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Following Up On The Japan Disaster Scenario; Or Can Still We Learn From The Failure Of Keynesianism?

Tyler Durden's picture




 

Two months ago we first presented a very gloomy outlook on Japan by Dylan Grice, one of the more erudite skeptics currently out there. Dylan's thesis was simple, and was subsequently taken up by a variety of other pundits to express comparable concerns about developed countries with burgeoning debt levels, namely that an aging population, now actively engaged in asset sales, will have less of an ability to participate in its traditional role of purchasing JGBs. Dylan takes this opportunity to rebuff critics, and to point out that no matter how the data is sliced, when adjusted for the ever so prevalent "recency bias", and when confronted with a topic near and dear to Zero Hedge, namely record rolls of increasing shorter-duration debt, coupled with an open admission by the biggest holderof JGBs, the Government Pension Investment Fund has "zero money to invest", the recently awakend bond vigilantes (with or without the evil CDS speculator cousins) will very soon migrate away from the Eurozone periphery and focus on where the material problems really are focused. Unfortunately no amount of postruing by Merkel or Sarkozy can do much to change the fact that the imminent funding crisis for the world's 2nd 3rd largest economy is becoming all too real.

Here is how Dylan himself summarizies his view:

The thesis I outlined back in January was that since Japanese households ? the biggest effective drivers of JGB demand ? are set to dis-save in coming years as they retire (left-hand chart below) there will soon be no one left to finance the government?s nosebleed deficits at current yields. Indeed, the chart below suggests households are already running down assets. And because the interest rates which might attract international investors will inevitably blow up the budget (debt service is already 35% of government revenues at existing yields) there is a very clear and present danger that the government reverts to the well-established historical precedent for cash-strapped governments of currency debasement.

The most common argument I received on why I was wrong to worry was along the lines that Japan has had rising debt ratios and huge deficits for many years now. Not only have yields fallen, but the economy has struggled with deflation, not inflation.

To me this feels like "?recency?" bias at work, which is a type of "?availability?" bias by which we overweight events we find easy to imagine relative to those we don?t. Japanese debt markets have been stable for such a long time it?s difficult to imagine anything different, so we don?t imagine anything different and predict that the future will look like the past. Now, Japan?s debt markets may well remain very stable in the future and I?m very open to the strong possibility that I?m barking up the wrong tree. But ?logic? like that outlined above is lazy indeed. It echoes Bernanke?s now infamous 2005 conclusion that nationwide housing collapse in the US wouldn?t happen because it hadn?t happened before. More thoughtful critics argued that I was ignoring the Japanese government?s significant financial assets. Taking this into account shows a net debt position of closer to 100% of GDP (chart below), considerably more manageable than the 200% gross debt-to-GDP ratio and more in line with other OECD economies such as Italy and Belgium (great!).

But I'?m not so convinced by this argument, or to be more accurate, I?m not so convinced the numbers underlying this argument are correct. For a start, around 40% of the assets recorded on the asset side of the Japanese government?s balance sheet don?t actually belong to the Japanese government. They belong to Social Security and therefore to the  Japanese public. That the vehicle which owns the assets happens to be publicly owned doesn?t change the fact that it is a very real liability owed to individuals who must be either paid or defaulted on. It doesn?t just cancel out.

And just in case you thought our concerns about central bank insolvency could be limited to the US, it should come as no surprise that Japan has very much the same issues when it comes to the asset side of its balance sheet.

And who on earth knows what the other assets are worth anyway? The central government, for example, has funded projects deemed "?socially useful?" and which private markets wouldn?t finance. These loans, made via direct ?investments? in public sector organisations (called Fiscal Investment and Loan Program [FILP] agencies), are recorded as assets on the government balance sheet worth around 10% of GDP. Yet we know from decades of banking problems and bank recapitalisations that even the loans that markets did finance soured pretty spectacularly, so one wouldn?t imagine the FILP agency loans to be of particularly high quality. Indeed, a few years ago two economists at the NBER reckoned that nearly half of the FILP agencies were insolvent. Maybe those assets are being provisioned for correctly on the government?s books, but ? and call me a cynic if you like ? I really doubt it.

But even if we assume those numbers are a fair reflection of asset value there is also the implicit assumption that the Japanese government can monetise them. But I don?t think they can. Shares and equity stakes are marked at around 20% of GDP, mainly reflecting Japan Post Bank - the "?jewel in the crown?" - with $2.5 trillion in deposits. But last year, plans for its long-awaited privatisation were shelved, apparently for fear that on a purely private sector calculus, many small and medium-sized companies wouldn?t qualify for the funding they need to stay afloat. Keeping it in public sector hands was the only way to ensure their life-support credit lines weren?t cut. Of course, I may just be being cynical again, but I note that Post Bank is also a huge buyer of JGBs and doubt it was just the SMEs life support the government was worried about?

