Andrew Smithers blogs at the FT. He presents himself thus:
I set up Smithers & Co in 1989 as an economics consultancy. Much of the comments on economics and markets that I read as a fund manager struck me as nonsense and I have had great fun in pointing this out to clients over the years.
I now have the opportunity to disseminate my views more widely and hope that this will amuse and inform readers.
From his latest post I agree with the “amuse” but strongly reject the “inform”.
Abenomics – the policy endorsed by Shinzo Abe, the Japanese prime minister – aims to raise the country’s growth by getting rid of deflation. It is based on two myths. The first is that the economy has done badly and the second is that it has been hurt by deflation.
The first myth comes from judging a country’s economic success by its gross domestic product. Japan has a falling and ageing population. If allowance is made for this, Japan has been the most successful(!) of all Group of Five leading economies. It is the country whose GDP at constant prices per person of working age has grown most rapidly, at least since 1999.
To “amuse” us he puts up this chart:
The solution for the US is clear: Retire 20% of the working age group and the economy will bounce strongly.
My take indicates something very different. The chart shows that Japan did very well relative to the US from 1975 to 1991, closing about half of the output gap per employed person (that by law has to be of drinking working age). Over the last 22 years the gap has opened up and is back to almost exactly what it was in 1975!
His second chart is just as “amusing”. Since he has no idea about what went on in Japan since 1991, he concludes that rising prices were associated with slower output growth. To Smithers:
Japan’s relatively slow growth is the result of demography, not deflation. Japan grew slowly after its stock market collapsed in 1990. Prices rose to 1998 and then fell as inflation gave way to deflation. While prices rose the economy grew more slowly than it did while prices fell.
He forgets that the jump in prices in 1997 (and drop in output due to tightening monetary policy) was due to a rise in the consumption tax rate (CT). By 2002 output was even lower than in 1997, and through all those years prices (CPI) fell (i.e. there was deflation).
Suddenly, after 2002 output takes off and prices stop falling. He probably doesn´t know but that was the period Japan undertook QE “light”. That continues through 2007. Then the oil shock hit soon followed by the international crisis. Initially prices rise and output falls. Prices then fall and output bounces back (as expected following the reversal of the supply (oil) shock). At the tail-end of the chart we glimpse the beginnings of the “Abe effect”.
Mr. Abe, don´t listen to Mr. Smithers, “keep on walking”.