正文
Decade of Deception |
| December 31, 2007 |
TheJapanese public has dubbed 2007 the “Year of Deception.” ExpectedJapanese GDP growth for the year has been revised down from 2.1% to1.3% and the stock market has fallen by 10%. I’ll return to whether theJapanese are right later, but the concept itself appears more generallyapplicable. There has in recent years been an excessivelysnake-oil-salesman quality to the policies and promises of politicians,monetary authorities and financial intermediaries.
In the UnitedStates for example, the country’s economic policymaking since 1995 hasinvolved not just a “Year of Deception” but a decade of it. Inexamining the record, one is tempted to quote Mary McCarthy’s verdicton Lillian Hellman’s autobiography: “Every word she writes is a lie,including “and” and “the.” Some examples:
In 1996, the Bureau ofLabor Statistics adopted “hedonic pricing” by which price statisticswere “corrected” for improvements in quality. There were two problemswith this. First, it counted quality improvement in the tech sector byraw processing power, which experience has shown to be wrong:functionality of tech equipment rises at best logarithmically withprocessing power. Second, it did not include the additional costsimposed on consumers by companies as a result of such innovations asautomated telephone answering systems, which hugely increase the timeand effort expended in conducting necessary consumer transactions. Theresult of hedonic pricing was to reduce consumer price increases byclose to 1% per annum, producing an entirely spurious decline inreported inflation and a corresponding increase in “real” GrossDomestic Product growth.
The second deception chronologically,though in many respects the most important, was Fed Chairman AlanGreenspan’s “recognition” in 1997 that a new era of faster productivitygrowth had dawned, so higher stock prices and lower interest rates werejustified. Part of this “acceleration” was just random fluctuation(much of which was eliminated in later statistical revisions), part wasthe result of increasing capital intensiveness in the US economy,caused by lower real interest rates and part was the effect of hedonicpricing, which artificially inflated GDP growth, and henceproductivity. The reality, when you look at the series over a longterm, was that well over 100% of any rise in productivity in the late1990s can be explained by these factors. The “miracle” was a mirage andlower interest rates and higher stock prices were wholly unjustified,inevitably leading to huge misallocations of capital.
As thebubble intensified, in 1999-2000, the Fed moved to the pretense that itwas impossible to know when a bubble was taking place, so monetaryauthorities couldn’t burst it. One may well in that case ask what isthe point of having a monetary authority; an automatic system, whethera “Gold Standard” or a fixed monetary growth rule, would cause interestrates to rise in a bubble, thus deflating it automatically. Of course amonetary authority can deflate a bubble, as has happened many times;the Fed under Alan Greenspan and Ben Bernanke has however been athoroughly political institution that doesn’t want to incur thetemporary unpopularity from doing so.
Connected with the lastpoint is the monetary authorities’ obfuscation of the monetary basis,both domestic and international, of their job. From 1993, the Fedabandoned the entirely sound Paul Volcker-era practice of money supplytargeting, which had successfully brought inflation down with onlymoderate pain. Allegedly, in the new world of technology, monetaryaggregates were no longer accurate enough to steer policy by. It is nocoincidence that immediately after this change, the Fed embarked on itsprogram of reckless expansion of M3 money supply, by almost 10% perannum for a decade when nominal GDP was growing at only 5-6%. TheBundesbank and initially the European Central Bank resisted thislaxity, but since Jean-Claude Trichet took over the ECB in November2003 that too has been printing money supply, in its case M2, as if itsDirectors were paid by the banknote. Then in March 2006 the Fedcompounded this error by the unparalleled arrogance of ceasing toreport M3, presumably hoping that by this means its monetary misdeedswould go unnoticed.
In 1999-2000, Wall Street sold dot-com andtelecom stocks to investors on the basis of non-existent earnings. Theywere aided in this by corporate top management, which proceeded to payitself vast sums by means of stock options, while pretending these hadno cost to shareholders. Again, deception.
In the politicalarena, one may note the “bait and switch” tactic of the George W. Bushadministration in foreign policy. Bush came to office promising topursue a “modest” foreign policy, avoiding expansionist Democrat“nation building.” Needless to say, the 9/11 attacks, similar in kindalbeit larger in scale to a myriad terrorist attacks in Europe, wereused as an excuse for a 180 degree reversal of this, inaugurating aforeign policy that would have fulfilled Woodrow Wilson’s wildest powerfantasies. The policy merits of this switch are still being determined(though at this stage one has doubts); what is clear is that a singleact by a small group of fanatics caused a complete reversal of theprogram on which Bush had been elected.
