Charlie Sheen Economics

Jim Cramer and Larry Summers are wrong.

Shocking.

Cramer, Summers, and the mainstream media, are telling us that what has happened in Japan is good for their economy, good for the world economy.  Cramer said on CNBC:

This is the largest economic stimulus that we have come across. And while Japan obviously has a lot of debt, and we know that the Japanese balance sheet is the worst, they will come up with ways to be able to rebuild this country.  And they are going to have to use all the coal, all the excess natural gas, all the excess wood, aluminum, metals, that’s out there.  Because they have to rebuild and rebuilt fast.  So, you know, again, terrible tragedy, but they’re going to rebuild, and rebuild with mostly American materials.

He gave us this insight as well:

If you’re assuming it will take the Japanese ages to recover from this disaster, I think you are severely underrating their ability to bounce back quickly.

This week, Michael Semblas, the terrific Chief Investment Officer at J.P. Morgan came out with a great note about the power of reconstruction. He quoted philosopher, John Stuart Mill, saying, “What has so often excited wonder is the great rapidity with which countries recover from a state of devastation. The disappearance in a short time of all traces of mischief done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all removable wealth existing in it. All the inhabitants are ruined. And yet, in a few years, everything is much as it was before.” And Mill was saying that in 1844, before we had modern technology to help us get back on our feet… or sell programs to knock stocks down either.

Bam.  Get long.  It’s all good again.  “BUY BUY BUY”.

Larry Summers, President Emeritus of Harvard University, tells us:

This is a human tragedy for the people who have lost their lives…and we need to recognize that is the most profound and important thing about an event like this.  If you look, this will clearly add complexity to Japan’s challenge of economic recovery.  It may lead to temporary increments, ironically, to GDP, as a process of rebuilding takes place.

To Maria Bartiromo, he said:

I think this eventually will be, ironically, stimulative for their economy.  In the short term, yes, there is great destruction of wealth.  But if you go back and look at great natural disasters, earthquakes, hurricanes, if they are severe enough, you actually do get rebuilding, which ironically does help the economy.

Again – this loss of life and destruction of capital is a good thing, economically, of course.  Because they know that its a tragedy.  That will create profit.  But only if they are severe enough.  Imagine how great Godzilla would be for their economy!

This is illogical.

So in response to Cramer’s and John Stuart Mill’s excited wonder, I offer the philosopher economist Bastiat and the Fallacy of the Broken Window:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.” It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another.

It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

According to Cramer and Summers, we can make money and improve the economy by randomly destroying our goods and capital.  Bulldoze a home.  Level an office building.  Trash Cramer’s television studio.

But alas, we can not be so lucky.

Destruction is never a boon for economic growth.  You are taking capital and savings away from what could have been new production, new innovation, and using it to replace things that you already had.

So if we were to follow this logic, a the best thing a homeowner could do would be to bulldoze his own home.  Because you will have to rebuild it, and that will spur productivity.  But all he will have, is a home.  Which he already had.  But it will have taken him time and money to restore what was already in place.

If it is illogical for the individual, then it must be illogical for society.  Because society is the collection of individuals.

Larry Summers is the President of Harvard.  Jim Cramer has the prime time show Mad Money on CNBC.  Do people listen to them because they analyze situations, and conclude things we cannot conclude?  How does breaking things make us better off?  It is this fancy think that bamboozles and awe’s the public.  Harvard.  CNBC.  Credentials.  They must be smarter than me.  As they twist and contort, the public gets lost.  And becomes deceived. Either they are stupid or they are liars.  But they are not reliable.

 

Less optimistic, I realize, but here are some facts about Japan:

  • Current death toll is 7,300 people with nearly 11,000 others missing (as of 3.19.2011).  This means there are fewer in the work force.
  • A quarter of Japan’s population is over 65 years old, and the elderly “bore the brunt of the initial impact of the quake and tsunami, with many of them unable to flee to higher ground.”
  • The nuclear power plant is not contained, let alone fixed.  There are radioactive plumes in the air, headed towards Tokyo, reaching the west coast of the US.  We don’t know the extent of the problem even now.  What are the long term health consequences of this?
  • Japan’s Debt to GDP is 196.40%
  • Japan as a nation is the second largest owner of US Treasury debt (after China.)  They own $885.9 billion of US debt, or 19.9% of our total outstanding debt.
  • The BOJ offered a combined 15 trillion yen ($183 billion) into the banking system on Monday March 14.
  • An additional 3 trillion yen ($36.6 billion) will be used to buy government bonds.  This is Quantitative Easing.
  • BOJ will underwrite a ¥10 trillion in earthquake recovery bonds.  More debt.
  • Congressional Budget Office Projects $9.5 Trillion In Deficits By 2021, $2.3 Trillion More Than Obama’s Estimate.  And we will borrow from who, Japan?
  • Japan is selling US bonds, and selling our dollars to repatriate their capital to Yen.  This is bearish for US bonds, which would be bullish for interest rates.  Isn’t keeping interest rates low the objective of the Federal Reserve and Ben Bernanke with Quantitative Easing 2?
  • The printing of additional yen, the buying of their own debt, the issuance of more “eqrthquake recovery” bonds, are all inflationary.  This means that commodity prices will continue to rise.  This will impair Japan’s ability to recover.

But according to Cramer and Summers, the Japanese Earthquake = WINNING.  “Duh, it’s how you perceive it.”

Except, it’s really what you would think: earthquake = losing.  Japan, the United States, and the world are much, much worse off.

Even if the Charlie Sheens of economics tell us otherwise.

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