Archive for November 8th, 2012
The Japanese model of incrementally perfecting consumer technologies may well have have reached marginal returns.
Do we have what it takes to get from here to there?
This apparently simple question offers profound insights into the dynamics of individuals, households, enterprises and nation-states. If we answer this question honestly, it establishes a “road map” of what must be in place before a progression from here to a more sustainable future (“there”) can take place.
Individuals, households, enterprises and nations can have goals–where they want to be in the future–but to get there, they need to construct the necessary foundation of values, processes, skillsets, networks, practical experience and capital.
Since my partner and I built about 100 houses back in the mid-1980s, I see building a house as a useful analogy for getting from here to there: each step requires different tools, skills, experience and sufficient capital invested to get to the next phase. If you don’t have all of these in hand for each step, the goal of completing the house will remain a fantasy.
As correspondent Mark G. recently observed in an email, “hyper-centralized entities are institutionally incapable of adopting decentralized solutions.” I immediately thought of the Federal Reserve, which has responded to a crisis of centralized “too big to fail” banks holding phantom collateral to support massive leverage and debt with increasingly centralized actions to recapitalize those same centralized banks.
The Federal Reserve is incapable of overseeing a decentralized economy; it has responded to the insolvency of our centralized banking sector by increasing counterproductive central planning (zero interest rate policy, money-laundering dodgy mortgages, monetizing Federal debt, etc.).
There is no way the Fed’s policies are going to get the nation from here (centralized stagnation) to there (sustainable prosperity).
It’s a profound question when answered honestly: Do we have what it takes to get from here to there? For most of the world’s economies and societies, the answer is a resounding “no.”
The U.S. Status Quo is as intellectually bankrupt as it is financially bankrupt. Our “leadership” cluelessly clings to the only model they know: incentivize “consumers” into borrowing more money to buy more “stuff” from China, in the magical-thinking belief this churn will somehow lead to sustainable “growth.” This is akin to handing a parched alcoholic a fresh bottle of whiskey to wean him of his addiction.
That model isn’t going to get us from here to there.
Since Gordon T. Long and I were recently discussing Lessons From Japan (video), let’s ask: does Japan have what it takes to get from here (fiscal-cliff stagnation) to there (sustainable growth)?
I recently presented a multi-part look at Japan’s economy and society:
Japan and the Exhaustion of Consumerism
The Hidden Cost of the “New Economy”: New-Type Depression
The Future of America Is Japan: Stagnation
The Future of America Is Japan: Runaway Deficits, Runaway Debts
The short answer is no, Japan does not have what it takes to exit stagnation. After 20+ years of extend-and-pretend Keynesian Cargo-Cult “stimulus” borrowing and QE, Japan has managed to construct:
1. Bridges to nowhere (make-work projects for the powerful construction lobby)
2. An unprecedented fiscal cliff (interest on the debt and Social Security are 114% of tax revenues–oh yeah, that’s sustainable)
3. A demographic cliff as having children is increasingly burdensome and the “long hours prove you’re worthy” work culture deprive children of their fathers
4. An export-based economy that is now running structural deficits
5. A sclerotic, ruled-by-vested-interests Central State in the grip of intrinsically corrupt political parties
6. A revolving-door prime ministry with a new prime minister every year or so
7. Global corporations that have lost their edge (when was the last time you saw Sony or Toshiba on a hot new electronics device? It’s all Apple, Samsung and Google)
8. An undeclared but very real trade war with China (Japanese brand auto sales have plummeted by 20+% in China, global auto makers’ last best market) China, Japan and the Senkaku Islands: The Roots of Conflict Go Back to 1274 (September 25, 2012)
9. An immigration policy that restricts the very workforce Japan needs to offset its rapidly aging population.
(During my last visit, we stayed for a few days in an apartment owned by a friend’s parents. The Japanese Police knocked on the door to check on the whereabouts and status of the previous residents, workers from Korea. Imagine the police in the U.S. keeping close tabs on every “foreign born worker.” Maybe this is a make-work project in low-crime Japan, but it does suggest that immigrants are viewed as “other” their entire time in Japan. How appealing is that to immigrants?)