Grice brings up a relevant counterpoint: is the demand calculus in Japan merely shifting away from traditional buyers of JGBs in favor of a just as yield "ravenous" corporate sector? Bear in mind this is much less of an issue for the US, where traditionally low household saving rates have meant at best a rotation out of one asset into another, and never a de facto new and/or persistent demand interest. After all we had the Chinese doing that for us, with the receipt of the cash of all those trinkets that Americans just had to have over the past 10 years. Regardless, when it comes to China

This leads nicely to the other argument worth thinking about, which runs like this: the household sector may well be retiring and less able to absorb new JGB issuance, but the corporate sector is expanding thanks to a vibrant export sector. Since corporate sector savings are as large as households? isn?t it reasonable to expect them to take over as the primary source for government funding? The honest truth is that I don?t know. Maybe, I guess. But my gut feeling is pretty definitively no. For one, the corporate sector doesn’t actually have as large a pool of savings as the household sector.

For another, the corporate sector ? even in Japan ? doesn?t have anywhere near the same propensity to hoard cash (see chart above). Open the papers today, for example, and you read about Astellas Pharma going hostile on OSI, where it thinks it can buy its way out of Japanese stagnation. When companies have money, they need to spend ? sorry "?invest?" ? it (occasionally they even need to return it to shareholders). Anyway, it looks unlikely to me that companies are going to take over from households in financing the government?s deficit.

So in summary, refutations of the funding crisis are still lacking (Grice welcomes all input on where he may be wrong). In the meantime, it appears that the facts are in his favor, especially when one considers that the two primary traditional sources of demand are fallling by the wayside.

So I still worry. Households are retiring and running down their wealth; non-financial corporates don?t hold as much cash. So the non-financial sector (i.e. households plus nonfinancial corporates) just isn?t going to be in a position to provide the financial sector with the deposits it needs to recycle into JGBs.

That leaves the foreign sector as the only candidate to fund the government?s ever increasing structural deficits and explains the increased frequency of JGB roadshows we?re seeing around the globe. But is it realistic to expect foreign investors to fund a likely insolvent government at 1.5% (if this week?s Greek financings are a fair gauge, investors want closer to 6% to fund insolvent governments)? Anyway, debt service already accounts for 35% of the Japanese budget! Any reasonable interest rate will expose Japan?s budget for the mess it is.

But why take my word for it? Why listen to the rantings of some supposed ?perma-bear?; a deranged strategist working on a cold rainy island on the other side of the Eurasian continent from Tokyo, and with no great insight into the workings the JGB market or much else for that matter? Well, you shouldn?t. But you might want to take Takahiro Kawase, head of Japan?'s $1.2tr Government Pension Investment Fund (GPIF) and the largest owner of JGBs on the planet, more seriously. He said last summer, "?The big change this year for us is that there is zero new money to invest, so we may need to be a seller in the market to meet the pension benefits … our bond allocations are overweight, so we may need to reduce those a bit to raise cash.” Not to worry, though, because he doesn?t think it will have much effect on the market. “… the sales are not expected to be big, as we can cover the shortfall from maturing bonds.

Ah: maturing bonds - the dreaded roll problem. We have recently demonstrated the major concern that rolling near-term debt is for Europe (here and here), here is what it looks like for Japan - the total amounts to a whopping 45% of GDP!

It sure does look a little scary. More from Dylan:

How significant a problem is this? In last week?s FT, Gillian Tett pointed to the importance of debt maturity in assessing fiscal breathing space. UK debt maturity, at 14 years, is one of the longest, while the US, at 5 years, is one of the shortest. In Japan, based on the Bloomberg data on the front page chart, the number is around 6, and ¥213 trillion matures in 2010.

To spell that out: we are going into a year in which the government has ¥213 trillion of bonds to roll over (chart below), and the biggest holder of JGBs is openly admitting he has no new inflows of money. I suspect he?s not as confident as he?s making out that this won?t be a problem, and I suspect the Japanese authorities aren?t either. Otherwise, they wouldn?t be scrambling to arrange a new borrowing facility for the GPIF so that it doesn?t have to sell JGBs to fund its pension obligations.?

Is Grice right? Time will tell. When a new, countertrend idea emerges, it needs a critical mass to gain traction. Are we going to see "idea dinners" in which selling JGBs (or, gasp, buying Japan CDS) is discussed? Unlikely. Especially not with Goldman Sachs as organizer. Yet the facts speak for themselves. We are on the cusp of a secular shift between traditional supply and demand mechanics, both in Japan and everywhere else, as the prevailing population gets older. Of course, the ramifications of all these observations are just as critical for America as they are for Japan. As we have been discussing extensively in the past, the real crisis is not Greece, not the UK, and not even Japan so much (and as for China who knows - if real, unmanipulated Chinese debt/GDP is at almost 100% as some economists have claimed recently, it will get quite interesting), but in our own country, whose only generic fall back is "we print the dollar." One critical, and as yet unanswered, question is just how long can this particular excuse be reapplied over and over.

 

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Tue, 03/09/2010 - 11:40 | 259125 AnonymousMonetarist
AnonymousMonetarist's picture

By Kathleen Madigan
blogs.wsj.com
March 9, 2010, 7:32 EST

The Small Business Optimism Index lost 1.3 points to 88.0 last month, reported the National Federation of Independent Business in a press release Tuesday. The NFIB noted that only two of 10 components posted gains last month.

