{"id":35826,"date":"2013-01-30T17:38:46","date_gmt":"2013-01-30T22:38:46","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=35826"},"modified":"2013-01-30T17:38:47","modified_gmt":"2013-01-30T22:38:47","slug":"japanomics-the-incredible-shrinking-russia-and-more","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/01\/30\/japanomics-the-incredible-shrinking-russia-and-more\/","title":{"rendered":"Japanomics, the Incredible Shrinking Russia, and More"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

The following is an excerpt from the January 2013 HS Dent Forecast<\/a>.<\/em><\/p>\n

\u201cThe message was clear\u2014deflation was the fault of Japan\u2019s inadequately fertile womenfolk, not the officials of the Bank of Japan.\u201d<\/strong>\u00a0 \u2014Financial Times, January 12, 2013<\/p>\n

Economics is usually a gentlemanly topic, but if there is one subject that irrationally makes me want to roll up my sleeves and slug the first person that walks by, it is the subject of prices\u2014or specifically inflation and deflation.<\/p>\n

With all due respect to the late Milton Friedman\u2014a fine economist and policymaker whose body of work I take seriously\u2014his claim that \u201cInflation\u00a0is always and everywhere a\u00a0monetary phenomenon\u201d is some of the most flawed logic I have ever seen in an economics book (and let me stress that economics books are not short on flawed logic).<\/p>\n

Friedman reveals an arrogant \u201cFed-centric\u201d view of the universe in which Ben Bernanke is an all-powerful godlike figure who can manipulate prices at will, like some sort of cartoonish James Bond villain.\u00a0 And it completely ignores the role played by demographics and the millions of buy and sell decisions made by individual consumers.<\/p>\n

For a man that preached free-market economics, it was a remarkably Soviet mindset.<\/p>\n

Unfortunately, due in part to Friedman\u2019s fame, it also happens to be the prevailing mindset among economists and most financial journalists.\u00a0 The quote above about deflation being caused by the lack of fertility among Japan\u2019s \u201cwomenfolk\u201d is absolutely correct.\u00a0 But don\u2019t tell that to the Financial Times.\u00a0 The writer used those words to mock the Bank of Japan for failing to stop the deflation that has been wrecking the Japanese economy for the past two decades\u2014again, a central-bank-centered view of the universe. (As a point of reference, prices in Japan haven\u2019t risen since Bill Clinton was the governor or Arkansas.\u00a0 Seriously.\u00a0 It\u2019s been that long.)<\/p>\n

Whenever a male writer uses words like \u201cwomenfolk\u201d and notes a lack of fertility, it can come across as being a little parochial or even sexist.\u00a0 I have no interest in criticizing Japanese family planning decisions or in telling a Japanese woman how many kids she should have.\u00a0 It\u2019s none of my business.\u00a0 But I am here to explain what Japan\u2019s birth dearth means for inflation and economic growth.<\/p>\n

A low (and falling) birthrate since the 1950s has caused Japan\u2019s population to age beyond anything seen in the modern world.\u00a0 Imagine the age demographics of Boca Raton, Florida\u2026but spread across a country of 120 million people.<\/p>\n

Our buying and selling decisions as consumers are largely a product of our age.\u00a0 I bought a house last year.\u00a0 Why did I do something so phenomenally stupid?\u00a0 Because I\u2019m 35 years old and have two rowdy young boys who need a backyard to run in.\u00a0 I also recently bought a new couch.\u00a0 Why?\u00a0 My three year old spilled grape juice on the old couch and ruined it.<\/p>\n

My father, on the other hand, just turned 70.\u00a0 He\u2019s looking to sell his large suburban house.\u00a0 \u00a0He doesn\u2019t need the space and is tired of paying for the maintenance and taxes.\u00a0 And he has no interest in buying new furniture.\u00a0 If anything, he\u2019ll be selling some of his existing furniture when he downsizes.<\/p>\n

Why do I share this?\u00a0 Because every other family in the developed world goes through a similar consumer lifecycle.\u00a0 And in the case of Japan, aging consumers have not been replaced with young families\u2014which has led to lack of consumer demand and flat prices.<\/p>\n

We\u2019re not the only people who have studied Japan\u2019s demographics or to suggest that changing demographics have had a major impact on the Japanese economy.\u00a0 But, to be frank, most everyone else misses the point entirely.<\/p>\n

Another (male) Financial Times writer wrote a headline titled \u201cMore Women in the Workplace Can Help Restore Japan\u2019s Growth\u201d<\/strong> (Mure Dickie, December 18, 2012).<\/p>\n

Hey, I\u2019m all for giving equal opportunities, and Japan\u2019s attitudes towards women are several decades behind most of the rest of the developed world. And certainly, Japan\u2019s stodgy old companies could benefit from fresh ideas and fresh talent, be it male or female.<\/p>\n

