Surrogate Consumer Demand

Hiroshi Ishiguro is a man. Geminoid is a tele-operated humanoid robot. At the Osaka University Intelligent Robotics Laboratory here in Japan, professor Ishiguro has created a surrogate robot to perform his lectures for him. Geminoid talks like Ishiguro. “He” looks like Ishiguro. “His” facial features and mannerisms were developed to mimic those of his owner-operator perfectly. For all intents and purposes, Geminoid is the ideal surrogate.

Bruce Willis, eat your heart out.

Impressive as the finished products are, the concept behind Ishiguro’s androids is not entirely new. The Japanese government, after all, has embarked on one of the largest surrogate spending programs in history, using the government coffers as proxies for real world demand. But instead of birthing any honest, sustainable demand, Japan’s policy wonks and central bankers created an economic Frankenstein, one that has kept the country in an on again-off again deflationary recession for two decades. Turns out prices can smell faux demand from a mile away.

“Last August, it was reported that deflation in Japan had reached a new record,” observed Reckoner-in-Chief, Bill Bonner, in yesterday’s issue. “Prices were dropping at the fastest pace 38 years. By November, it was duration, rather than depth, that got the press’s attention. Prices had been going down for 10 months in a row…

“Prices fall in Japan. The yen rises,” continued Bill. “And the government uses every trick in the book – and some as yet unpublished – to knock it down. If you are in a position to borrow money from the central bank, the bankers will give it to you at practically zero interest. And if your neighborhood wants a bridge or a community center, that too will be forthcoming from the Japanese government. No government has ever been so generous. At least, not without going broke. For every yen the government squeezes from its taxpayers, it returns more than 2 yen in public spending.”

The problem, of course, is that “surrogate spending” cannot provide sustainable price support indefinitely. In the long run, it can only slow the rate at which prices go where they want to go anyway: down. It stretches a short, sharp correction over a much longer timeframe…and erodes the national balance sheet in the process. Moreover, because it is so difficult to measure the real-world value of the goods and services that surrogate spending “demands,” it tends to be immensely wasteful. People are put to work doing jobs that nobody would ordinarily pay for. Useless goods are produced at the expense of useful ones. And, as prices invariably drift lower, consumers employ the best defense against deflation yet known: they save, driving real demand down ever further.

Your editor wandered around the über chic Ginza shopping district today in search of that illusive real world demand. The streets are lined with high-end retailers…but the crowds are mostly to be found on the sidewalk and in the relatively cheap, but equally trendy, cafés and yakitori houses. Many people carry briefcases. Few carry shopping bags.

Consumer spending has been on a steady decline here since the government’s last stimulus effort began wearing off. Now, in the face of falling wages and easing consumer demand, central planners find themselves forced to make their next move. What to do? A front-page story on this week’s The Nikkei Weekly provides the answer:

“In a bid to prevent the nascent recovery from giving way to another economic tumble, the government last week enacted a second fiscal 2009 supplementary budget. But with the first stimulus partially suspended and its successor not taking effect until April, the economy, for the time being, is fending for itself.”

It is important to remember that not all demand is created equal. There is the kind forged in the crucible of the free market, rooted in sound money and underpinned by the desires of real people. Then there is the surrogate, government-sponsored variety, masquerading behind a lookalike, skin-colored sheath of public spending boondoggles and debased currencies. Administrations around the world are guilty of exactly this kind of economic prestidigitation but, as usual, Japan is way ahead of the curve. Unfortunately, that learning curve has cost the Land of the Rising Sun nearly a generation worth of growth and economic progress and plunged her government into deeper debt than any other nation in the world.

Central planners attempting to “imitate the imitators” with phony make-work programs and stimulus injections might like to ask themselves, therefore, “Will the real world demand, please stand up?”

The Daily Reckoning