The subindex covering expected business conditions dropped 10 points to a -9 reading, and sales expectations dropped three points to zero.

AM here : Zero point Zero? Oh ye quivering throngs of bullisht Nancy Capitalists with liquidity chalices extended, thou doth proclaim that we can bypass the consumer, mayhaps even bypass the small businessperson, but verily can we also bypass reason?

The Demand Restoration Project is not working yet. Your money Mr. Federales has no velocity here for the band of The Hand can only conjure a Potemkin demand. Organic wage growth, absent for the last decade, comes from ... wait for it ... the productive allocation of capital when a free market pins winners and chooses losers. (AM Rule #8)

Phat, Plummed and Cupid is no way to go through strife son.

Failure to liquidate the insolvent banksters has led to the liquidation of a large part of the productive economy.A taxpayer financed bailout of rich folks' bad speculative bets has resulted in zombie banks and zombie customers... a fiscal tide that lifts no boats. (AM Rule #7)

Barry, as one Chicago liberal to another, here's a suggestion. Screw health reform, what we need is wealth reform. Loading up the banks with a trillion meatballs is nothing more than DIP financing for a generational workout. A year after the Devil's Peek (S&P 666) and the banksters are still too bloody bankrupt to go broke? Top-down crisis management has resulted in an obese obscenity poised on a flagpole in a windstorm. And make no mistake Mr. Dunham, it is always brightest before dusk ... the storm is approaching.

The cold hard fact of our age is that the bankrupt ideology of the rich that had greatly succeeded in drafting the inner monologue of regular folks so that they would vote against their self-interests is colliding head-on with a Mr. Market that is a bit pissed off that we've inflated it out of the business cycle for the last quarter century. (AM Rule #6)

Either you're a hero Barry or its' generation zero...

blogs.abcnews.com
March 08, 2010 6:20 PM
By Byron Wolf

President Obama and Democrats launched a campaign to vilify insurance companies in the final stretch of their health reform effort.

Republicans, meanwhile, pointed out that those very same insurance companies would get huge checks from the government if health reform is enacted.

“(Health Insurers) will keep on doing this for as long as they can get away with it. This is no secret,” the president said. “They're telling their investors this – ‘We are in the money. We are going to keep on making big profits even though a lot of folks are going to be put under hardship,’” the President told supporters at a stop in Pennsylvania today.

HHS Secretary Kathleen Sebelius, meanwhile, wrote to insurance company executives demanding that they justify premium hikes.

Neither mentioned that the Senate health reform bill, which is the basis for Democrats' last best chance at comprehensive reform, would give the insurance companies millions of new customers required by law to buy health insurance. It would also require insurers to cover everyone, regardless of age, gender or pre-existing condition.

To help pay for the new insurance requirements the government would give to people money to buy insurance - $336 billion over the next ten years. That money, ultimately, would have to go to... drum roll... insurance companies.

AM here: The bold pap of a road map exchanged for the insouciance of elites and the Antoinette economy.

And soon coming to the pablum narrative near you, the oft-proclaimed 'counterproductive' populism that will stall the V-Shaped, scratch that, nascent, scratch that, oxymoronic jobless recovery.

Exhibit thyself to a public that may hiss thee, bemoan the solons. Let them eat debt!

Quis custodiet ipsos custodes? said the Roman poet Juvenal. Who will guard the guards themselves?

Why, pronounce our modern day guards, we will. Trust us but don't task us lest you see trust in us lost to your peril.

Don't Task Don't Smell, the central plank of the 'I Can't Believe it's Not Capitalism Plan' has given us Sugar Mountain, where stupidity is cupidity.

Buckle up citizens, the Deadhead Economy awaits on the other side of this black diamond demographic slope.

On the bright side, 2017-2018 will be a once-in-a-generation opportunity for the value investor!

Tue, 03/09/2010 - 11:53 | 259137 SWRichmond
SWRichmond's picture

Organic wage growth, absent for the last decade, comes from ... wait for it ... the productive allocation of capital when a free market pins winners and chooses losers.

Productive allocation of capital in a free market?  Are you implying we actually have to make something?  Damned radicals!

Tue, 03/09/2010 - 13:48 | 259268 merehuman
merehuman's picture

cant hardly wait. Wake me when its over.

Tue, 03/09/2010 - 14:16 | 259294 TraderMark
TraderMark's picture

Another $148B of Keynes headed our way. Shh, focus on that $15B "jobs bill" while I throw a program 10x the size through the backdoor.

http://www.fundmymutualfund.com/2010/03/another-148-billion-of-federal-money.html

Tue, 03/09/2010 - 16:44 | 259503 merehuman
merehuman's picture

Been watching the currency exchange numbers.

First time i see a change in chinas numbers.

Usually always on 0.00 today, now at kitco

0.14 minus. Is the yuan devaluing?

Tue, 03/09/2010 - 11:40 | 259128 Anonymous
Anonymous's picture

There is going to be some major pain going forward. Demographics are going to be a killer for the US economy going forward also just like it has been for Japan's since the 90's.

Tue, 03/09/2010 - 11:46 | 259134 bugs_
bugs_'s picture

"dis-save" excellent!

