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Guest Post: JPN ? US: Japan Is Not Us
Submitted by Gonzalo Lira
JPN ≠ US: Japan Is Not Us
Japan went through an equities and real estate boom during the 1980’s—a boom that was really a bubble. And like all bubbles, it eventually burst in 1990.
Since then, Japan has been lost. Equities have never again reached the heights of 1990, nor have real estate prices. The Japanese government has spent a fabulous amount of money for domestic stimulus, creating the most modern infrastructure on earth—yet it hasn’t helped at all. GDP has been anemic, as the population slowly begins to shrink. Japan is in full-on deflation—in every sense of the word.
Now that the United States has had its own real-estate bubble pricked, a lot of smart people have been selling the idea that the U.S. will experience what Japan has experienced: Persistently sluggish growth. Continued fiscal deficits, carried out by the Federal government in order to prop up aggregate demand by way of various stimulus programs. Slow and painful working out of the debt overhang. All of this happening within a deflationary environment, whereby the dollar—just like the yen in Japan—accrues value, as full-throttle deflation sets in.
In other words, this camp believes America is set to begin its own version of Japan’s Lost Decades.
This camp falls for what I call the “Japan Is Us” fallacy—and they are wrong.
Their rationale is simple—and superficially persuasive: Just like Japan in 1990, the United States went through a bubble in equities and real estate, which eventually popped in 2007–‘08. Since then—just like Japan—the U.S. has been experiencing deflation. Just like Japan, the U.S. now has zombie banks, the so-called “Too Big To Fail”. Just like the Japanese government, the U.S. government is spending-spending-spending, so as to prop up aggregate demand. The Federal Reserve—just like the Bank of Japan—is issuing enormous sums of money in order to prop up aggregate asset price levels—the Fed’s policies are so reminiscent of the BoJ’s money printing that Bernanke & Co. have borrowed the term outright: Quantitative easing.
Everything screams Just Like Japan—right? So according to the “Japan Is Us” camp, 2010 through at least 2015 will be just like Japan between 1990 and 2010: Sluggish growth, stagnation—and most important of all, deflation, deflation, deflation.
But there is one key difference that the Japan Is Us crowd conveniently ignore. They ignore it out of blindness, or incompetence, or—occasionally—out of malice. They ignore this key issue like the elephant in the room that’s gone and got drunk, and is now making a fool of himself: Balance of payments.
Balance of payments (BOP) is the measure of a country’s total exchange with the rest of the world. From the Federal Reserve’s “Fedpoints”:
- The balance of payments is an accounting of a country's international transactions for a particular time period.
- Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit.
- The BOP includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets; and the financial account, which records investment flows.
(Emphasis added.)
The current account is the key metric: It’s the net balance between imports and exports. In other words, the trade surplus or deficit.
As everyone knows, the U.S. current account has been negative for a long, long time—in fact the last time the current account was in surplus was 1973. Since then, current account deficits have totaled about $7.5 trillion in nominal dollars. (Data is here.)
Japan, meanwhile, has had a current account surplus. I found a nifty chart that neatly summarizes the differences between the two countries:
Current account surplus/deficit per country as percent of world GDP. De Mello/Padoan.
(Original chart by Luis de Mello and Pier Carlo Padoan can be found here.)
To finance this massive current account deficit, the U.S. has sold assets to the rest of the world. The U.S. Federal government has gone into deficit spending on top of this current account deficit—it too has sold assets to cover the fiscal deficit.
So in a net sense, both the U.S. Federal government and the United States as a whole have “sold assets” to the rest of the world, in order to pay for their spending.
What “assets” have been sold to pay for all this spending? Basically, Treasury bonds. And as everyone knows, Treasuries might be called “assets” by the sophisticates, but they are really nothing more complicated than a loan.
In other words, Americans and their government have gone into massive debt with the rest of the world, in order to finance all this spending.
Japan, meanwhile, has been carrying a current account surplus. Therefore, the Japanese government has been borrowing money not from overseas, but from its own citizen’s savings. All of the Japanese government’s stimulus spending has been paid for by the Japanese people.
