Global Economic Rebirth Will Have to Start at Home

Global Economic Rebirth Will Have to Start at Home
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In a country now infamous for false dawns, the one in 1991 really stands out. The Japanese economy had spent the decade of the eighties dominating. There was little little Japan couldn’t accomplish. Even missteps in monetary policy, ignorance more than anything, which had left the system under prevailing asset bubbles were thought small hurdles to be easily jumped by expert government guidance. The Bank of Japan was believed just that close to omniscient.

By October 1991, there were looming clouds on the horizon if not already storms overhead. The economic data in Japan, however, was more muddied than the outlook. Modern statistical techniques hadn’t yet caught on, so in that particular month it was declared Japan had managed to surpass its longest prior boom.

Achieving 58 straight months of expansion, there was cause, many thought, to celebrate surpassing the miracle growth of the late sixties. That earlier one was so impressive it was given a name. The Izanagi Boom had lasted from October 1965 all the way through July 1970. Izanagi, he who invites, is half of a divine duo largely responsible for the creation of Japan.

The economic power which now bears his name fits in that sense. Modern Japan was born and raised up from this one half-decade. What was a cluster of devastated, occupied islands two decades before it had become the object of global envy two decades afterward.

Thus, when Japan’s economy jumped to a 58-month boom by 1991 the science seemed settled. One senior economist at Deutsche Bank in Tokyo told The New York Times, “The Japanese economy has so much momentum that, competitively speaking, the 1990's will be over in 1995. The West won't be able to catch them after that.” Yoshio Suzuki, a former central banker then at Nomura Securities, boasted, “The Japanese economy has improved not just quantitatively, but qualitatively.”

It wasn’t to be. Everything had changed, not that anyone seemed able to grasp the enormous implications of clueless central bankers leading nothing. If monetary policy had been wrong in the late eighties in Japan, it was because it didn’t include money in it.

There was no 58-month expansion, either. Statistical updates would later show that Japan had indeed contracted long before October 1991. In many ways, all those that actually count, it has yet to emerge from it. It’s been twenty-eight years.

Desperate for any measure of success, however, Economists have begun focusing in on these frequency measures of economic output. The Izanagi Boom was eventually surpassed in the middle 2000’s by an economic period that should have no association whatsoever with it.

In December 2006, modern GDP numbers from Japan’s Cabinet Office would show that its economy had grown for 58 straight months through that October. It was the longest boom on record for Japan, but was it even a boom?

To even ask the question shows how Economics has devalued itself as a scientific pursuit. It has become entangled within politics, coming full-circle from its primitive roots as political economy. In the 21st century, officials have turned exclusively to frequency to justify themselves in the total absence of any appreciation for amplitude.

Any cycle whether economy or in nature is a wave function with two dimensions: frequency and amplitude. The former is how “long” the wave cycle is along the horizontal axis, which in economics usually associates with time. The latter, amplitude, is how high the wave gets within each cycle, meaning rate of growth and output. Both are important factors.

Only nowadays, just the one is ever cited. The Izanagi Boom lasted 57 months in frequency, and in amplitude it raised Japanese GDP (modern estimates) by nearly 65% in real terms. By comparison, the middle 2000’s “boom” ended up lasting all of 23 quarters, 69 months, and raised real GDP by the patently unimpressive total of 9.3%. The average annual growth during the late sixties, +11.5%, was significantly more than the total for the whole “boom” after 2001.

Some have even attempted to give this later expansion the name Izanami, Izanagi’s wife and the other half of Japan’s divine founding deities. The reason was simple, to suggest that central bankers through their “genius” of QE and ZIRP had by 2006 laid the foundations for Japan’s road back to prosperity. A 21st century rebirth on the same theme as the late sixties. This view was absurdly based only on the frequency of a cycle “somehow” lacking any amplitude.

It is somewhat unfair to compare these two economic periods. Japan was a young industrial power on the rise then and today it is, what? This is largely the point I’m attempting to make. Economics assigns us only the two possibilities, either recession or boom. Yet, Japan has demonstrated repeatedly there are other alternative states, these which are far more dangerous than even the most insipid, deep recessions.

The Izanagi period was again surpassed just last year. In November 2017, the Cabinet Office confirmed the “success” of Abenomics with a 58th month of consecutive expansion. Abe at least has faced a much tougher crowd as many even in the media in Japan have come to recognize the difference between frequency and amplitude.

From Nikkei announcing this second place something:

“The Japanese economy expanded for a 58th consecutive month in September [2017] to mark the second-longest recovery in postwar history, government data shows, but sluggish wage growth and consumption belie the statistical milestone's significance for most people.

If people aren’t getting anything out of it, it isn’t a boom. Japan’s economy still qualifies as being one if by these empty standards. It’s not so certain for how much longer, though. The Cabinet Office reported on Wednesday that GDP contracted in Q3 2018, which was actually the second quarterly negative just this year.

Fitting how Japan’s economy remains booming but is no longer growing.

If the frequency of the latest “cycle” is now in doubt, the amplitude never was. Over the last 23 quarters, including last quarter, real GDP rose just 7.6% total, an annual rate of 1.3%. It’s even less amplitude than the middle 2000’s “boom” despite QQE.

Japan has come to redefine the whole idea of business cycles. Its atrocious record has introduced the concept of a supercycle. The inflection point between actual growth and modern “growth” is absolutely clear, right at 1990. It is as if someone flipped a switch, to where before there was frequency and amplitude to now just frequency and only if the Japanese are lucky.