Looking forward to the day when the
Professors have to stop teaching
Keynesianism because they will be
laughed out of the classroom by
students that survived the great
meltdown.

Tue, 03/09/2010 - 16:26 | 259472 Anonymous
Anonymous's picture

Keynes should be taught unless you believe the dumb ideas or policies attributed to him after his death should be held against him or you miscite his ideas.

Inflation--Keynes wrote Tract on Monetary Reform in 1923[20] – a trenchant argument that countries should target stability of domestic prices, avoiding inflation even at the cost of allowing their currency to depreciate.

Government policies--Keynes believed in government solutions as beneficial to the people. Why it is a bad proposition that groups of people acting in a coordinated fashion is almost always a better than the alternatives?

Fiscal policies--Keynes believes government should run surpluses in good times and spend money in bad times.

I.e., you save for the 100 year flood and then have money saved to meet the emergency when Katrina hits. (This has been misused by people who always see an emergency--an unfair rap on Keynes I'd say)

Applied Mathematics--Keynes pioneered the use of statistical modelling and math theory in the area of micro economics.

Situations change- The underlying situations change. Keynes's specific ideas applied to specific situations he addressed. To attempt to apply his solutions to different problems coming up in later times is really dumb, and I'm sure not something Keynes would advocate. The anti-"progress" Beck and other RW folk on the other hand...

Its true various goverment officials have used Keynes (wrongly I'd say) to justify spendthrift ways. But the rights constant attacks on Governments and Keynes is akin to attacking doctors for the drug/meth head problem because doctors advocate use of anesthesia during surgeries.

The RW's attack on higher math and science continues with their attacks on Keynes. Economic modelling is not perfect, but its the best set of tools we have. The Treasuries\Fed response to the 2008/2009 credit crisis--a crisis excerbated by RW stupidity-- has not been perfect, but saved a real economic disaster. They have so far gotten a large mess straightened mostly out.

Bugs is correct that people should not teach dumb policy and claim Keynes advocated the dumb policies. But not teaching Keynes would be even dumber.

Instead of the RW considering themselves really smart when in fact they are typically uninformed and ignorant--the D and F students claiming the A students did not deserve their grades because the math test was not "fair"--consider the possibility that being ignorant and uninformed is not something to be proud of. Maybe you should be quiet and let the smart folk drive. Or kindly move to Somalia where there are no laws, no taxes and the maximum liberty--and where Keynes is likely not taught in the non-existent public schools.

Tue, 03/09/2010 - 18:49 | 259765 Anonymous
Anonymous's picture

Wow, I'll bet you love to hear yourself talk. So on the one hand you get upset at people oversimplifying Keynesian economics (which to an extent I agree), then on the other hand you go and oversimplify the opposing point of view. Ha! This is what irritates me about ideologues on the left (in your case) and ideologues on the right.

Tue, 03/09/2010 - 12:02 | 259139 Crummy
Crummy's picture

If Keynes owned a pizzeria, for every pizza sold enough topping to make 10 more would be scattered all over the floor

Tue, 03/09/2010 - 18:04 | 259692 Anonymous
Anonymous's picture

And if that pizzeria were Milton Freidman's there would be dead bodies scattered about
Courtesy of a Pinochet type pizza guy watching the door

Tue, 03/09/2010 - 12:00 | 259142 Anonymous
Anonymous's picture

Ben said we are different because of the speed in which we are addressing the issues.

That's all I need to know.

Tue, 03/09/2010 - 12:07 | 259146 trav7777
trav7777's picture

Good news from where I sit.

I can point you to where I made the prediction 2 or 3 years ago that the Rogue Wave financial event at the sovereign level would be Japan's sovereign default.  Also, I forecast that things come completely apart when the Fed loses control of the POG.

Saw these same things upon investigation back in 2007 or 2006.  I expected it in 2009 so maybe I was a bit early lol.

Tue, 03/09/2010 - 12:16 | 259151 Anonymous
Anonymous's picture

So exactly how is Japan gonna roll all their maturing bonds? Can they print money like the Federal Reserve is doing or do they actually have to attract new capital to pour down their social services drain?

Tue, 03/09/2010 - 12:17 | 259153 poydras
poydras's picture

The piece neglected to include my comments made in the past.

Does Japan have a problem? Yes. You need to look at Japan's issue in the context of other countries.

Japan's NIIP is the highest in the world

Japan's trade surplus is around $70B per year

Aggregate debt to GDP is high, but below the peak.  Private debt to GDP has contracted significantly.

Japan has a household problem.  One of the solutions involves the repatriation of money back to Japan.

Clearly, the NIIP and the trade surplus is insufficient to plug the gap.  Contrast Japan's position with the US or the UK and explain to me who has worse problems.

 

 

Tue, 03/09/2010 - 12:19 | 259155 Anonymous
Anonymous's picture

You're making this way too convoluted. Look, when we all went off the gold std, CB accountants didn't know what to do, so now they just "pretend" we're still on a gold std, and we pretend to "sell" gov bonds. We don't have to, and don't have to pay interest on them, it's just an accounting habit whose only remaining function was to prop up CB target interest rates. Now even those are low or zero!