This is the main difference between the United States and Japan. It should be obvious—and ominous—what this difference means.
The U.S.—unlike Japan—cannot pay back its loans: Because the United States is broke. The Federal government is running deficits of around 10% of GDP. America as a whole has racked up $7.5 trillion in current account deficits over the last 25 years—over 50% of total GDP—with no end in sight.
So the United States—unlike Japan—has been spending what it does not have. The U.S.—unlike Japan—depends on the rest of the world to lend it money to continue on this spending spree. Americans—unlike Japan—do not produce enough to self-finance its government’s stimulus programs.
Therefore—unlike Japan—the United States will eventually be unable to pay the Treasury bonds it has issued. Therefore, as I wrote in A Termite-Riddled House, there will be a collapse in the Treasury bond market. Therefore, as I wrote in How Hyperinflation Will Happen, a panic in Treasuries will mean a run up of commodities—which will bring about the death of the dollar, and hyperinflation in America.
This is why Japan Is NOT Us.
But even if you don’t subscribe to my hyperinflationary scenario—even if you think I’m full of shit on this issue (and plenty of sensible people think I’m full of it to the brim)—it’s obvious that Japan is not like the United States—it’s obvious to anyone who looks at the situation evenhandedly: The contrast in the two countries’ balance of payments is enough to show definitively and unequivocally that they are not the same.
The source of the two countries’ funding is key: One produces its own stimulus from its current account surplus, while the other borrows it from abroad, adding more debt on top of its already existing debt. Therefore, one country’s spending and stimulus programs—Japan’s—are sustainable, while the other’s—America’s—is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan, but lethal in America.
So if it’s so obvious that the two countries’ situations are so different, then who is selling this clearly false notion that Japan Is Us?
Why, people who have a vested interest in this point of view. People who are selling things. Or people who are trying to explain away why they have lost so much money by making the wrong bets.
For instance, money managers. A lot of pseudo-Austrian money managers in particular have been doing the hard sell to their clients, insisting and insisting that the U.S. is experiencing Japan-redux. They have been steering their clients’ money to Treasury bonds—because if you were in Japan in 1990, their sovereign bonds turned out to be the smartest investments in the long run.
But as we have seen, the U.S. is not Japan.
So these money managers who are playing the Japan Is Us trade have either lost their shirt, or are terrified that they are about to. Because everyone knows that U.S. Treasury bonds are overpriced, and that it’s only a matter of time before this Treasury bubble pops.
And when it pops, it will be bad—a lot of people counting on the United States following in the footsteps of Japan won’t just lose a bit: They’ll lose huge. They’ll be wiped out—or maybe they won’t be wiped out, but their clients sure will be.
That’s why so many people keep insisting that Japan Is Us!-Japan Is Us!-Japan Is Us! They are selling their clients on something, or else trying to explain away their underperformance, by sheer force of personality—while ignoring the blindingly obvious fact that the U.S. is not Japan.
One prominent blogger in particular has been going insane, insisting day after day that Japan Is Us, to the point of psychosis—evidence to the contrary be damned. Every day, this blogger—Michael “Mish” Shedlock—bangs on the same old tired drum. Mr. Shedlock is affiliated with Sitka Pacific, whose performance leaves something to be desired. There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments. So it is reasonable to question whether Mr. Shedlock is ranting and raving how the U.S. is following the deflationary spiral that Japan did because he genuinely believes what he is saying, or because he is trying to convince someone—maybe his clients, maybe himself—of something that he knows in his bones might not be true.
What is true is that anyone who has made bets that Japan Is Us will soon find out if they were wise bets, or foolish ones. The Treasury bubble is soon to burst—so we’ll know the fate of the American economy soon enough.
If those bets turn out to be foolish—if it turns out that, indeed, Japan Is Not Us—just keep in mind one final fact: An average person can survive a leap from a third floor window, even a fourth floor window.
But a leap from a fifth floor window or higher? That’s how you get the job done right. You jump from a fifth floor window, and you’ll go splat!—guaranteed.
