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BIS' Report On The Irreconcilable Differences Between The US And Japanese Household
The compare and contrast between Japan and the rest of the developed world is a topic that will only get more and more attention as increasingly more pundits debate America's plunge into a deflationary spiral (sorry, with $2.1 trillion in shadow debt evaporating YTD, it is inevitable. It is the economy's reaction to the Fed's response, i.e., the nuclear option, at that point that is the topic of most contention - whether it will rekindle hyperinflation or have no impact on the deflationary collapse into a Keynesian black hole). The latest to chime in, interestingly, is the all important Bank of International Settlements, recently best known for promoting the regulatory farce that is Basel III. A just released paper by Shinobu Nakagawa and Yosuke Yasui looks at the nuances of Japanese household debt, and how its build up, concentration and composition is uniquely Japanese, and why Japan, unlike the US, has traditionally had the capacity of falling back on its domestic population to bid up its sovereign bonds (which is all in flux currently, as the Japanese savings rate is plunging, as the demographic shift so well covered in the past by Dylan Grice is currently taking place). Here are the findings of the BIS economists, which may provide some insight on how America's upcoming fight with deflation could proceed. Of particular note is just how skewed US society (based on GINI scores and the distribution of net worth) is compared to Japan. It also explains why America is now a democracy only on paper, while in fact it merely caters to the interests of the top 1% of the population.
Going straight to the paper's conclusions:
(1) Household leverage, relative to both safe and liquid assets and to GDP, is smaller in Japan than in other industrialised countries, and was so even during Japan’s bubble period.
(2) The finances of Japanese households were not severely damaged by the mid-1990s bursting of the bubble. Banks, however, with their large accumulation of household deposits on the liability side of their balance sheets, were a victim of their large holdings of defaulted corporate loans and the resulting capital deterioration during the bust; in response, banks tightened credit significantly during this period.
(3) Household net worth in Japan is not highly concentrated. Thus, regardless of income level, Japanese households are in general resilient to shocks thanks to a sizeable buffer of assets and moderate leverage. The situation is quite different in the United States, where the distribution of net worth among households is highly skewed in favour of the highest-income cohorts. With only a thin buffer of assets, low-income families in the United States – the subprime cohorts – could be vulnerable to market shocks.
Seeing a theme here? For all intents and purposes, Japan, even during its two-decade long deflationary process is far better equipped to handle the economic collapse that is unravelling for an entire generation of Japanese consumers. Which is why the Fed is now actively pumping $5 billion in the market every other day to stimulate inflation, and the stock market, as this is now the Keynesian system's Maginot line. The Fed can not allow mass perception of the the double dip to become entrneched as that would be the proverbial game over. What has worked in Japan for 20 years will fail miserably when applied in the US, simply because US consumers are in a far, far worse shape than their Japanese counterparts. This is further exacerbated by the massive difference in net worth distribution: Japanese society is far more homogeneous, and thus far better represented, than the US, which is extremely skewed toward high wage earners, and their specific interests (think Wall Street). If that means a POMO every day, every hour, every minute, so it shall be done. This is Bernanke's last attempt to reflate the economy by traditional means before he uses the nuclear option. Which he will have to do shortly anyway.
Here are the relevant charts from the presentation:
And the kicker:
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The problem Japanese households have is that so much of their savings (deposits, bonds, mutual funds, pensions, life insurance) is in the form of government debt. The meager interest they earn comes out of the increase in household savings. As the savings rate drops with the aging demographic, this slow-acting Ponzi is doomed to break down.
A bit off topic but do you folks remember Morgan Stanley's flip-flop on QE2? It was right in the midst of Yen intervention. Funny.
I agree with Tom. Japan's household/private sector may have these charactetistics, but the "rump" of the net financing burden of the household sector is carried by the Japanese Government, which, after all, is a form of private sector debt.