In fact, it hasn’t really mattered as much as it is made to sound at times. If we pick the 23 quarters between the end of 1994 and Q3 2000, real GDP in Japan grew by 8.2% total, or 1.4% per year. It was slightly better than this latest one and a little less than the middle 2000’s “boom.” Yet, this stretch in the nineties included one nasty recession in the middle. Though it wasn’t technically a boom, then, “somehow” it ended up with about the same overall output growth anyway.

The Bank of Japan simply doesn’t factor; it is a nonentity, yet it persists in leading every effort against an economy that doesn’t ever actually grow. One of the primary reasons for this continuity is this narrowed focus on frequency, the reduction of economic standards and therefore Economics as a science into pure political propaganda.

It isn’t partisan politics in that it favors one party affiliation over another, rather it’s the same fault lines between the status quo or so-called establishment versus the population who might seek something else. In Japan, there isn’t something else nor does there appear to be any appetite among the Japanese people to look for it. They seem to have accepted their fate, the true scale of the tragedy.

In May this year, the US media was filled with stories about how the American economy had surpassed a similar milestone. The current “expansion” is now the second longest on record, and if it lasts two quarters more it will reach the one from the nineties.

And just like in Japan, this current economy will be nothing like the prior version in every way that counts. The frequencies might match up, but that is all.

Starting in the second quarter of 1991, US real GDP would expand without recession until the first quarter of 2001; a record 39 straight quarters, one shy of a full decade. Over those 39 quarters, output rose 43%, or 3.7% per year. This latest “expansion” including now Q3 2018 has lasted 37 quarters. Output is up 23%, or 2.3% per year. And trough to peak, as these numbers are, is the most charitable measure of amplitude.

The more appropriate comparison is peak to peak – because you can’t just ignore the contraction that takes place in between. What happens to turn the cycle is every bit as relevant as what comes after; specifically, in that the contraction itself plays a key role in defining the recovery. In actual business cycles, the larger the decline the faster and more intense the comeback.

Peak to peak, in the nineties growth was 41% for an annual rate of 3.4%. Since 2007, it’s 18% for an annual rate of 1.5%. The economy fell down hard, and never got back up. This right here already proposes a paradigm change along the lines the Japanese experienced in 1990.

It’s as if someone just flipped a switch in August 2007. The economy used to achieve some amplitude before then, but now can’t ever get going that way anymore. We hear about a boom all the time, incessantly, based on nothing more than one good quarter of GDP perhaps at best two.

The Japanese economy has had good quarters, as well, but those are too few and far between. It is the same problem here, like looking at a playing card face on and thinking it’s a substantially deep therefore sturdy brick. You needn’t turn it that far to see all the dimensions and then easily understand just how shallow and flimsy a playing card really is.

This fragility is what’s hidden by focus on frequency. Momentum is an important element, sometimes the most important element. A real boom is about self-reinforcing processes often related to expectations. If officials say the economy is booming and you see it for yourself, you tend to believe officials and go along with what they may have planned.

If officials say the economy is booming, and you can’t seem to find it anywhere, you may agree with the convention but act very differently. Central bankers seemed to have it all together when economies had amplitude. There were even times when monetary policies appeared to affect the level of amplitude. It was simply extrapolated from there that central banks could then use monetary policy to create it if necessary.

So, we have to ask ourselves which one comes first; does the central bank create amplitude as it advertises, or does monetary policy require it in order to have any even small effect? Japan’s experience is dispositive as to the latter. In the West, we’ve now got more than a decade with the same results. The sample size is beyond sufficient in time as well as geography.

This is, actually, by far the easiest correlation to see and understand. The highly activist central bank corresponds to these periods where there is no amplitude. The Bank of Japan was doing almost nothing during the Izanagi Boom, yet it was doing everything and more in the Izanami “boom.”

The Federal Reserve moved a single money rate around here and there during the nineties, practically no dollar bank reserves required by anyone anywhere around the world. Over the last eleven years, in stark contrast, the Fed has tried numerous policies and procedures, created trillions in bank reserves, and achieved almost no amplitude for approaching the same frequency.

Monetary policy is akin to a fire alarm except those who operate it believe it is a fire suppression system. They go nuts telling us when the economy is being consumed by conflagration, in doing so believing they are putting it out. We see both the alarm as well as the lack of extinguishing.

Positive numbers was the one thing 2017, or Reflation #3, had going for it, really the only thing. Because there was nothing else, it was turned into a big thing this globally synchronized growth. The idea was a playing card held out to the public face on, an illusion. All the world’s big economies would be sporting plus signs at the same time as if by itself this was meaningful.

It would’ve been had they been big positives, globally synchronized amplitude. Like Japan since 1990, they weren’t. The booms don’t ever boom anymore. You might think people aren’t noticing, and maybe they don’t in the specific context of quarterly GDP, but they have noticed.

What happens when even these small positive numbers turn back negative? We know what happened the last time, 2015, because it unleashed the first wave of populism across the planet. Before then, most in the US, Europe, or in emerging market economies on the Road to Lima were willing to give these Economists the benefit of the doubt despite their bungling of 2007 and 2008. Many still are blindly willing, but unlike in Japan the margin of who aren’t is rapidly growing.

They should’ve appreciated the vast difference among Japan’s booms and seen what was coming. Japan’s latest economic stumble, now more and more negative numbers, is the unsuppressed global economic fire flaring up yet again. The central bank alarms will be raised shortly, and then they’ll just let it burn some more anyway. The amplitude shrinks again regardless.

Global economic rebirth, actual recovery and boom, will have to start at home. Grassroots will be the only way. Japan’s going on three decades like this, and with minus signs spreading again throughout the world, the chances the global economy is going to miraculously, spontaneously heal itself are back down to practically nil. The world-at-large just doesn’t have that kind of frequency.  

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

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