Solution? Just stop the charade. Make every CB a dept in a Treasury Agency, and just accept sovereign currency creation for what it is, a fiscal transfer. The reveals currency as what it is - just scorekeeping allowing efficient matching of aggregate producers to aggregate demand. Anything less is failing to leverage your own citizens. Now, just make sure public spending distributes enough currency, and let Fx rates float.

Tue, 03/09/2010 - 13:20 | 259238 Anonymous
Anonymous's picture

I get what you are saying - this is Warren Mosler's argument.

So lets do away with the charade. What would society look like at that point? Why work? Why accept government money in transactions? What about hyperinflation? Our belief in the relative scarcity of fiat money is integral to its acceptance. What happens when you blow away that belief?

Tue, 03/09/2010 - 12:26 | 259165 SgtShaftoe
SgtShaftoe's picture

I find it extremely ironic that there are "buy California bonds" ads on this page... 

I just cannot see how this situation can hold for much longer.  I get the feeling that once the pieces start to really fall, it will go very quickly; taking days, maybe hours.  The question that keeps me up lately is: How long do we have before the pieces begin to fall in earnest?  weeks, months, a year or two? 

 

Before the endgame, the gods have placed the middlegame. - Tarrasch

 

Tue, 03/09/2010 - 12:36 | 259181 AnonymousMonetarist
AnonymousMonetarist's picture

Re: middlegame

Clowns to the left of me jokers to the right ...

Tue, 03/09/2010 - 17:27 | 259605 cougar_w
cougar_w's picture

Most here would not agree with Kunstler's politics, but the blog this week is related to the phenomenon where "it goes slowly at first. and then it goes all at once."

http://kunstler.com/blog/2010/03/then-all-at-once.html?utm_source=feedbu...

I read it twice.

cougar

Tue, 03/09/2010 - 18:22 | 259721 Ripped Chunk
Ripped Chunk's picture

It is very well written in a soothing matter-of-fact way. Almost like looking into another dimension.

It is fiction of course, until it isn't.

Wed, 03/10/2010 - 01:10 | 260244 Anonymous
Anonymous's picture

Just ambience, says nothing really, not worth reading IMHO.

Undecadent

Tue, 03/09/2010 - 12:47 | 259195 poydras
poydras's picture

Here is an idea for Japan.  Apply an extra tax foreign financial holdings and/or earnings to encourage adequate repatration.  From where I sit, the Yen is destined to appreciate.

Contrast this with the US who vacuums massive quantities of foreign money to function.  In addition, the US had to print money to subsidize interest rates/housing.  Japan's QE is to stem deflation.  The Yen has been a solid store of value for over ten years.

Tue, 03/09/2010 - 13:50 | 259269 jm
jm's picture

This is an interesting take.  Japan's QE to stem deflation is nothing more than subsidizing interest rates on CRE debt, no?

The difference from the past ten years is that the US consumer is done, and no other country is willing or able to pick up the slack in demand.

 

 

Tue, 03/09/2010 - 15:17 | 259376 Agent P
Agent P's picture

I am married to the US consumer, and trust me...she is not done!

Tue, 03/09/2010 - 18:23 | 259723 Ripped Chunk
Ripped Chunk's picture

Until you are

Tue, 03/09/2010 - 14:32 | 259316 SWRichmond
SWRichmond's picture

Capital controls, how novel.

Tue, 03/09/2010 - 12:56 | 259205 dumpster
dumpster's picture

Keynesian goo.. is not about learning ,, it is a way to fleece the population,, endorsed by the fed, all central bankers as a cover for their bait and switch operation. a cover for politicians who scum their way to seniority. 

why all the talk about learning from.. it has infested the pavlovian gruel bowl,, made happy the campers on wine women and super bowls ,

this stuff is intentional with plausible deniability

it lines the pockets of the bought and paid for academics .. the stink tanks ,, and assorted college grants ,

 

Tue, 03/09/2010 - 14:10 | 259288 Anonymous
Anonymous's picture

I used to get upset about crap like this, but then I spent a couple of hours watching the throngs of people at Mall of America and I realized just how unbelievably stupid the majority of Americans are. I could not bring myself to sympathize with them, the rip off artists can't help themselves and it is still plenty possible to be smart in America and avoid most all of the bs traps if you care to do so. For the rest, well, fuck 'em.

Tue, 03/09/2010 - 17:30 | 259611 cougar_w
cougar_w's picture

+1

But do remember, the bell also tolls for thee.

Tue, 03/09/2010 - 18:25 | 259727 Ripped Chunk
Ripped Chunk's picture

"I realized just how unbelievably stupid the majority of Americans are"

How old are you? (if you don't mind me asking)

 

Tue, 03/09/2010 - 14:46 | 259330 Chumly
Chumly's picture

ouch!  how horribly and painfully true....

...oh well, personally I'm in the po hos, so I think I'll at least get a return on the investment in the speedmachines and the tv80's (at least I was on the winning side of that bid/ask) and hit the slopes for a few days...