On public spending, too,the electorate can reasonably claim to have been sold a false bill ofgoods. The Republican Congresses elected after 1994 initially pursuedan admirably tight fiscal policy. However after Newt Gingrich wasreplaced as Speaker of the House of Representatives by Dennis Hastertin December 1998, Hastert and Tom DeLay proceeded to go hog-wild at thepublic trough, using it for innumerable corrupt pork-barrel schemes, towhich Bush joined fatuous and counterproductive public spendingboondoggles like the “No Child Left Behind Act.” It is little wonderHastert and DeLay were thrown out in 2006; the electorate reasonablyfelt that if it wanted wasteful public spending and inventive newsocial programs, it could get them from the Democrats, traditionallyexpert in such matters.
After the stock market bubble burst, theFed cut interest rates viciously, decimating the income of US saversand thereby causing a savings dearth and a huge balance of paymentsdeficit. The Fed justified this by claiming to see a “deflation” forwhich there was no evidence whatever, as retail prices continued risinggently, stock prices remained overvalued by historical standards andhouse prices were soaring. Once again, deception was used to justify amistaken policy.
In January 2004 and through June 2007, the Bushadministration announced that a top priority would be to legalize the12 million illegal immigrants who had mysteriously appeared in thecountry. No significant attempt was made to enforce immigration laws,either at the borders or more importantly among employers. Theadministration spent a huge effort claiming, entirely contrary to theevidence, that uncontrolled low-skill immigration had no effect on theearnings of domestic workers of modest attainments. The reality wasthat, however useful the illegal immigrants in erecting millions ofugly, unnecessary houses for which there would soon be no market, bydoubling or more the supply of unskilled labor the immigration had theobvious economic effect of depressing low-skill wage rates tosubsistence levels. Again, breathtaking and unjustifiable deception.
Inhousing itself, the modern housing finance market has been built ondeception. Instead of assessing a credit risk and making a loan, themodern housing financier merely collects a fee and passes the risk offto some unknown investor, preferably a foreign bank. Needless to say,this has resulted in a substantial percentage of housing loans beingentirely fraudulent. It is increasingly becoming clear that a largeproportion of modern finance rests on similar deceptions, with assetbacked commercial paper, securitization in general, and much of thederivatives market resting solely on aggressive obfuscation of economicreality in pursuit of fees.
To return to the Fed (who may havebeen thinking I had finished with it), its recent activities haverested on two further deceptions. First, it pretends loudly that “core”inflation, stripping out food and energy, is all it needs to worryabout. This is economically nonsense, and it knows it to be so –naturally when the economy is overheating food and energy prices arethe first to rise, providing valuable signals of inflation in general.Second, the Fed and the ECB have now decided that the inevitableilliquidity in the interbank market following exposure of the bankingsystem’s defalcations in housing and elsewhere can be cured by cuttinginterest rates aggressively and pumping $600 billion of taxpayer moneyinto the banking system. Needless to say, such activities do notrestore a systemic confidence that has proved itself unjustified; theysimply prop up the stock market and cause an increase in inflationarypressure, pushing oil prices up over 30% in four months. Again, it’squite literally a confidence trick, which will be exposed during 2008.
Turningnow to Japan, whose people came up with the “year of deception” line,one is puzzled to find where the deception lies. Yes, economic growthin 2007 will be 1.3% compared with the 2.1% projected, but that is amodest difference, caused partly by the fiscal tightening in Japan’s2007 budget, which was both essential to fiscal stability and in thelong run economically beneficial as it reduces the burden of Japan’sexcessive government debt.
There is a certain amount ofdeception in the monetary area. The Bank of Japan has kept its keyinterest rate at 0.5%, on the pretence that deflation is rampant. Inreality, with energy and commodity prices having increased so rapidly,Japan is now suffering significant inflation, so its short term ratesare negative in real terms. For the health of the economy, and aboveall the income of Japan’s numerous hard-saving retirees, Japan’s shortterm interest rates should be increased to a more normal 2.5-3% as soonas possible. Nevertheless, it does not appear that the damage done bythis mistake has yet been severe, so one can hope it will promptly becorrected.
A third example of alleged “deception” is the loss of50 million pension records by the Japanese government. However, theresponsible minister resigned, as is proper, and Britain shortlythereafter, by losing 25 million social security records of its own,proved that this was not a Japanese problem, but a universal problem ofplacing excessive reliance on computer systems managed by incompetentgovernment bureaucracies. One can also ask oneself where there is morerisk of serious identity theft: in a country with almost no immigrationand a well-established domestic criminal class that helpfullyidentifies itself by means of tattoos, or a country that has completelylost control of its borders, and sold most of the prime real estate inits capital to the Russian mafia.
Naturally, a primary reasonthe Japanese investor class regards 2007 as a “year of deception” isthat the Tokyo stock market has dropped 10%, the only large market tohave done so. However, in a year of a major international financialcrisis, in which several medium sized banks have collapsed and $600billion in emergency funds has been pumped into the interbank market,it may reasonably be questioned why any of the world’s stock marketsshould have risen.
It appears that the Tokyo stock market is currently the only major market in the world that is NOT ruled by deception!
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