Tuesday, December 30, 2014

Japan Is Writing History As A Prime Boom And Bust Case

Zerohedge reports:
Recently, we wrote a paper about the dynamics behind the boom and bust cycles, based on the view of the Austrian School (the Austrian Business Cycle Theory, or ABCT). The key takeaway was that central banks don’t help in smoothing the amplitude of the cycles, but rather are the cause of cycles.

Business cycles are a direct result of excessive credit flow into the market, facilitated by an intentionally low interest rate set by the government.

The problem with ongoing monetary policies is that the excessive money supply sends the wrong signals to the market, which ultimately leads to misallocation of investments or ‘malinvestments’.

On the one hand, entrepreneurs invest more and increase the depth of the production process. On the other hand, consumers spend more as saving becomes unattractive. When the excess products created through the cheap money-induced investments reach the market, consumers are unable to buy them due to the lack of prior savings. At this point the bust occurs.

It is key to understand that by manipulating interest rates (particularly by lowering them), central banks create bubbles that end in busts.

Japan is an excellent case study depicting the scenario discussed by the Austrian Business Cycle Theory (ABCT). In this article, we will examine the course of the economic and monetary situation in Japan from the ABCT’s point of view.

The latest quarterly GDP release in Japan was a real disaster. Economists had forecast a GDP growth between 2.2% and 2.5% but the result was a contraction of 1.6% on an annualized basis (i.e., -0.5% on a quarterly basis). That comes after a quarter in which GDP had already fallen 7.3% on an annualized basis (i.e., -1.9% on a quarterly basis).
Printing money doesn't create economic growth.