STAFF NEWS & ANALYSIS
Asian Catastrophe of Keynesianism Now Being Arranged
By Staff News & Analysis - August 20, 2014

Government unveils significant stimulus measures to prop up cooling economy Korea … Economic growth decelerated in the second quarter of the year and more recent data indicate that the economy is still losing momentum. …, Although exports have been rising, growth is moderate, mainly due to the strong appreciation of the Korean won. Against this backdrop, Choi Kyoung-hwan's economic policy is focused mainly on stimulating domestic demand. The stimulus entails three components: macro easing in fiscal, financial and exchange rate policies; a boost to the housing market; and encouraging firms to spend cash on investments and wages. The fiscal and financial package totals KRW 40.7 trillion (USD 40 billion) or nearly 3.0% of GDP and breaks down into KRW 11.7 trillion for additional fiscal spending and KRW 29.0 trillion to provide financial support mostly to small- and medium-sized businesses. – FocusEconomics

Dominant Social Theme: Thank goodness for Keynesian economics that provides governments with a theoretical justification for debasing currency.

Free-Market Analysis: The deliberate and ongoing introduction of the disease which is Keynesian economics was perhaps not so evident prior to the Internet era, but thanks to the Internet we can see clearly how pervasive this faux-palliative is, as well as how ineffective and even ruinous.

Keynesian palliatives have failed in the West: There is no economic recovery in Europe and any US "recovery" will no doubt be accompanied by a surge in price inflation that will render it moot for all but the wealthiest.

China, which has adopted Western measures, is continually struggling against a real-estate asset bubble as well as climbing food prices. Japan's recently announced Keynesian stimulus program – Abenomics – is already on the proverbial rocks. And now here comes Korea to expand the same nostrums to its economy:

The measures are expected … to continue into 2015. Regarding exchange rates, the measures underline the importance of stability in the currency market in the wake of swift changes in other economies' monetary policies, particularly in developed economies.

The measures include the relaxation of regulations for outbound financial flows, the creation of a new Korean won and Chinese renminbi market, as well as the tightening of macroprudential measures.

In an effort to boost the housing market, the government has introduced measures that relax rules on mortgage lending, thus allowing for higher debt-to-income and loan-to-property value ratios. Although these adjustments are expected to improve the state of the housing market, they are likely to increase pressure on ballooning household debt, which has already reached over KRW 1,000 trillion in 2013 (USD 998 billion).

Much of the Korean program, as we can see from the above, is fiscal but this does not mean monetary stimulus is being overlooked. In concert with tax fiddling comes a recent interest rate cut, as we can see here from an accompanying article posted at FocusEconomics:

Bank of Korea cuts interest rates for the first time since May 2013 … At its 14 August monetary policy meeting, the Bank of Korea (BoK) decided to cut the base rate for the first time, after 14 consecutive meetings in which the Bank refrained from raising the main monetary policy rate. The Bank cut the rate by 25 basis points to 2.25%, which was a move that markets had expected. The Bank's decision also came after the government's presentation of the stimulus package on 24 July, which, according to analysts, will create synergy with the government's policies to boost economic growth.

South Korea is a relatively tiny country, yet has managed to compete around the world, creating international brands as important as any in Japan, Europe or the US. Continuous, sustained growth is important to South Korea, especially as it joined the ranks of mature, successful economies – and thus the rationale for Keynesian measures to counter a "slow-down."

Yet, in a sense, the economics don't matter. South Korean culture generated an influential empire in the past and the country's current success is doubtless based on the same disciplined work ethic that supports success elsewhere in Asia.

There is something to be said for monetary inflation when facilities are in a nascent or formative state (as was the case after World War II). But that is not Korea's situation now. Nor is it Japan's, where Abenomics is currently foundering. See here, from Bloomberg:

Abenomics Skepticism Grows as Price Gauge Retreats …Traders are growing more skeptical Prime Minister Shinzo Abe will achieve his 2 percent inflation target after a sales tax increase derailed growth. … Abe needs to push through structural reforms to spur the world's third-largest economy, Fitch Ratings said in a report last week, after gross domestic product shrank the most in three years last quarter.

"Japan's economy has taken a severe knock which, inevitably, calls into question the credibility of the government's reflationary program," Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said in an e-mailed response to questions yesterday. "Abenomics is far from dead and buried but it's increasingly on life support."

The article goes on to explain that the cost of living in Japan grew at three times the pace of wage increases last month and that core consumer prices rose 3.3 percent from a year earlier. This sort of news prompted a Bloomberg columnist to pen a column last week entitled, "Stagflation Stalks Abenomics."

Maybe it's time to stop dismissing the risk of stagflation in Japan. I've raised this risk a couple of times during the last 12 months as inflation rose without commensurate increases in wages or productivity. But yesterday's ugly gross domestic product report suggests it's a clear and present threat to Japan's best chance at economic recovery in more than a decade.

The collective reaction yesterday to the 6.8 percent plunge in second-quarter growth seemed to be: "Relax, it could've been worse." After all, many economists were braced for a 7 percent-plus contraction following an ill-timed and ill-conceived consumption-tax increase in April. Yet the detail of the report — and the balance of other recent data — point toward a period of sluggish growth, at best, and continued inflation gains.

Of course, Japan is going to be subject to stagflation – when price inflation rises while the economy as a whole remains stagnant and unresponsive. This state of affairs was not even considered possible in the 1970s when Murray Rothbard and others argued that it was the inevitable outcome of monetary debasement.

What's the "bottom line" here? Modern Keynesian policies are the proverbial whip flogging the dead horse of Asian economies. What was efficacious and hopeful after World War II is ineffective in the 21st century. Anybody can conjure double-digit growth from war-torn, moribund economies. But Asia's economies are neither now. And this is the reason for Keynesianism's fading efficacy.

Keynesianism, in fact, is an apparatus of authoritarianism. It justifies governmental activism of the most radical kind and favors intrusive government policies. It is in a sense the handmaiden of fascism, encouraging all of the industrial elements of society to organize under one broad banner.

The tightly controlled facilities of Asian industrial powerhouses such as Singapore, Japan and South Korea are especially amenable to Keynesian rhetoric and implementation of central bank price fixing. People forget, perhaps, that South Korea was subject to a dictatorship throughout its post-war formative years. And the dictator's daughter is currently the country's president – and busily trying to repress certain other parties that may pose a threat to the continuance of the Park dynasty.

Asian economies tottered when government debt ballooned in the 1990s and European banks called in their loans – and would accept nothing but gold for repayment. This hushed-up and ill-reported episode by the Western media was not anomalous. The conditions remain ripe for a replay and once the asset bubble is punctured in the West, as it inevitably will be, Asian economic weaknesses will be further – perhaps catastrophically – exposed.

In the meantime, the "band will play on" and Keynesian economics will continue to be applied, theoretically anyway, to Asian economies that continue to function despite its debasing effects not because of it.

The Wall Street Party that has been expanded due to Keynesian stimulative effects in the West may in fact spread to Asia as well. We would not be surprised if this was actually the plan. The idea apparently is to make the party a worldwide one, thus rendering the inevitable crash even more devastating.

After Thoughts

It will take a catastrophe of epic proportions to invalidate the idea that currency debasement generates economic growth. Unfortunately, from our perspective, this catastrophe is being arranged …

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