Full disclosure: I do not manage any money except for my personal stake and my family’s private interests. I do not provide professional investment advice to anyone. I am not affiliated to, nor am a spokesman for any third party investment or financial company. I do not endorse any product, save Head squash raquets, Slazenger squash balls, Montecristo (Cuba) cigars, Cálem vintage port wines, and Durex X-Treme X-Long X-Large X-Tra Comfort condoms.
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Treasury bubble soon to burst: define "soon".
Exactly. Been hearing that song for a long, long time.
*
Before entering hyperinflation, there's always a period of fake deflation like sea water retreating before the tsunami strikes. I think what Japan has experienced - 2 lost decades - is merely a retreat before the final mass inflation erupts.
welp as long at Japan keeps surplusing inflation won't show up for a while.
Great Point. Time was not defined. So when our time is up. It will be a mass concert when we all sing alike.
Finally somebody said it! The US *WISHES* it can replicate the SUCCESS of Japan ove rthe last 20yrs in fighting their situation. Ours will be much worse. And I do believe that the TSY bubble will burst, but w/the FED on the bid, may take a lilbit ;)
Yes Japan had the luxury of being able to export to our market and obtain a massive trade surplus.
We will have no such luxury.
Although today China and Japan now compete for the luxury to export to our market. Japan's third lost decade will really BITE as the US consumer suffers Kondratiev Winter and the Japanese suffer China's neo-mercantilist forrays into what was once Japan's market share.
Boy, Gonza, you missed by far & away the biggest differences between Japan and the US: race, culture & crime. Per Wikipedia:
In 1989 Japan experienced 1.3 robberies per 100,000 population, compared with 48.6 for West Germany, 65.8 for Great Britain, and 233.0 for the United States; and it experienced 1.1 murder per 100,000 population, compared with 3.9 for West Germany, 1.03 for England and Wales, and 8.7 for the United States that same year.
Notwithstanding WWII, Japan is an inherently stable nation based on strict cultural norms. In contrast, the USA is an incredibly violent, unstable nation that owes its entire existence to continual conquest, expansion and expropriation.
These characteristcs have served us well for four centuries, and indeed, continue to provide for all our daily comforts and sense of disconnect from the real world of resource scarcity and wealth production. (That is, if it wasn't for our superior technological fire-power, we'd be no better off than Argentinians or Russians.)
This means the real difference between Japan and the US is not monetary, economic, fiscal or otherwise. We're like a shark - if we don't keep moving, you don't want to be here when the SHTF.
note the timeline of the sinking of the NK ship as relates to Japan elections and Okinawa protests. Then note the timing of the Japan China flare up and the elections. Further note the appointment several days ago of new Defense Minsiter deemed hawkish which is to say pro US, China skeptic and pro US basing. Coincidence?
Yep, B9K9, Japan is a whole different world, culturally. Lived there for a couple of years. Aging, group-oriented, ultra-conservative population. Were the world's top savers, until China replaced them recently.
Gonzalo is right about the difference between the Japanese and U.S. economies.
Japan's debt/GDP is 206%, but they're not owned by the rest of the world like the U.S.
U.S. debt/GDP is 63% if you believe the lies that the FED is telling us about the real value of the securities it holds, otherwise it's 93%.
There's also the difference in population growth rates to consider. GL mentions it very briefly above, but you don't need more and more money if there aren't more and more people.
"To finance this massive current account deficit, the U.S. has sold assets to the rest of the world."
Which assets would that be? Treasuries? Treasuries are a loan, not an asset.
Well the treasuries in a technical sense are assets. The asset is the tax base or whatever the government decides to own next, war ships, your child's future, my left hand, your family business.
Even more accurately, they're best described as "toxic" or "imaginary" assets.
I think the better word would be forfeited. All of our productive capacity..
oops...
Perhaps a closer reading is in order?
I believe he covered that (emphasis mine):
well it is debt and yes it is a loan, but it has backing (sorta). I equate treasuries to like a mortgage you took out on your grandkid's first house.
not all loans have backing, look at your credit cards. So there is "assets" to prop up treasuries.