Tue, 03/09/2010 - 19:28 | 259823 KevinB
KevinB's picture

Why do I have to post this every two weeks? Keynes argued that governments should run surpluses in good times, and deficits in bad times. Somehow this has morphed into "always run deficits", which is not at all what Keynes suggested.

Many of you really should learn about Canada. Our past two governments - one Liberal, one Conservative - routinely ran surpluses in the late 90's and early 2000's. When the financial shock came, the present Conservative government ran a large deficit, although it's only half the per capita level of Bambam's budget. As the Canadian economy recovers, they have already signaled their intention to cut the deficits. A chart in this thread showed how much lower Canada's federal net debt as a percent of GDP is than any of the G8. 

We run our banks better, too.

Tue, 03/09/2010 - 13:13 | 259227 Anonymous
Anonymous's picture

Japan's problem is so unique that few people could understand that correctly.This guy is no exception. Talk to your dad, and he may be able to teach you that shorting JGB was once called Black Widow trade.

Quite contrary to your intuition, having financially healthy government is actually a very dangerous thing. Check the financial situation of Iceland's and South Korea's governments just before they went to IMF for help. While their private sectors were accumulating external debt, their governments had no need to do that.

Japan's real problem is that its money does not go out of its banking sector no matter what Japanese government tried.

If Japan's saving rate is decreasing, that's really a good news for Japan, because it means that money starts circulating within its society and starts working. In Japan, money does not disappear unless you physically destroy it. If someone spends his/her money on something, other person picks up that money. There will be a chain reaction called credit creation. With the process, Japanese government can collect tax at each step. While private sector utilizes money, public sector does not need to help its hand. Therefore, public sector could reduce the amount of bond issuance. This way, public sector debt ratio to GDP will be stabilized with nominal GDP expansion.

Being the world's most rapidly aging society is also a good news for Japanese business who have been investing in various products targeted to elder people. After field testing those products in Japan, they will start selling those products worldwide. American baby boom generation will be a good market for them.

At macro level, Japan's balance sheet as a country is different from that of Japanese government.

Japan has been almost always a current account surplus country for 3 decades. As a result, Japan accumulated the largest surplus in the world, which is about 1.8 times bigger than that of China's.
http://en.wikipedia.org/wiki/File:Cumulative_Current_Account_Balance.png

Japan's current account is like a combination of Germany's & Switzerland's. Japan is actually the world's largest creditor and investor as a country for the past 17 years. Japan has been building factories all over the world, and sending money back to Japan. With aging society, Japan's model is currently moving from that of Germany to that of Switzerland, i.e. making money from investment. Japan is no longer export reliant country. Check the ratio of export over GDP, and you will find Japan's number is second low to US among major economies.

Japan has no external "net" debt as a country. The Japanese government bond is denominated in JPY, which is a fiat money, and so Japanese government can print it. Japanese government bond's 95% are owned by Japanese. In other worlds, Japanese government's debt is Japanese people's credit/asset. The tax burden including sales tax is still very low, and so the government can collect tax if needed. Thanks to its extremely low yield, the cost of servicing debt per GDP is lower than other countries, e.g. US.

So, Japanese government's debt is a family issue as FT correctly pointed out.
http://www.ft.com/cms/s/0/cb125274-14e3-11df-8f1d-00144feab49a.html

If you are still interested in Japanese government bond market, please check the followings.
http://www.mof.go.jp/english/bonds/saimukanri/2009/saimu.pdf
page 95 Breakdown of the Outstanding Amount of General Bonds by Remaining Years to Maturity
page 96 Breakdown of the Outstanding Amount of General Bonds by Maturity Types and their Average Interest Rate at the end of FY2008
page 97 Outstanding, Interest payment of general bonds and Average years to maturity

If you want to learn more on sovereign default issue, read McKinsey's report.
http://www.mckinsey.com/mgi/reports/freepass_pdfs/debt_and_deleveraging/...

Hope you write up better report next time. Thanks.

Tue, 03/09/2010 - 14:23 | 259304 Anonymous
Anonymous's picture

Thank you for taking the time to write this. It's wise to be anonymous when supporting Keynes in this salon of wisdom.

Zero Hedge comments:economics::Fox News:politics

Tue, 03/09/2010 - 22:48 | 260102 jm
jm's picture

This is some good shit, man.  Thanks for the www.mof.go.jp link.

Tue, 03/09/2010 - 13:16 | 259233 Anonymous
Anonymous's picture

"But is it realistic to expect foreign investors to fund a likely insolvent government at 1.5% (if this week?s Greek financings are a fair gauge, investors want closer to 6% to fund insolvent governments)?"

That made me laugh.

Tue, 03/09/2010 - 13:39 | 259251 toathis
toathis's picture

We are in worse shape in Japan. We have the world reserve currency. Once that goes (within a few years). U.S.A implodes!

Tue, 03/09/2010 - 13:45 | 259262 Anonymous
Anonymous's picture

What's with all this hand-wringing and gnashing of teeth? Pansies. Come on in - the water is nice and warm (from all the folks with a brain who pissed in their trunks when they looked at the numbers). No idea why they are leaving the pool when it's so nice...come on in, there's plenty of room...What are you waiting for?