The 5-10% annual fical deficit is simply households voting for a government to finance what the household sector can't afford. This is democracy, well japanese democracy, well umm asian communism, at its finest. In Japan, families borrow from each other and save in the post office which buys the Japanese Government debt that is the representation of Japanese househlds living beyond their means.
This type of "ostrich" behaviour was also used to give Japanese car companies a global pricing advantage via a rigged exchange rate (price fixing at the national level). The long term impact on the well being of the Japanese citizen will only eventuate when citizens try and cash in their post office savings, only to find that there is simply no "real" money to pay their pensions and geriatric care. This is the "draw down" rate, which is replacing the interest rate model which has broken down in every economy operating fiat currency.
Interest rates are now a faulty monetary control mechanism and economic signalling device, since central banks have sought to replace economic dynamism with dogma. We are on the same path as Japan. When Japan's post office deposits vanish (via a sustained and inexorable erosion in pruchasing power) the Japanese might come up with a solution that our failed "eco geeks" have not come up with. Nature abhors a vacuum after all.
We in the West need to watch Japan fail utterly and then learn what can be done to make some kind of useful soap out of the bones.
Very interesting (and sickening), thanks Tyler.
the japanese market declines because there are FEWER japanese people every year. the USA--- by comparison, is GROWING population every year. game-set-match. you get inflation with incremental demand, the USA has the incremental demand coming with the increased population. shawn mesaros, pamria, llc
japan from 2002
http://www.japaneselifestyle.com.au/japan/japanpopulation.htm
pop = 127.0m, with 18% 65 and over
japan from july 2010
https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html
pop = 127.1m with 22% 65 and over.
us population from april 2000 to july 2009
http://quickfacts.census.gov/qfd/states/00000.html
pop from 281m to 307m= +26m or <1% per annum with 13% 65 and over.
I think your point has to relate to the rate of change in the over 65 yo's. Baby boomer cohorts in the US v the equivalent in Japan.
I'd rather get your comments on trends in per capita GDP, then the impact of debt on per capita GDP!
You do not get increased demand if the population becomes increasingly poorer. The companies on US stock exchanges aren't even totally related to the U.S., they do business globally. It is the same for many companies on Japanese stock indices.
The U.S. population has grown greatly, yet there are less people employed today than there were in 2002.
hence Nikkei dowm from 39,000 to 10,000 since 1991 and the dow/s&p500 flatlining over the last ten years?
ponders how much economic rent an i-phone generates now aapl is bigger than msft....
like when csco was bigger than ge in '99
don't cha know
- Ned
Don't mention AAPL. You'll attract Hairy Whanger-Banger.
As for the us consumer and the recent flow of funds (WSJ/ZH articles re deleveraging), is there a reasonable explanation as to how the run rate DPI from 2007-present amounts to something north of $1.6T run rate and yet card/mtg balances down a mere $600b while financial assets down 7T (deposits down) with receding flows to equity (thus not destroyed in capital loss). Further personal income is up several hundred billion despite the loss of 8 million jobs which at present weekly wage amoutns to something like $300B (offset by the rising transfers admittedly). That said where is this flow and where is it going because it is missing from the balance sheet.
"a deflationary spiral ..., with $2.1 trillion in shadow debt evaporating YTD, ... is inevitable." ------- If you look at the pace of lending of the World Bank, International Monetary Fund and other "enabling" organizations, you will see that they are on track to replace that 2.1 trillion dollar-for-dollar. Have a nice day.
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a deflationary spiral ..., with $2.1 trillion in shadow debt evaporating YTD, ... is inevitable." ------- If you look at the pace of lending of the World Bank, International Monetary Fund and other "enabling" organizations, you will see that they are on track to replace that 2.1 trillion dollar-for-dollar. Have a nice day.
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a deflationary spiral ..., with $2.1 trillion in shadow debt evaporating YTD, ... is inevitable." ------- If you look at the pace of lending of the World Bank, International Monetary Fund and other "enabling" organizations, you will see that they are on track to replace that 2.1 trillion dollar-for-dollar. Have a nice day.
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