Taoyuan Nights

Taiwan’s latest plan is to hand out free money to lots of people. That way, we won’t be in recession any more! Hurray!

Just one problem. It’s completely daft, and it doesn’t work.

As I understand it, Keynes’ idea of monetary stimulus involved government spending on projects in situations where consumers had stopped spending, in essence, becoming a forced spender of last resort. Handing out extra money to consumers, when they have started saving and paying down debt, is only going to make them save more or pay down debt more. A meaningless transfer from the public debt to private debt balance sheets, that has no short-term effect, and will be reversed years down the line, for no net gain overall.

Aha! But wait. There is a cunning plan. They’re going to give out ’spending coupons’ that you can’t save, so you’ll have to spend them.

The problem is that after about ten second’s thought, people will just substitute these coupons for ordinary money in their normal spending. Then, they will save or pay down debts with the money they saved.

There’s another cunning plan. Why don’t we give out ‘50% discount’ coupons - that way people HAVE to spend some money to get the government handout? Again, a moment’s thought makes it obvious that people will just use up the coupon in place of everyday spending, over twice as long a period. When it comes to adding unnecessary flourishes to a bad idea, you can always rely on academics and public officials. I am sure this weekend will be busy, as people work hard to re-arrange the deckchairs on the Titanic.

Don’t get me wrong. I’m sure a few people will get in the mood and go and pointlessly buy crap - after all, they’ve been doing it for the last 5 years with great enthusiasm, using borrowed money. But where is this money coming from? Ultimately, it’s coming from taxation, increased debt (which must ultimately be repaid through taxation) or from inflation (which is a form of taxation). So guess who’s paying for this mystery bonus? Either ‘future you’, or your children. And what could be better than stealing from the pockets of unborn generations? Isn’t that how society improves?

So, here’s my question. How does pointlessly buying crap fix a problem of overindebtedness, which is at the heart of the current difficulties? How does it fix the problem of overvalued assets (houses, particularly) which drove that excessive debt? How does it fix the problem of an export-driven economy when no-one is importing Taiwan’s stuff?

The answer is, it doesn’t solve the problem, or even come close. Actually, it makes it much worse. It pushes up public debt and price inflation at a time when people have not much money anyway. This drives up the short-term costs of debt, and increases future taxation.

Besides, Japan tried this years ago as a solution to recession in 1998 and surprise surprise, it didn’t work there either - even during the dotcom boom worldwide, Japan remained firmly stuck in recession as it handed out pointless spending coupons, while public debt ballooned. And did I mention that the JPY devalued completely, to record lows, over the decade that followed?

But, I guess it makes people feel good to ‘get money from the government’. Even though really, it’s just deferred taxation, and even though really, it does nothing but piss money up the wall, wasting the government’s ability to actually solve the problem later.

I mean think about it for a moment. The problem is that people have taken on something like 8 M NTD of debt, to buy houses that are worth perhaps 3-4 M NTD on a good day. We’re talking millions of dollars of unsustainable debt. And the government’s solution? Hand out 10,000 NTD to solve a 4,000,000 NTD shortfall per household? It’s like shouting into a hurricane.

Oh, and you know what annoys me most of all? This!

“At least one banker said the government should consider issuing a “tax reduction/rebate card” to all citizens if the Cabinet wants to see an immediate effect to encourage spending.”

So who will probably get these coupons? Voters, since this is a idiotic voter bribe as much as it is an idiotic effort to stimulate spending. But who will pay for these coupons? Taxpayers.

If, like me, you are not a Taiwanese citizen, I want you to think about the distinction between voter and taxpayer. It implies a forced transfer of cash from non-Taiwanese resident’s wallets to Taiwanese resident’s wallets. But I guess weiguoren probably deserve it because of their weiguo-ness and its apparently horrid effect on the Taiwanese economy.

In unrelated news. While ’supporting the price of shares’, the Taiwanese government has been busy buying shares at prices higher than their current level, as the market dropped. So… you, Joe Public, are now sitting on a gigantic stockmarket loss, thanks to the government. Gong xi!