Yet Dickie\u2019s argument suggest that all Japan needs to jumpstart growth is more workers.\u00a0 He should be careful what he wishes for.\u00a0 More workers\u2014and more production\u2014in the absence of new consumer demand will simply lead to more oversupply and more deflation.<\/p>\n

Sagging demographics or not, Japan may finally get inflation\u2026and get it in spades.\u00a0 Prime Minister Abe is embarking on some of the loosest fiscal policies in modern Japanese history, and he is putting major pressure on the Bank of Japan to push down the value of the yen.<\/p>\n

At some point, Japan\u2019s creditors will lose faith in its abilities to make good on its gargantuan debts\u2014which are roughly double the size of America\u2019s debts, adjusting for the size of the economy.\u00a0 And when that happens, the yen will fall and interest rates will soar to levels that make debt service impossible.<\/p>\n

Japan will get inflation at that point.\u00a0 But it won\u2019t be the mild 1-3% inflation they\u2019re hoping for.\u00a0 It will be Weimar-style hyperinflation.<\/p>\n

That day of reckoning may take another couple years.\u00a0 Until then, expect more of the same\u2014flat-to-slightly declining prices and a sickly domestic economy.<\/p>\n

The Incredible Shrinking Russia<\/h1>\n

Japan isn\u2019t alone in fighting a demographic war it can\u2019t win.\u00a0 Its neighbor to the west\u2014the Russian bear\u2014has had a distinct shortage of cubs in recent decades.\u00a0 Since the end of the Cold War, Russia has lost nearly 5 percent of its population to early deaths, emigration, and\u2014most critically\u2014to a lack of new births.<\/p>\n

If the Japanese attitude towards women is a little behind the times, I\u2019m not sure there are words to describe Russia\u2019s.\u00a0 In a recent speech on Russia\u2019s demographic crisis and its lack of children, President Vladimir Putin stopped to comment that \u201cOur women know what to do and when.\u201d<\/strong><\/em><\/p>\n

\"You<\/a><\/p>\n

You gotta gift, Vladimir. Youuuu.<\/p>\n<\/div>\n

I didn\u2019t see the speech, but I\u2019m assuming the comment was accompanied with a wink and probably some inappropriate hand gestures or pelvic thrusts.\u00a0 (Though to be fair, this is Vladimir Putin we are talking about, not Silvio Berlusconi.)<\/p>\n

You can say what you want about Vladimir Putin, that he is a thug, a dictator, a nationalist\u2026\u00a0 But I will give him credit, for whatever it is worth, for one point.\u00a0 And that is his realization that Russia\u2019s demographic decline is a major crisis.<\/p>\n

Putin pushed one of the most aggressive pro-natal policies in modern history in one of his prior terms as president.\u00a0 He proposed paying Russian mothers $10,000 per child for every child after their first. And remember, $10,000 goes a lot further in most of Russia than it does here.\u00a0 That is roughly equivalent to one year\u2019s wages for the average Russian worker.\u00a0 An equivalent sum in the United States would be closer to $30,000.<\/p>\n

Putin also recently blocked the adoption of Russian children by American parents. \u00a0His public rationale was the high-profile death of a Russian orphan due to negligence on the part of his adoptive parents.\u00a0 But given the content of his speeches in recent years, I would say his real motivation is keeping more Russians in Russia.<\/p>\n

Russians have a history of being stoic in the face of seemingly hopeless battles, as anyone who has studied World War II would agree.\u00a0 But this time, the battle is truly unwinnable.<\/p>\n

Russia had a mini baby boom during the perestroika years under Gorbachev, in the 1980s.\u00a0\u00a0 These Russians are now in their peak years for family formation and childbirth. \u00a0That should be good news, right?<\/p>\n

Well, despite the large bulge of Russians in the family formation stage, the increase in Russian births of the last few years hasn\u2019t been big enough to push Russia above the replacement rate.\u00a0 As of 2011, the fertility rate was barely 1.6 babies per woman.\u00a0 You need 2.1 babies just to prevent your existing population from shrinking.<\/p>\n

And it\u2019s about to get a lot worse.\u00a0 The number of women of childbearing age is projected to decline by nearly 10% between 2011 and 2020\u2014just seven years from now.\u00a0 And it will decline by another 10-15% by 2025\u2026and another 10-12% by 2030.<\/p>\n

If Russia has fewer potential mothers every year from now until 2030, it\u2019s hard to see them turning their population decline around.\u00a0 Each remaining woman of childbearing age would have to have more children to compensate, and it would be an understatement to say that this would be unlikely.<\/p>\n

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The post Japanomics, the Incredible Shrinking Russia, and More<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

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