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After Abenomics Failed In Japan, It Is About To Be Tried In Europe

After two years of Abenomics, Japan officially admitted it has entered a triple-dip recession. While people with a modicum of common sense warned this would happen long ago, it actually came as a surprise to traditionally trained economists: after all, a country whose economy collapsed under piecemeal episodes of "Abenomics" over the past three decades was supposed to, if only for those trained in the Keynesian school, promptly recover (even though its fundamental problem is not economic but demographic) when that which had failed for so long was applied in one shock episode.

It didn't work.

So now that Abenomics has officially failed in Japan (but will remain in place until Abe is ouster, either voluntarily as the local population has had enough of Japan's record inflation imports) what comes next? It is about to be tried in Europe of course, that other place where 5 years of unconventional monetary policy has masked the complete fiscal collapse and lack of reform of its member states, and as a result, nothing has improved except for a transitory bounce in stock prices, which recently hit record highs benefiting the 1% if only for a short period, with the hangover now is settling in and Germany's DAX back to a 1 year low.

Here is the WSJ's take on the double down "shift" taking place in Europe:

Some commentators, such as New York University’s Nouriel Roubini, have likened Mr. Draghi’s plan to Japan’s Abenomics—named for Japanese Prime Minister Shinzo Abe. This 2012 plan to spark inflation and drag Japan out of a long economic malaise had three “arrows”: a big monetary stimulus, fiscal “flexibility” and supply-side reforms.

 

Some officials in Brussels say there is a bargain along these lines being developed that will take shape after a new European Commission executive takes office in November.

 

It would combine four elements: a deeper commitment to supply-side reforms from France and Italy, the eurozone’s current problem children; more public investment from Germany, both at home and in Europe; and a public-investment plan whose outline has been described by commission president-elect Jean-Claude Juncker.

 

According to these officials, the more governments deliver on this deal, the further Mr. Draghi will be willing to go to support the economy by expanding the ECB’s balance sheet.

One can hardly wait for Draghi to intone in his Italian accent: "the three arrows will hit their target, whatever it takes." B

But there is a problem: Abenomics has failed in Japan.

Yet, if there is one thing that unites past initiatives to spur European growth it is that they have all underwhelmed. Is there any reason to think a version of Abenomics can work here?

 

Russell Jones of Llewellyn Consulting, a London-based consultancy, said there are indeed some parallels between Mr. Draghi’s outlined plan and Abenomics. “The problem is that Abenomics isn’t working very well,” he said.

 

While there has been some evidence of fiscal flexibility in Japan, there has been little progress in promised structural reform, he said.

There is another problem: "The Bank of Japan is taking on roughly $2 billion every working day in new assets to keep the plan afloat." As is well-known by now, in Europe there is an epic scarcity of unencumbered assets, something covered here back in 2012.

It is the inability of the ECB to freely inject reserves into the system in exchange for purchasing some asset, that has been the biggest stumbling block for the ECB ever since Mario came to power, and why Europe's primary and largely only form of intervention to date has been a verbal one.

Still, despite the structural limitations of a European QE, it may still be tried regardless:

The eurozone program would start, by contrast, after a period of contraction in the ECB’s balance sheet since 2012—suggesting monetary policy may have constrained growth in the last two years. Economists like Mr. Jones predict that the ECB will have difficulty expanding its balance sheet even to the levels that prevailed in 2012.

 

On fiscal policy, most budget cuts have already been made. But there isn’t that much scope for more fiscal flexibility in the eurozone. Many senior officials in the Brussels-based commission, along with quite a few eurozone governments, are unsympathetic to French and Italian requests to further relax budget rules.

 

Many observers are skeptical that any German boost to public investment will amount to much, while most of the Juncker plan remains unelaborated.

 

Officials say they are exploring a number of innovations to galvanize EU investment, including using more guarantees in the EU’s own budget, increasing the capital governments pay in to the European Investment Bank and even using the eurozone bailout fund, the European Stability Mechanism.

 

The latter is a long shot. But even if all of these ideas come together and overcome inevitable political opposition, it would be lucky to reach the more than €300 billion ($380 billion), to be invested over several years, that’s being talked of.

 

Abenomics, European-style, thus faces different obstacles to its Japanese counterpart.

Of course, the most important issue that is not being discussed by the WSJ, or economists anywhere for that matter, is that Abenomics, whether in Japan or Europe, is merely applying more of the same policies that resulted in a worldwide financial crisis in the first palce.

What should happen, is what we have advocated from the start: a fresh start liquidation of the massive debt overhang. That, however, will not happen in the current system as a global debt restructuring would also wipe out the equity tranche, those trillions of the legacy "uber-wealth" class.

Which means there are just two options for the world's (central) bankers: hyperinflation, i.e. helicopter money, and war. Both are getting closer with every passing day.