Tue, 03/09/2010 - 13:59 | 259276 Shameful
Shameful's picture

Japan is in a bad way but who will be the first to fall? Will it be Japan, the USA, the UK, the EU? It's a global race to the bottom and everyone is giving it their all!

Tue, 03/09/2010 - 14:02 | 259278 B9K9
B9K9's picture

I'm re-posting this from the Fed thread since it's become stale:

@Trav7777 - Nobody bothered to think through and discuss what would happen if/when the real economy PEAKED.  The interest component MANDATES growth and it is clear now that this cannot be achieved.  How can credit growth exist in a climate of NO RETURN?  That is where we find ourselves.

Travis, I'm not sure if you subscribe to the theory of the NWO, but some believe there are those who DID think about the end of growth. In the following article, Richard Moore makes an interesting point that not only did the PTB fully understand what happens when growth ends, but that they have made the appropriate preparations in order to benefit & prosper from the transition to stasis:

Capitalism is a vehicle that helped bring the bankers to absolute power, but they have no more loyalty to that system than they have to place, or to anything or anyone else. As mentioned earlier, they think on a global scale, with nations and populations as pawns. They define what money is and they issue it, just like the banker in a game of Monopoly. They can also make up a new game with a new kind of money. They have long outgrown any need to rely on any particular economic system in order to maintain their power. Capitalism was handy in an era of rapid growth. For an era of non-growth, a different game is being prepared.

http://www.marketoracle.co.uk/Article17568.html

 

 

Tue, 03/09/2010 - 14:24 | 259303 Lux Fiat
Lux Fiat's picture

Thank you for the repost.  Very interesting perspective. 

 I was well aware of the cycle of the lucky young growth company maturing to the point where is becomes a usually much slower growing large cap.  Hadn't thought about applying that same life cycle perspective to countries and economies.

Tue, 03/09/2010 - 14:31 | 259313 Shameful
Shameful's picture

The problem is on a national level when growth stops rot really sets in and usually you see a weakness and decline followed by an eventually dissolution of the nation. Look at Rome or most empires. All companies and nations eventually disappear and go bankrupt and are replaced. All things eventually come to an end or change so much as to not be recognizable.

Also growth is not the one way street, mankind does not endlessly grow. Humanity has a good check on itself to bring itself back down, conflict. Look at the destruction of WW1 and WW2. Look at the insanity of our foreign policy and then what a WW3 could do. Would be a lot of growth opportunities after the destruction wrought by a new world war. I'm not saying war is good, it most certainly is not, but is a mainstay of humanity. When the boom times turn and times look bleak the sabers start rattling in earnest.

Tue, 03/09/2010 - 17:51 | 259654 cougar_w
cougar_w's picture

Hah. More of that "recency" thing. You guys gotta think back further than WW2.

Most of the growth in banking and economics is due to free energy. Oil and coal mostly, going back 300 years. Energy is money, pure and simple. With energy you can do things you couldn't do before, creating value; build new and bigger things, travel farther, do everything faster. Money is used to buy energy or to transform energy into goods. But money doesn't create energy, it just finds it and moves it around.

The energy gravy train is nearing its end. Maybe a few years, maybe 10. Doesn't matter. It's going to happen way too soon for anyone readying this.

Then what?

Then it stops, my people. And all that wealth and all that stuff will be all you get, forever. And it won't even last that long. A few years, maybe 10, the actual duration won't matter. It will be gone too soon for anyone reading this.

cougar

Tue, 03/09/2010 - 19:03 | 259782 wake the roach
wake the roach's picture


Capitalism was handy in an era of rapid growth. For an era of non-growth, a different game is being prepared.

 

Yep, one would have to be completely ignorant to believe otherwise and like I have said many times here on ZH, that new  "non-growth" currency will be what I refer to as the carbon standard of capitalism. All those hoarding gold like we are going to return to the 19th century, infinite growth gold standard paradigm are deluding themselves...

It is clear that for over 30 years, the wealthy circles have been way ahead of the game in regards to understanding the physical limits of economic growth within a world of finite natural resources and please, do not mistake me as a NWO reptilian rockefeller, fema death camps, alex jones global enslavement type...

Money is ultimately a claim on energy, energy that allows us to consume natural resources. Allocation of resources is moneys secondary and least relevant property so dismiss it... If that is not clear then nows a good time to learn why...

Money is created from debt/credit and this debts interest must be serviced with positive (and exponential) economic growth within the base of the pyramid in order to maintain the survival of the system. Therefore, the collateral for the required monetary growth is in fact a claim on future surplus energy/resources. Once the physical limits to growth have been reached its all over, this is where we are today.

98% of the worlds energy is derived from fossil fuels, half the worlds population want to (and why not?) live like Americans that consume 25% of that energy and remember, there is no sustainable way to consume finite resources. Hopefully its clear why so much interest from the top levels has been paid to environmental degridation and carbon "pollution"...

The new carbon credit currency system will work opposite to the fiat debt currency's which require infinite resource consumption.  Carbon credit (your energy consumption claim) supply will need to be incrementally tightened instead of expanded in order to create profit from the bottom of the pyramid that of course moves too and is hoarded at the top, just like the old system ;-)...