10. Innovation in Japan has atrophied to specialized techno-gimmicks, materials and biomedical research with unknown commercial applications. Yes, it remains a high-tech research dynamo, but without commercial applications, thousands of patents come to naught.
The Japanese model of incrementally perfecting consumer technologies may well have have reached marginal returns. Japan’s reliance on the auto and machine tools industries is also creating a drag, as these once fast-growing sectors have reached the stagnation phase as China’s growth matures. The notion that everyone wants a car is also on an S-curve as miles driven and auto ownership decline across the developed world.
There is a subdued but worried debate in Japan over many of these issues. Clearly, what worked in the postwar boom era from 1949 to 1989–forty years–no longer works, and indeed is now counterproductive.
The MITI model of deeply interconnected government agencies, banks and corporations that got Japan from “postwar ruins” to “advanced, wealthy democracy” is not enough to get Japan from here (stagnation and social recession) to there (a rejuvenated society that encourages and enables parenthood and sustainable growth).
NEW VIDEO: CHS and Gordon Long discuss Lessons From Japan: ”How has Japan avoided an economic death spiral?”. (24 minutes, 35 slides)
Anecdotal evidence has been coagulating into numbers, and these numbers are now beginning to weigh down corporate earnings calls. It appears the toughest creature out there, the one that no one has been able to subdue yet, the ever wily and inexplicable American consumer, is having second thoughts about prescription drugs. And is fighting back. A paradigm shift.
We’ve already heard from some companies, such as drug maker Pfizer, whose revenues in the US plunged 18%, largely due to the collapse of its flagship drug Lipitor that is losing its battle with much cheaper generics. But the direst indications came from Express Scripts, the largest pharmacy benefit manager in the US—and perhaps one of the best gauges of spending patterns for prescription drugs.
During the earnings call, CEO George Paz, who ominously was “not prepared to provide 2013 guidance,” embarked on a dark speech. The company’s clients had “unprecedented concerns about our country’s economic outlook,” he said. Unprecedented concerns! So even worse than 2008-2009. He went on:
Our health claim clients are expecting membership reductions in 2013. Large employers have pulled back on hiring plans, using contractors and part-time employees when necessary. Mid to small employers are cutting back or postponing health care coverage decisions while waiting for more clarity on Health Care Reform. And we continue to see low rates of drug utilization as individuals deal with uncertainty at the household level.
He lamented “the current weak business climate and the unemployment outlook” and was worried about the “challenging macroeconomic environment.” Shorts must have felt a certain frisson. Remains to be seen whether the dive that Express Scripts shares performed is a buying opportunity that will add to a cushy retirement or one that will slice off your fingers.
But beyond the company’s fate, he’d pointed at what ails the US economy, including a shift to part-time workers and contractors often without healthcare benefits, and smaller employers who, in their struggle to survive, are cutting back on healthcare benefits. As these workers—the inexplicable American consumers—are left to their own devices, they have to make their own decisions about what prescription drugs, if any, to blow their scarce money on.
Express Scripts has seen this trend in another area. Its Drug Trend Report, which dissected prescription drugs sold to its members in 2010 and 2011, sketched the beginnings of the paradigm shift: in 2011, specialty drugs sales increased 17.1%, down from a 19.6% increase in 2010; traditional drugs only eked out a gain of 0.1%, the lowest increase since it began tracking the data; and spending on all prescription drugs combined rose only 2.7%, also a record low. That was for 2011.
But the report didn’t include insights into the buying behavior of the 48.6 million uninsured Americans who’re even more reluctant to spend money they don’t have on prescription drugs they can live without. And it didn’t include the trends of 2012, which as Paz phrased it, are cause for “unprecedented concerns.”
Whatever the reasons, whether prescribing behavior by doctors or buying behavior by consumers, lack of insurance or lack of money, or the growing prevalence of generic alternatives: spending on prescription drugs, long considered recession-proof, seems to have bumped into a wall for the first time ever.