Thank you!
GL
Can't treasuries be used by banks as collateral for loans from the fed.?
Yep, it's a perverse version of quantitative easing.
I figure the ramp-short squeeze has been about this all along. The banks buy treasuries, borrow on these "assets", and ramp stocks on these POMO days.
From an accounting perspective a loan receivable, such as a Treasury, is an asset on the balance sheet of the lender.
And so is "goodwill"...
JAPAN?---WHAT ABOUT THE NEXT FEW WEEKS? IRELAND IS TOO PIIG TO FAIL AND WILL TANK THE EURO AND THE EQUITY MARKETS SOONER THAN YOU CAN SAY SUSHI.
SEE MY COMMENT ON IRELAND--THAT OHER PESKY ISLAND COUNTRY JUST OFFSHORE--BELOW.
TYPING IN ALL CAPS IS THE AWESOMEST THING EVAR. JUST BY PRESSING THE THE "CAPS LOCK" BUTTON AND THEN PROCEEDING TO TYPE NORMALLY, YOU'LL SOON BECOME NOTICED BY EVERYONE. PEOPLE WILL START TAKING YOU MORE SERIOUSLY ONLINE AND YOU'LL SOON BECOME AN IMPORTANT AND RESPECTED INTERNETS USER. THEY WILL FIND EVERYTHING YOU SAY TERRIBLY INTERESTING AND INSIGHTFUL, MEMBERS OF ALL GENDERS WILL WANT TO HAVE SEX WITH YOU AND YOU'LL BECOME EXTREMELY GOOD IN BED. NOT ONLY WILL IT DO ALL THESE THINGS AND MORE, IT WILL ALSO MAKE YOU SOUND LIKE SAMUEL JACKSON, JUST LIKE IN HIS MOVIES. AN UNFORTUNATE SIDE EFFECT TO THIS GREAT ADDITION CONDITION IS YELLING "MOTHERFUCKER", "FUCKING RACISTS", "FUCK YOU, NIGGA", " ENGLISH MOTHERFUCKER, DO YOU SPEAK IT?" AND "BITCH PLEASE". ALSO TAKE IT TO THE NEXT LEVEL, IF YOU FUCKING DARE.
BUUCKIN' AAAAAAAAAAAAAAAAAAAAAAAAAAA CAPS LOCKS RULZ!
can i haz cheezburger nowz? thxbynw
Caps lock == cruise control for cool.
How is it that anyone on Planet Earth doesn't know this by now?
They are used as assets when the banks lever up and buy stocks using the treasuries as collateral.
I wouldn't say Japan is in a great way, that bomb will go off in due time as well. However right about the US. We rely on the kindness of foreigners to keep floating us by. When the foreign gravy train stops the options are print, tax, or default. No way the tax hike of that level flies, and no way the spending stops, which leaves only one option. The only chance America has is if the world is terminally stupid and willing to lend to us at shockingly low rates for a few decades as we mire in the mud.
But hell I hope I'm wrong. I would love for the US to have the same stagnation as Japan. The alternatives are horrifying to say the least. And we should have deflation...to bad our monetary system is tried to faith and not anything tangible. Maybe we should ask the Pope to help people keep the faith.
I hope your right. I'd rather know the truth than wait around to be embarrassed and humiliated and without escape plans.
Both countries have large populations in the process of retiring, lasting for a while to come. This group does not spend as much and withdraws money from the economy at a much higher rate.
I <3 boobs!
That's dai anyone read the article about how the Fed is tinkering with the idea of 1-2 trillion more in bond purchases to surpress rates further?
http://www.cnbc.com/id/39271495
i hate CNBC but if the fed is that stupid 9which they are) we are only prolonging the inevitable and making the situation worse.
Hyperinflation BITCHEZ
Read it.
Read further down, when they talk about "announcement effects". ;)
Let's not forget Mr. Hugh Hendry also believes the deflationary thesis. As the graph shows (which Mr. Hendry has pointed out), the US produced a current account surplus during the recession in the early 1990s.