Wealth will be created through any and all means of gaining resource (energy) efficiency. Those efficiency gains will become  money or "carbon credits" that can be saved, traded, invested in all the ways we have grown to love. African and many asian nations will once again have poverty pushed upon them as their nations will be forced to deindustrialise as carbon is monetised and so, energy becomes un affordable.  Then wealthy will pay them to regrow forests, plant trees, live without carbon energy etc which creates "carbon credits" (money).

The only benefits to this system is that it will make sustainability and environmental responcibility affordable and of course profitable for those that wish to maintain their positions in the upper levels of the pyramid... Killing two birds with one stone. This is the plan...

Hope ya'll found my scattered ramblings entertaining as most people often do ;-)

Tue, 03/09/2010 - 19:36 | 259833 wake the roach
wake the roach's picture

Oh, and I forgot to mention that the carbon standard is another pyramid scheme that will eventually fail once increases in energy and resource efficiency gains no longer support the pyramids foundation...

By this time however, the future generations (maybe children alive today?) will have infinitely sustainable lifestyles, energy supplies, populations, clean environments etc. At this stage however, money itself will no longer be required, a stage 1 (or 5) civilisation as many refer to it will be born...

 

 

Tue, 03/09/2010 - 14:06 | 259283 Anonymous
Anonymous's picture

Can't wait to see China repo parts of Japan after the bond defaults.

Tue, 03/09/2010 - 14:08 | 259287 ShankyS
ShankyS's picture

I'll be looking to actively short the duck (AFL) with 70% of their business derived from Japan it could get really ugly when it finally hits the fan over there. Supplemental insurance (or any "additional" insurance for that matter) will surely be deemed unnecessary no matter how "loyal" their policyholders are. It fell to 10.83 last time the markets collapsed (and that was on a domestic scare representing only 30% of their business), how will the market react to something even more threatening? Sitting at 52 now? You do the math.

Tue, 03/09/2010 - 14:37 | 259324 Anonymous
Anonymous's picture

It is true that people retiring, which are big holders of JGBs will be selling them, and this will put pressure on yields, but they will be selling them to spend on things.

Buying food, holidays, golf courses? whatever retired japanese people generally spend their retirement money on.

And these JPY will go somewhere into other households, government and the private corps.

Will spare capacity be enough to satisfy this demand without creating demand inflation and after that pushing yields? I have no idea, but if it were capabl, to produce more, with a reduced workforce, the monetary issue should not become a problem, as long as the perception of JGBs as a "safe investment" prevails across the different ages, so new savers buy the rolling JGBs.

Since these types of crisis are fast, but do not happen and end overnight, when it will move into Japan, I think there will be time to move quickly in and short JGBs or buy CDS, if still legal by then.. I am not sure it is worth waiting, paying carry until it happens, even if the rates there are ridiculous.

Tue, 03/09/2010 - 14:46 | 259331 Anonymous
Anonymous's picture

Am I wron or isn^t Japan the biggest T Bond holder ? Maybe they should sell some of their holdings and repatriate ? Hum...

Tue, 03/09/2010 - 15:35 | 259405 TraderMark
TraderMark's picture

China #1

Japan #2

 

Tue, 03/09/2010 - 15:26 | 259385 TraderMark
TraderMark's picture

Corzine left a nice gift for Christie on his way out... public unions in NJ negotiated in 2009 that if one is fired or furloughed all the rest get $300M in pay raises.

http://www.bloomberg.com/apps/news?pid=20601110&sid=aNvNPz_2gT7U

Nice! Just like how it works in the private sector.... errr...

Tue, 03/09/2010 - 18:35 | 259740 Ripped Chunk
Ripped Chunk's picture

NJ is done.

The tax base has had it with getting ass fucked, is finding jobs elsewhere and moving away. 2010 will be a record outflow of taxpyers.

Then the tit dries up and the cretins figure out that they will have to work for a living.

 

Tue, 03/09/2010 - 19:24 | 259820 Anonymous
Anonymous's picture

Come on Christie, that's so EASY. Here's a hint: What's $300M divided among zero state workers?

Tue, 03/09/2010 - 17:23 | 259594 Anonymous
Anonymous's picture

You say "recency bias" like it's a *bad* thing.

But I just jumped off the top of my brokerage house (sending this from my blackberry) -- I've already covered more than 90% of the distance to the ground and I still feel fine.

Tue, 03/09/2010 - 17:47 | 259642 BlackBeard
BlackBeard's picture

How do you say "Oh Gaawwwdd!! We're so fucked!" in Japanese?

Tue, 03/09/2010 - 17:55 | 259667 cougar_w
cougar_w's picture

Just the way you said it; there are no equivalents in the Japanese language for expressing that degree of fucktardedness.

 

Tue, 03/09/2010 - 23:53 | 260184 tj3
tj3's picture

Hari Kari?

Wed, 03/10/2010 - 06:37 | 260368 Anonymous
Anonymous's picture

Running on a deficit is more the hallmark of an imperialist government than anything else.

Japan has been following into the steps of the US by nesting its debt into the US debt.

Thu, 04/15/2010 - 10:21 | 301916 mark456
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