'In fact, more credit — as opposed to more real savings — creates economic problems and slows an economy.'<blockquote>'As I will explain below, an economy's growth is not easily or accurately measured with a calculation based on the dollar amount of money spent on goods. Not only are statistical indices like GNP and GDP inaccurate, they are unneeded as far as observing real economic growth. Ordinary citizens in Denmark do not need to compare GDP per capita to know that they live better than ordinary citizens in Somalia. One can simply look around and see what kind of homes, streets, restaurants, grocery stores, and other goods and services are available in each of these countries, and how many hours of labor are needed to acquire these things.
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The misleading measurement of growth in question is GDP growth, because it is practically the sole indicator used by professionals to assess economic output. The problem is that GDP is in fact not a measure of real, physical production of goods and services, as it is intended to be. It is primarily a measure of inflation, which it is not intended to be. To understand this, we must be clear on what inflation is and what causes it.
In short, prices can rise overall throughout an economy only if the quantity of money in the economy increases faster than the quantity of goods and services. (In economically retrogressing countries, prices can rise because the supply of goods diminishes.)
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That last sentence is worth repeating: consumer prices have been mostly flat — not falling. The "deflation" Japan is supposed to have experienced over the last 20 years — as commonly stated by financial journalists and professional economists — really consists of prices periodically falling 1, 2, and sometimes 3 or 4 percent over a year or two before returning to slight positive growth rates. All in all, consumer prices have seen a slight
increase, not decrease over the last two decades.
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Given my exposition of Japan's true growth, many might wonder exactly how Japan's economy has grown without much credit creation and bank lending, because it is well known that Japanese banks have been carrying bad loans on their books for many years, and that they are hesitant to lend for that and various other reasons.
To begin with, banks have actually been lending, just at reduced rates relative to historical standards (and in part because of the fact that money and thus credit are being created at a reduced rate). Also, there are other types of lenders today in Japan in addition to traditional banks.
But, more importantly, it needs to be understood that new credit is not required for a country to prosper.
In fact, more credit — as opposed to more real savings — creates economic problems and slows an economy.Once prices adjust to the newest credit created, the amount of credit available in an economy reflects the amount of real monetary savings. To then create additional credit in excess of real savings increases the amount of claims used to acquire the very same real, physical capital that the real savings is intended to purchase — this is similar to a game of musical chairs where, instead of chairs being taken away, people are added. After prices adjust, all the credit that existed prior to the creation of the new credit has been diluted by the addition of the new credit. Thus, creation of fiat money reduces the real purchasing power of each unit of savings and of previously created credit once price inflation sets in.
Artificially created credit also causes economic boom-and-bust sequences due to the malinvestments and subsequent liquidations that excessive, false savings (i.e., credit masquerading as savings) creates. The new money artificially alters interest rates, profits, relative prices, and other market signals, causing a misallocation of capital that unnaturally expands some industries relative to others. The more credit created, the more is the economic distortion of the production structure, and the greater is the corrective process required once the money flow slows or stops. The more economic distortion that comes about, the more real capital that is ultimately destroyed through malinvestment. (For a relatively concise explanation of this process, see pages 141–155 in my
book.)
Japan has
not been creating credit at a high rate, so it has not diminished the value of its real savings through inflation or through financial and economic booms and busts at a high rate (compared to Japan previously, and to other countries).
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Despite conventional opinion, Japan's economy has not been stagnant; it has in fact been growing in real terms — although not in monetary terms. The crucial point is that monetary changes do not necessarily reflect real changes. Japan's GDP growth has been slow because money-supply growth has been slow; it is mainly money growth which drives GDP numbers. Therefore, going forward, we must try to observe real economic growth — the production of real goods and services — instead of just GDP. Seeing things in the correct light allows us to recoup Japan's lost decades, which weren't really lost.
- Kel Kelly,
The Myth of Japan's Lost Decades, April 15, 2011</blockquote>