I don't necessarily agree with that thesis- I am just trying to point out that the Treasury run can go much longer than anyone expects. If the US starts to save, it will buy time before the inevitable plunge in Treasuries. Hence, the reason Mr. Hendry seems to believe the 'deflation followed by inflation' supernova.
Come to think of it... where has good ol' Hugh been recently??
At the end of one of Hugh's speeches or something I remember him saying "I'm probably wrong because Faber is usually right". I believe Faber is in the hyperinflation camp..
'..the US produced a current account surplus during the recession in the early 1990s..'
I think that was just sleight of hand by Mon-sewer Rubin, was it not?
I don't believe there has been an honest surplus since early 70's
Clinton (Rubin) used accrual accounting which amounted to wishful thinking on huge tax receipts to *show* a balanced budget ON THE BOOKS, but in the future, not in real life. We did not have *cash* on hand or even equity on hand that would
have been tangible assets to "balance" our budget. However, starting with Reagan
(mid 80's)and continuing with Clinton (even with the then largest tax increase
in history) we were on a better path towards balanced budgets. The disclaimer
there though.... we borrowed money to pay for pet projects, just as Bush II
became addicted to doing, because we knew SS and both Mediscare programs were insolvent, so the budget was balanced "on the books" while the National Debt
(what we owe everyone else) went through the roof!
Its going to get interesting when either Japan or China wakes up and realizes what they really own in American debt is probably a rough grade of toilet paper, but here's my question. If either one of these players does start to dump our trash, why won't Bernanke just raise interest rates to more attractive levels to encourage other buyers to step in?
I know this is simplistic, but why won't that happen?
The Chinese have already smelled the coffee. This year, they've quietly traded at least 5% of their U.S. holdings for other popular brands as well as hard assets in the developing countries. They just can't bail too fast or they cut their own financial throats with a sudden depreciation of these USA IOUs.
Every OECD country is selling massive amounts of debt
Every OECD country is buying debt, financed by debt sold by its own treasury and from debt money created by their own reserve bank
So why can't all european countries abandon euro and start financing their own debt by asking thier own reserve banks to keep buying their bonds for ever just like US and Japan??
Ooh, this is even tougher to get than Zen theology!!!!!
It's the same as someone who is in massive credit card debt, and keeps paying the minimum on one with a different card. Eventually, you have to apply for more cards, and, guess what, at some point no bank will give you another card because they've checked your credit rating and you've got too many cards with too much debt. Once you are considered a bad risk, game over, no more cards.
If a government's central bank buys it's own debt too long, everyone loses faith in that country's economy, and its currency, and the currency will drop in value compared to the currencies of all the more economically sound countries. There are more eurodollars (dollars held outside the U.S.) than dollars in the U.S. If those foreign dollars came flooding back into the country, the value of the dollar would plummet.
The only way to stop it is to refuse to convert the dollars, or dump your dollars and come up with another currency, essentially screwing all the holders of dollars. Your standing in the world has just dropped below the piigs, and is right about where Argentina was when its currency was devalued. |B^)
Right now the government is running a Ponzi scheme, by selling treasuries (IOU's) to run the government and pay the debt service on the last IOU's it sold. Its bond holders are beginning to sweat!
If the Fed raises rates, it would kill housing and Wall Street, and the government would not be able to roll its debts. In the 70s, the Fed had to raise rates to 20% to fight off hyperinflation. The dollar survived because America had lower debt, more industrial production, less garbage on Wall Street, a less corrupt and burdensome government, etc. If rates were 20% today, it would be Game Over. This time it's different.
hahaha rates at 20%... make it 5% to 10% and it's game over! who can pay interest rates that high?
large caps - yes.
small caps - maybe.
unlisted "small caps" - no (this is by far the matority of companies in the us).
households - hahahahaha.
government - well...
Once bonds begin to tank, rates will raise as you said, however, not in a controlled fashion. It's likely to create a tipping point.
Every country knows that the U.S. government runs on debt, and that if it can't sell its bonds it can't continue to function, and service it's debts.
