The first paragraph of this article in the Financial Times reveals perhaps more about the inability of the policy to render any successful result than anything I have seen in a long, long time. It’s not just that policy is badly calibrated or miscalculated, those are simply symptoms of a discipline that has totally lost all focus or sense of proportion. It is so deeply embedded as to not even warrant a casual note about being so out of alignment with common understanding about what or how an economy should be or function.

“A Bank of Japan board member has urged companies to respond to better conditions by raising wages, signalling concern among policy makers that the goals of ‘Abenomics’ may be thwarted by the private sector.” [emphasis added]

To these people, including the vast majority of the media and political class that simply takes it all on faith, the economy really is just a spreadsheet with variables to be changed by a central committee. Policy is never to blame, only businesses and individuals with too much freedom to make their own choices. The greater good demands subjugation, where utopia is to be had when the private sector stops fighting against the benevolent overlords of the central banking class.

What’s perhaps more remarkable is that Koji Ishida actually understands the problem fully,

“’Unless income rises in tandem with prices, economic growth will be temporary and not sustainable’, said Mr Ishida on Wednesday. ‘Households’ real purchasing power would decrease, causing consumer spending to decline and the whole economy to deteriorate. This would render meaningless our goal to exit deflation.’”

My post on Monday was directed at this sentiment exactly. The economy seems to be rising and working only if you think about it in terms of numbers on a spreadsheet, but the real world works far, far differently. The entire monetary affair rises and falls on incomes and wages; the rest is noise. If companies are unwilling to increase wages in line with “better” economic results, perhaps it is because those results aren’t really better in anything other than a purely mathematic sense.

That is the fool’s errand of appealing to inflation. Inflation makes it appear as if the economy is growing, but if there is any, even the smallest, daylight between the increase in costs and the increase in incomes it will fail. Inflation is understood and measured poorly, as prices against themselves. That is no real standard of measure, and it reveals an ignorance about how inflation actually works inside the real economy. Inflation should be measured against income, but that analysis would show, as Ishida correctly surmises, the spreadsheet approach as untenable.

It also exposes, importantly, the true means for monetary policy injection. As I have stated time and time again, monetary policy has nothing to do with money, or even credit, anymore; it is pure psychology. Economists, Ben Bernanke in particular, have made a living out of studying non-monetary effects in periods like the Great Depression and the Great Inflation. The entire premise of rational expectations theory leads to exactly this sentiment, that people and businesses should be fooled by policy actions to achieve a socialized greater good. The people are not to be trusted to make their own economic decisions.

The same philosophy in monetary and fiscal policy has been at work in Japan since the 1980’s, yet they have the nerve to claim superior knowledge about real economic function? Businesses and individuals should be not only fooled but controlled (the next stop on this road of the “philosopher kings”) by these “experts” with such an atrocious track record?

There can be no confusion left, no ambiguity at all – this is not capitalism and it has little resemblance to free markets. Further, there is not an ounce of difference between this sentiment in Japan and that expressed through policy in every other orthodox central banking jurisdiction.


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