Healthcare costs in the US, around $2.6 trillion a year, or 17.9% of GDP, may be reaching a level beyond which the various players in the economy cannot go, or refuse to go, a market-based barrier of sorts. And the inexplicable American consumer may be on the forefront—not only those who don’t have insurance, but also those who have high-deductible plans.
In 2012, plans with deductibles of $1,000 or more made up 19% of employee-sponsored health plans. Families covered by such plans, for better or worse, are cutting back medical spending … by 14%, according to a study last year. They’re making medical decisions where at least one part of the equation is their own money. And they’re accomplishing what no one has been able to accomplish so far, namely taming the untamable healthcare expense monster.
That the US has too much debt is no longer a controversial statement. Some may believe other problems are more urgent, or that we need to grow our way out rather than slash spending. But the debt-to-GDP ratio must decrease if we are to have a stable, prosperous economy. Read…One Chart Explains Why Government Debt Is Dragging on the Economy.
Wolf Richter for Zero Hedge
The day after a hard-fought election that left Barack Obama in the White House and control of Congress divided between the two parties, the nation’s political leaders promised to try to avoid year-end spending cuts and tax increases that threaten to push the U.S. back into recession.
In carefully worded comments Wednesday, major actors in the fiscal drama were both conciliatory to their adversaries and resolute in sticking to their principles. Whether this represents a temporary truce, or a step toward a pact to trim the deficit, won’t be known for weeks.
Here’s what it is, and it’s shameful the WSJ won’t call it by its true name: Total crap.
This is a matter of arithmetic more than it is politics. And the arithmetic is quite-clear when you boil down what’s being said and what reality is.
We must go back to arithmetic, because it is there that one finds the truth.
GDP = C + I + G + (x – i)
That is, GDP = Consumption + Investment + Government Spending + Net Exports
Note that this alleged “measurement” is inherently flawed, however, because it is a nominal value.
That is, if we have 10,000 units of credit and currency in the system and we add 1,000 units through deficit spending,GDP increases even though from the common man’s perspective who is not a recipient of the government largesse he actually saw his economic prosperity in real terms decline!
But even the recipient of the largesse did not see an actual gain, although one was reported — he saw “status quo.” That is, he saw “more” but each unit of currency and credit bought less, and those more-or-less cancel out.
To “fix” the fiscal cliff you must stop deficit spending, one way or another. And there is no free lunch — if you increase taxes then either “C” (consumption) or “I” (investment) must decline since the money to pay the taxes has to come from one of those two categories. If you cut government spending then GDP decreases by the exact amount that “G” is decreased.
When “growth” in GDP is 2% a year but you are deficit spending 8% then the real economic growth is -6%. If you stop the deficit spending, no matter how you do it, the true economic rate of change becomes exposed irrespective of how you do it.
This is what our true economic growth rate has looked like in recent years (the red line, my friends, the red line):
At present run-rates this year looks to be coming in at $1.246 trillion, effectively identical to last year in terms of the calendar-year deficit (which was $1.225) while nominal GDP appears to have not changed much either, although we do not yet have current figures and won’t for the last two quarters until early 2013.
But — this chart shows you the problem quite-clearly: We haven’t had a materially-positive GDP value in real terms — that is, over 2% — since 2000!
This, when you boil it all down, is the problem. The government, both Republicans and Democrats, have “discovered” that they can fake ”economic growth” by running fiscal deficits! This in turn results in nominal GDP values that look much better than the truth really is, and that in turn spurs people to do foolish things, such as spending money and increasing leverage into what is a factually-deteriorating economic picture.
If you think either of the parties is going to voluntarily step back from this and recognize the truth, you’ve been smoking too much of that whacky weed that was just legalized in Colorado.
Until we, as people, demand that our government tell the truth when it comes to economic statistics, reporting GDP ex-fiscal deficit spending so as to neutralize the ability of the government to game the numbers with this fraudulent and intentionally-false reporting there is no solution other than that which will be imposed by the market.