Rates would skyrocket, if an investor could be found that would want that kind of risk.
Chances are that bond auctions would fail and the dollar would collapse.
"But even if you don’t subscribe to my hyperinflationary scenario—even if you think I’m full of shit on this issue (and plenty of sensible people think I’m full of it to the brim) ..."
Thank you. Yes, you are. If there's going to be hyperinflation, it's going to be triggered by rapid money supply expansion, not by some idiotic gargantuan run on oil futures that would only trap the buyers into selling them back to processors at a massive loss.
"it’s obvious that Japan is not like the United States ... One produces its own stimulus from its current account surplus, while the other borrows it from abroad"
True.
"Therefore, one country’s spending and stimulus programs—Japan’s—are sustainable, while the other’s—America’s—is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan"
Wrong. It's true that the Japanese government's creditors are far more reliable and loyal than the US government's creditors, which allows the Japanese government to borrow more for longer. But Japan's borrowing isn't "rock solid" or even "sustainable", and since it's so much further advanced than the US's - around 200% of GDP - it's not a certainty that Japan can last longer at its current pace of borrowing than the US can last at its current pace.
Japan's borrowing program depends on a steadily increasing pool of domestic savings. But the aging demographic is pushing the savings rate inexorably down. Eventually, the domestic savings rate will not be enough to fund the government's borrowing. But Japan won't be able to afford to pay the interest rate that foreign lenders would demand. So Japan will be forced to slash spending and restructure its government debts.
But since the US with its footloose creditors will probably get into fiscal crisis earlier, it might not make sense to spend a lot of time worrying about Japan.
That may be partly true, but a large portion of it really is that japan continues it's trade surplus, so I know at least for the near future that my Japanese yen can still buy me stuff in japan with more or less stable consistency (no dramatic changes in japanese purchasing power with japan). Unlike the US which largely depends on people being nice to us.
As for hyperinflation we may not see Weimer republic, but I wouldn't be surprised if we had 50% inflation yoy. Your argument falls flat mainly because the Fed has pumped what 3 trillion? And it will back stop up to 8? The Govt is backstopping another 4-6? The money is there. It's like filling the pot with water just not turning on the fire.
The aging population is what will finally cause the inflection point for Japan. For the US, I think we will reach it quicker because of our debt problems.
"Japan's population is aging (see Aging of Japan). During the 1950s, the percentage of the population in the sixty-five-and-over group remained steady at around 5%. Throughout subsequent decades, however, that age group expanded, and by 1989 it had grown to 11.6% of the population. It was expected to reach 16.9% by 2000 and almost 25.2% by 2020. Perhaps the most outstanding feature of this trend was the speed with which it was occurring in comparison to trends in other industrialized nations. In the United States, expansion of the sixty-five-and-over age-group from 7% to 14% took seventy-five years; in Britain and the Federal Republic of Germany (West Germany), this expansion took forty-five years. The same expansion in Japan was expected to take only twenty-six years."(Wickipedia)
Japan will continue to have the largest % elderly draining the economy for a while.
Well, that just depends upon ones frame of reference... If referring to Japans balance of payments having allowed it to tread water then no, the U.S. is not Japan. But what is the difference today between the debtor and the creditor? Nothing, nada and zilch. Two sides of the same coin. The US is japan, in that they are both fucked, just like the rest of us. Ich bin ein Australianer.
http://www.youtube.com/watch?v=O-4EzKLpJT0
Was it just me who thought the title was a play on the ternary operator? (At least before I realized it made no sense)
Just you—I'm not smart enough to even SPELL tertianaryiousness.
GL
repeated comment—sorry.
http://pages.interlog.com/~gilgames/empire.htm
Mortgage Bailout, Roman Style
http://www.fourmilab.ch/fourmilog/archives/2008-12/001089.html
Roman Timeline
http://library.thinkquest.org/22866/English/Tijdlijn.html
Nuke Jap.
