Japan Is a Reminder of How Situational Today’s Inflation ‘Hawk-ery’ Is

What happens when words lose their meaning? Confucius made plain that freedom is what suffers under such a scenario, and it seems he might be vindicated yet again.

For background, let’s consider the present inflation discussion. According to the inflation hawks of the moment, all the government spending has unleashed massive, price-increasing “demand.” The consequence is said to be higher prices born of “excess demand.” Even conservatives are making this odd claim; odd firstly because there’s no such thing as “excess demand.” More on that in a bit.

For now, let’s make no mistake about the certain tax that is government spending. It signals the extraction of precious resources from the private sector that are being allocated by people with last names like Pelosi and McConnell. The unseen with government spending is gargantuan. What could profit-motivated individuals do with such precious resources in the private sector?

Still, it’s worth pointing out since conservatives and liberals have both embraced the demand side that government spending would if anything reduce demand. Think about it. Demand is a certain result of the production that preceded it, and government spending is a certain tax on production.

From there, hopefully readers can see the flaw in the argument overall. All demand once again emerges from supply, which means the two balance at all times. Government can’t increase demand as much as it can shift it from productive hands to more indolent ones. There’s no “excess” here leading to higher prices. How odd in particular that conservatives are promoting this fiction. And they are, including prominent names like Phil Gramm, John Cochrane, etc.

After which, it’s particularly odd when Trump partisans, or George W. Bush partisans like Karl Rove bruit the notion that government is some kind of “other” capable of stimulating inflation through spending. If so, inflation would have soared under Donald Trump and George W. Bush. Actually, the dollar did collapse (actual inflation) under George W. Bush (see the greenback versus gold, oil, and every major foreign currency from 2001-2009), but the Bush years go unmentioned by conservatives, after which Democrats have seemingly forgotten the definition of inflation.

Supposedly deficits cause inflation too, as though borrowing is some kind of “other.” See above if you’re wondering what today’s inflation hawks were saying in the past.

This brings us to Japan. If government spending were in fact a sign of “excess demand” leading to inflation, it’s certainly true that Japan would have long existed as a modern cautionary tale about the horrific, inflationary impact of government spending.

Indeed, how soon we forget how legislators in Japan have been spending in Keynesian fashion for decades with an eye on “stimulating” a moribund (in a relative sense) Japanese economy. Except as logic would dictate, there was no such stimulation. It’s sad that something so basic requires stating, but political allocation of precious resources is the cruelest tax of all. Entrepreneurs and businesses require capital to expand, and government spending shrinks the capital base while at the same time employing physical and human resources sub-optimally.

Notable about all this demand-side faux stimulus in Japan is that a lot of it has been deficit spending. Getting into specifics, as of 2017 Japanese debt as a percentage of GDP had skyrocketed to 225%. According to the neo-inflationists of the moment, this lethal combination of government spending with “deficits” would have been the ultimate source of inflation. In truth, a dollar was exchangeable for roughly 112 yen during the year in question; down from 360 in 1971, 240 in 1985, etc. Put another way, major increases in government spending in Japan have taken place for decades in concert with a soaring yen against the dollar, gold, oil, etc. Currency prices are a policy choice despite what you’re told.

Some will resort to central banks and interest rates as their explanation for currency movements. Supposedly rate hikes from central banks shore up a currency. Actually, the Fed hiked throughout the 1970s alongside a collapsing dollar. Considering the dollar yet again vis-à-vis the yen, interest rates have been lower in Japan versus the U.S. for decades, up and down the yield curve, but as mentioned the yen has largely risen against the greenback.

It’s all a reasonably short way of saying that Japan’s inflation situation in recent decades (meaning, a lack of it) thoroughly discredits the narrative of neo-inflationists clinging to government spending, deficits, and central bank rates as their alleged “case” for inflation today. More important, the experience in Japan raises a basic question of where these hawks have been for all these years with regard to Japan. Their commentary was different, as was it when Bush #43 roamed the halls of the White House.

None of this is meant to besmirch a GOP that this writer caucuses with as much as it’s meant to encourage a better GOP. It’s not just that conservatives and Republicans are ignoring Japanese history in their inflation hysteria, it’s not just that they’re ignoring their Party’s two most recent presidents, it’s that they’re redefining inflation (formerly it was a currency devaluation) altogether in their analysis of the moment.

Confucius yet again says freedom is the victim of words losing their meaning, and sure enough this bout of “inflation” has empowered the Fed and other arms of government to “do something.” One expects Democrats to support government action, but Republicans not so much. How sad.