The Abe-fication of Trickle-down Economics
Scott Bessent´s obsession with Japan and Abenomics and its perversion
Scott Bessent is the announced nominee for Treasury Secretary by Trump. I have created this substack to follow him, the Trump Treasury Department and their economic policy.
In most interviews with Scott Bessent, the topic of Japan and Abenomics will come up. It was clearly a formative experience for the current iteration of his economic thinking.
2011 Earthquake and Fukishima
In Scott Bessent’s telling, it began with the 2011 9.0 earthquake and tsunami right off the coast of Japan. The force radiating towards Japan was so strong that it moved the largest island of Japan by 8 feet. GPS had to be reconfigured afterward to account for this significant shift in the position of the island on the surface of the earth. While not the most severe earthquake ever recorded, it is the most expensive catastrophe in world history and killed nearly 20,000 people.
In the aftermath of this cataclysm, Japan had to undertake recovery efforts everywhere, while simultaneously dealing with the nuclear disaster of the Fukishima power plant. The energy crisis required the importation of fossil fuels. The importation of materials for recovery was required on a huge scale. Cash flowed into Japan from their earthquake insurance on a massive scale.
Enter Scott Bessent, who saw that usually Japan sent more money in the world outside of Japan with a strong currency but their current account balance in the wake of the earthquake had strikingly reduced. This started his exploration of potentially betting against the Yen.
Scott Bessent Discussing the 2011 Earthquake and the Yen
Abenomics
Because Scott Bessent was prospecting Japan to bet against the Yen in the aftermath of the 2011 earthquake, he was early in noticing the rise of the politician Abe in Japan and his introduction of Abenomics and its 3 arrows.
Japan had been facing decades of incredibly stubborn low growth and low inflation despite significant governmental steps to spur economic activity. In the wake of the 2011 earthquake, President Abe was able to get support for an unprecedented aggressive economic policy to try to shift Japan’s economic trajectory.
The 3 arrows of Abenomics were:
Use of quantitative easing to print vast amounts of Yen to get inflation up to 2%
Fiscal stimulus to increase government spending by 2% of GDP
Structural reforms to the Japanese economy
Scott Bessent was already in place evaluating the prospects for shorting the Yen, and Abenomics as proposed was nearly optimally designed to cause a significant depreciation in the Yen and Scott Bessent executed a significant bet against the Yen making huge profits.
Abenomics Impacts
The success of Abenomics is considered mixed by most economists.
In terms of accomplishing President Abe’s 3 arrows, it was successful on arrow 1, partially successful on arrow 2, and only somewhat successful on arrow 3. For arrow 2, the goal to increase fiscal stimulus was somewhat undermined by the increase in the Value Added Tax (VAT) to shore up Japan’s deficit spending. For arrow 3, the negotiations to join the TPP trade deal and some other reforms were made, but was far short of the reforms initially desired.
As for President Abe’s objective to put Japan on a new economic path, the jury is still out, but it did not manage to be as effective as hoped.
For Scott Bessent, however, it did deliver. The parts of Abenomics that was most likely to be achieved and was achieved was the devaluation of the Yen. Scott Bessent’s warm feelings towards President Abe and the economic success of the policy more broadly may be influenced by how well it turned out for Scott Bessent personally when he shorted the Yen in 2013.
Scott Bessent’s Trickle-down Abenomics
For Scott Bessent, his early read on Abenomics is his calling card and also how he is wrapping his policy recommendations for the United States. He has adopted a recommendation that Trump deploy our own 3 arrows like President Abe did.
They are:
3% real economic growth through deregulation, more US energy production, keeping inflation low
3% deficits by the end of his term by paying for reinstating Trump’s tax cuts while eliminating the Biden legislation investing in America, cutting medicaid and shifting federal obligations to states, and freezing government spending except the military
3 million more oil barrel equivalent a day of U.S. energy production
Scott Bessent describing his 3 arrows
What is the objective of this combination of policies? He says it is our ¨last chance to grow out of this¨ and would allow the federal reserve to lower real interest rates. His justification of this goal in turn for U.S. economic policy is that our status as the global reserve currency and global economic position relies on our continued military dominance, and unlimited financing is ¨the sinew that drives war¨, quoting Cicero.
Wait? Is this trickle-down economics?
Like with Abenomics, Scott Bessent’s policy goals have direct ramifications, intermediate policy objectives, and long term aspirations. For direct ramifications, each of his 3 arrows involve lower taxes while increasing profitability and valuations of business. The goals of achieving any of the 3 arrow objectives are far from assured through the policy prescriptions he is favoring, and likely multiple of them will be only partially successful.
And if the objectives of these arrows fails, the objective of America ¨growing its way out of this¨ is even more tenuous. All with the ramification that this American power and prosperity will… trickle-down to normal Americans to benefit from our nation’s success.
I think Scott Bessent is happy to believe that what is good for Scott Bessent and all of his friends in investing will also end up being good for America in a similar way that he now views Abenomics as an unqualified success because it was an unqualified success for him, but you cannot rewrap trickle-down economics in a new theory to memory-hole our experiences with what happens when trickle-down economic policies are enacted.