Abenomics: Japan’s McDonald’s to Raise Prices by 25%

Lo and behold! This is one example of the supposed magic of Abenomics, Japan’s McDonald’s will raise prices of their products by 25% in order to offset losses!

From Bloomberg

McDonald’s Corp. (MCD)’s Japan business will raise some prices by much as 25 percent next month, the fast food chain’s first increase on burgers in the country since 2008.

Hamburger prices will go up to 120 yen from 100 yen and cheeseburgers will rise to to 150 yen from 120 yen in Japan in May, McDonald’s Holdings Co. Japan Ltd. said in a statement today. The hikes are part of the company’s plan to boost profitability, it said.

McDonald’s is raising the prices after the Japanese unit reported a 12 percent drop in operating profit last year. Fewer discounts drove March same-store sales 3.6 percent lower at the local business, the 12th consecutive monthly decline.

Of course basic economics tells us that higher prices leads to lesser demand. Thus a fall in purchasing power should extrapolate to lesser sales in terms of quantity (and also quality) which eventually should put pressure on profits. 

Chart from Yardeni.com

Yet given Bank of Japan’s recourse to inflationism which hasn’t been anything new, as the Japanese government has been doing this since the start of the new millennium, but has only become more aggressive since 2008, McDonald’s has been suffering from poor sales which isn’t supposed to be the case, especially at the onset of expansionary boom. 

The employment of such poilcies embodies precisely the definition of insanity specifically "doing the same thing over and over again but expecting different results."

Inflationism will hardly bring a boost to the economy, why? Because it inhibits economic calculation and the division of labor by distorting market prices.

As the great Murray N. Rothbard explained (bold mine)

Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation. Since prices do not all change uniformly and at the same speed, it becomes very difficult for business to separate the lasting from the transitional, and gauge truly the demands of consumers or the cost of their operations. For example, accounting practice enters the "cost" of an asset at the amount the business has paid for it. But if inflation intervenes, the cost of replacing the asset when it wears out will be far greater than that recorded on the books. As a result, business accounting will seriously overstate their profits during inflation--and may even consume capital while presumably increasing their investments.  Similarly, stock holders and real estate holders will acquire capital gains during an inflation that are not really "gains" at all. But they may spend part of these gains without realizing that they are thereby consuming their original capital.

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

This only means that in a highly inflationary environment McDonald’s and other Japanese firms will be compelled to either reduce quality or to continually raise prices in order to survive or even speculate, which is contradictory to bring about ‘competitiveness’.

Yet any elevated accounting figures boosted by higher prices will be exposed when the BoJ desists from pursuing inflationist policies—the boom bust cycle.

Moreover, given that Japanese households are said to be ‘risk averse’ where 56% of their liquid assets are in the form of cash and where liquid ‘cash’ financial wealth accounts for 319% of Japan’s GDP, while only 5.8% have been invested in equities and .08% in foreign assets, one should expect that the massive fall in the purchasing power of the yen, will lead not to more investments, but to yield chasing masked as capital flight.

Former Morgan Stanley analyst now managing director and cofounder of SLJ Macro Partners Stephen Jen quoted by SNBCHF.com 

The first stage is foreign leveraged funds shorting the yen, acting on the rhetoric from the Abe Administration. This stage is coming to an end, to be followed by the second stage: Japanese investors selling yen

We have already seen signs where Japanese firms would rather raise financing from foreigners than to deploy domestic cash to investments.

So it would signify as a grotesquely obtuse idea to blindly believe (yes inflationism isn’t economics but religion based on heuristics) that inflation will save the day for Japan. Doing the same thing over a decade hasn't help, why should it be different this time? Because of the shock and awe?

One can only look at Argentina and Venezuela’s transition from stagflation to hyperinflation to see how disastrous a policy inflation makes.

Abenomics will only hasten Japan's path to a crisis.

Air India’s Failure: Epitome of Bureaucratic Enterprises

Massive infusion of taxpayer money has failed to revive the viability of government owned airline carrier, Air India

From a Bloomberg report,

Indian taxpayers gave Air India Ltd. $1.7 billion as bailout funds in the past four years. The airline now says it lacks cash to purchase spare parts.

That’s grounded 16 aircraft for the nation’s oldest carrier. Without the funds, the airline is also unable to refurbish some of the idled planes before returning to lessors.

“Some are just empty shells standing,” Air India Chairman Rohit Nandan said about the grounded aircraft. “We are in the process of returning some leased planes.”

The grounded planes add to the struggles of the former monopoly carrier saddled with about $8 billion of debt and six straight years of losses. Air India has also lost market share as discount carriers that started flights less than a decade ago lure passengers with the latest fleet and cut-rate fares.

Inability to fully utilize the fleet means Air India, the nation’s largest by number of aircraft, will operate fewer local flights than smaller rivals. The flag carrier won approval to operate 1,788 departures a week in the six months through September compared with IndiGo’s 2,821 and SpiceJet Ltd.’s (SJET) 2,467, according to the Ministry of Civil Aviation.

“It’s a criminal waste of public money,” said Harsh Vardhan, chairman of Starair Consulting, a New Delhi-based company that advises airlines. “With all this funds pumped in, what’s stopping Air India from spending on aircraft? They have to deploy fleet, expand network, increase frequency and go for market share.”

Since the Indian government liberalized the airline industry via the repeal of the Air Corporation Act of 1953 in 1994, privately owned firms dominated the market share. Air India’s share, from a monopoly, had been reduced to an estimated 18% of the domestic market.

The merger between Air India and Indian airlines, hobbled by labor unions, have reportedly been a factor in Air India’s continued losses.

Another important variable has been high prices of jet fuel which emanates from high taxes, around 32% of aviation fuel comes from a combination of sales tax, excise tax and freight related costs, as well as, from the inefficiencies of state owned oil marketing companies. High fuel prices has made domestic airlines less competitive relative to international counterparts. As of 2011, 5 of the top 6 major airlines were in the red.

Air India’s case is a classic example of the difference between bureaucratic firms and private companies which boils down to economic calculation.

As the great Ludwig von Mises explained:

A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation; it has to solve problems which are unknown to business management. It is out of the question to improve its management by reshaping it according to the pattern of private business. It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors…

Like any kind of engineering, management engineering too is conditioned by the availability of a method of calculation. Such a method exists in profit-seeking business. Here the profit-and-loss statement is supreme. The problem of bureaucratic management is precisely the absence of such a method of calculation.

In short, political enterprises are operated mainly from political goals, whereas the free market runs under the discipline of profit and losses. 

One should also make a distinction between private companies operating under the influences of politics or rent seeking “crony” firms.

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