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Does the World End in Fire or Ice? Thoughts on Japan and the Inflation/Deflation Debate

May 23, 2017

Japan has managed to offset decades of deflationary dynamics, but at a cost that is hidden beneath the surface of apparent stability.

Do we implode in a deflationary death spiral (ice) or in an inflationary death spiral (fire)? Debating the question has been a popular parlor game for years, with Eric Janszen's 1999 Ka-Poom Deflation/Inflation Theory often anchoring the discussion.

I invite everyone interested in the debate to read Janszen's reasoning and prediction of a deflationary spiral that then triggers a monstrous inflationary response from central banks/states desperate to prop up their faltering status quo.

Alternatively, economies can skip the deflationary spiral and move directly to the collapse of their currency via hyper-inflation. This chart of the Venezuelan currency (Bolivar) illustrates the "skip deflation, go straight to hyper-inflation" pathway:

If we set aside the many financial rabbit holes of the inflation/deflation discussion, we find three dominant non-financial dynamics in play: demographics, technology and energy.

As populations age and retire, the resulting decline in incomes and spending are inherently deflationary: less money is earned, and less money is spent, reducing economic activity (gross domestic product).

The elderly also sell assets such as stocks, bonds and their primary house to fund their retirement, and if the elderly populace is a major cohort (due to low birth rates and increasing life spans, etc.), then this mass dumping of assets is also deflationary, as the increasing supply of sellers and the stagnating supply of buyers pushes prices lower.

Recession and stagnation are also deflationary. Shift 10 million workers from secure fulltime employment with full benefits to low-paid, insecure part-time jobs with few benefits, and you have a self-reinforcing deflationary spiral in action: a significant percentage of the workforce is now receiving far less income, which necessarily slashes their spending and just as importantly, their ability to borrow huge sums of money to buy vehicles, homes, overseas vacations, etc.

In consumer-dependent economies that are dependent on debt for much of the consumer spending, this decline in borrowing and spending power is extremely deflationary, as there is a lot less money available to chase the existing output of goods and services.

Japan is a case in point. A friend of ours who lived and worked in Japan for a decade (the 1990s) recently visited Japan again after 15 years working in Europe and the U.S., and he was surprised to find prices were the same or lower as when he was living in Japan.

This is the result of multiple sources of deflation operating in Japan.

A recent NHK TV program reported some young people in Japan are trickling back to rural villages and renting large traditional farm houses and the adjoining land for $200/month, a fraction of what they were paying for cramped studios in big cities. This is an example of deflation in action: people abandon costly housing, transportation, etc. and adopt lifestyles that generate far less income and far lower expenses--both are deflationary.

Given the structural rise of part-time employment, an aging populace and the deflationary impacts of technology and globalization, no wonder Japan is experiencing deflationary/stable prices.

Technology is relentlessly deflationary. Where consumers once spent small fortunes buying stereo equipment and music storage (LPs, cassettes, CDs, etc.), cameras, film, photo printing, etc., game consoles and equipment, small-screen TVs, and paying for telephony, now a single device--a smart phone--combines all these functions (with some obvious limitations) in one device.

Globalization and commoditization are also deflationary. Global wage arbitrage and automation lowers production costs, and the commoditization of labor and inputs (capital and materials) push prices lower.

Declining energy costs are also deflationary, as the cost of energy affects the pricing of almost every good and service.

We now discern the outlines of why money created out of thin air needn't be as inflationary as expected. If economic activity declines by $1 trillion due to lower incomes, spending, etc., creating $1 trillion out of thin air and injecting it into the economy as monetary and fiscal stimulus is more or less simply replacing the $1 trillion of deflation.

The Bank of Japan has tripled its asset purchases (monetary stimulus and support of the stock and bond markets) with little apparent effect on conventional measures of inflation.

This print-to-offset deflationary declines may appear to be stable and sustainable, but the expansion of bonds (to fund fiscal stimulus) accrues interest, which even at low rates eventually starts burdening state spending.

All this new currency doesn't necessarily lead to productive spending or investment; rather, it may increase mal-investment and systemic asymmetries that eventually destabilize the entire financial system.

Japan has managed to offset decades of deflationary dynamics, but at a cost that is hidden beneath the surface of apparent stability. Building bridges to nowhere and creating money from thin air to buy stocks and bonds only appears sustainable because the risks and imbalances are piling up out of sight. Eventually the "perfect balance" between deflation and inflation tips one way or the other, and a systemic crisis "nobody saw coming" unfolds.


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Inequality is rising globally, and rising inequality is destabilizing. A status quo of increasing inequality self-destructs. To avoid this fate, we must answer this question: why is the gulf between the wealthy and everyone else widening so dramatically?

The answer boils down to one word: privilege.

What is privilege? There are many types of privilege, but they all share two characteristics: privilege delivers benefits, wealth and power that are unearned.

Privilege is destabilizing for many reasons: the dead weight of privilege reduces productivity, generates perverse incentives and fuels social injustice. Innovation and competition are threats to privileged monopolies and are therefore suppressed.

The only way to foster sustainable stability is to dismantle institutionalized privilege.

We have a moral imperative to eradicate privilege: privilege is immoral, as rising inequality is the only possible output of privilege. Privilege is exploitive, parasitic, predatory and destructive to the society and economy, and generates inequality by its very nature.

Stripped to its essence, privilege is nothing but institutionalized racketeering.

The only way to reverse rising inequality is to eradicate its source: privilege.

Inequality and the Collapse of Privilege ($3.95 Kindle ebook, $8.95 print edition)



Recent entries:

Does the World End in Fire or Ice? Thoughts on Japan and the Inflation/Deflation Debate May 23, 2017

TINA's Legacy: Free Money, Bread and Circuses and Collapse May 22, 2017

Want to Understand Rising Wealth Inequality? Look at Debt and Interest May 19, 2017

The Soft Underbelly of Scandinavian "High-Tax Happy-Capitalism" May 18, 2017

Why We're Fragmenting: The Status Quo Is Disintegrating May 17, 2017

State of Denial: The Economy No Longer Works As It Did in the Past May 16, 2017

Globalization and the Rural-Urban Divide May 15, 2017

Mao and the Middle Class: What's the Source of Political Power? May 11, 2017

How Higher Education Became an Obscenely Profitable Racket That Enriches the Few at the Expense of the Many (Student Debt-Serfs) May 10, 2017

What's Killing the Middle Class? (Part 2) May 9, 2017

What's Killing the Middle Class? (Part 1) May 8, 2017

There Is One Way Out of Debt-Serfdom: Fanatic Frugality May 4, 2017

Redefining the Middle Class: It Isn't What You Earn and Owe, It's What You Own That Generates Income May 3, 2017

The Elites Have Destroyed the Status Quo's Ability to Self-Correct May 2, 2017

International Workers' Day: Profitable Work Will Be Automated, The Rest Will Be Left to Us May 1, 2017


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Our status quo--the pyramid of wealth and power dominated by the few at the top--has failed and is beyond reform.

This failure is not rooted in superficial issues such as politics or governmental regulations; the failure is structural.

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