were increasingly concentrated in the money sector because that was the only sector of the economy offering any serious (though artificial) offset to the labor dislocation. The Great Recession showed that just wasn't a sustainable effort, which is why the economy hasn't yet come close to recovery despite all the assurances of economists that it has.

Central bankers, however, have been intent this whole time via only more "stimulus" to try to continue the money sector counterbalance to the foundational decay. It doesn't work because the eurodollar system which once fostered and delivered this disastrous transformation is now wed to the smaller economy. In broad terms, the eurodollar shrinks in capacity to match this actual state of the US and global economy. That was the difference of the Great Recession, as it showed conclusively that the financial "revolution" was a lie and could never, as the industrial revolution, take the place of increasingly lost labor. At best, it was a temporary workaround that in the end only made it that much worse.

Even those countries that have "taken" jobs from developed world manufacturing are struggling and to an even greater degree now than the nations that lost them. It's not just American workers that have been robbed of opportunity, the stimulus-weary global economy is sharing that misery on all sides.

Again, it was never "free trade" nor capitalism. Populists on both sides deride and decry them, but in reality they are really against the monetary versions that have been put forth in their place. Thus, the populists are right about what it is they actually perceive but wrong as to why that is, while economists are actually right to defend free trade as a concept but utterly wrong and guilty about what they have instead delivered. It was always financialism propagated through the credit-based reserve currency of the eurodollar. As it declines, everybody loses. Even US GDP is coming painfully close to that conclusion.

Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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