In other news, the U.S. taxpayer is now guaranteeing the State of Mexico's debt:
OPIC's First-ever Guaranty of Local Capital Market Bond Issuance Supports State of Mexico
"The Overseas Private Investment Corporation (OPIC) today announced its first-ever support of a local currency capital market bond issuance, guaranteeing 2.765 billion pesos of bonds (approximately $217 million) issued in the Mexican market. By relying on domestic rather than international investors, the project will expand Mexican capital markets and their ability to support infrastructure improvements in the country."
i've always like mexican music.
Umm, while I agree that the US, owing money to foreigners, is in deeper doo-doo than Japan, I completely missed where you explained how Japan can actually pay all of its debts.
I see no reason, certainly none that you provided, not to think that all those Japanese housewives planning to retire on their government bonds are in exactly the same spot as the US Baby Boomers planning to retire on the Social Security into which they've paid for forty years.
Japan maintains positive trade balance.
People really don't understand that in large measure being a net exporter is like being employed and not eating out so much, vs. being a net importer is taco bell 3 times a day and working once a week at min wage for 2 hrs.
Mr Lira is right.
US Treasuries are a bubble, whose day of reckoning may be postponed by obscene FED intervention. But Treasuries are a peaked bubble that will pop. The timing of the inevitable bubble-burst depends on the 1) amount/length of FED intervention and 2) cooperation from foreign central banks. Ask yourself, How bad do foreign govts want to keep the FRN as the world's reserve currency? Not that much, these days....
The emporor has no clothes.
Thank you—my point exactly.
GL
On the one hand, as long as the ponzi's working, foreign CB's will not want to sell UST's, since this would strengthen their currency (though they could buy other dollar-assets, but a collapsing UST would also strengthen their currency).
On the other hand, if the event horizon is perceived as near, they will want to sell yesterday, as something is better than nothing.
Which implies that the US Tsy holders will hold just slightly too long, and then panic when it is slightly too late? He who panics first, panics best, they say -- would that be correct?
So you are claiming that Japan will pay all of its bonds. No Japanese citizen will lose money if he/she holds the bond to maturity?
It is difficult to be a Treasury bubble when there's a prick everywhere you look.
and all that comes after is sleep no less.
Agree completely. I have a question however, for Gonzalo, and other ZeroHedgers. After a USD collapse, what replaces it as the world's reserve currency? I know one popular answer will be the Yuan. But I think China has demonstrated again and again that they want to avoid making the Yuan the global reserve currency because of the long term detriments that it can bring. Is an SDS the future as the IMF has proposed, or is there another viable alternative?
There's a nice market in old Russian and Chinese railway bonds that are really works of art the print work is so intricate,they were never honoured of course.
Benny and Timmy won't default of course,they will just keep buying the new bills noone else will buy,followed by a revaluation of the dollar and most western currencies to gold.Anyone with a dollar now will be lucky to end up with 10,20 30 cents by the time its all finished.
A fact Mish completely refuses to acknowledge.Lira may have a point.
The reevaluation you speak about will come after massive defaulting and bankruptcy in both the private and public sectors. It will be the hyperinflation at the end of the deflationary tunnel. Lira is right that the bond bubble is going to pop. Mish is right that we are going to have deflation. The deflation will be only a few years before the SHTF moment occurs, Mish misses that point.
"sovereign bonds—are rock solid in Japan"
The Japanese government may only be screwing over its own people, rather than the rest of the world, but surely there is a limit to this?
Look at Zimbabwe, at some point the people called bullshit on the Mugabe government's bonds (the large part of the Reserve Bank of Zimbabwe's 'assets'). Even a hardass government cannot endlessly force its worthless paper onto the general populace.
Yeah there's a limit it's called death.
Japan may not be us in other ways.
1) It is far easier for us to either default...or threaten to...without as severe a set of repercussions as would be fall Japan?
2) It is far more possible for there to be scenarios where the US is worth thirty cents someday when the rest of the world is worth ten cents?
3) It is a weak and unstable world everywhere you look. Relative to others, are Treasuries weaker or stronger investments for the rest of the world?
In the land of the blind, the one eyed man is king
4) I do not at all like or respect the elites we have had for the last 30 years. Does not mean they cannot slide through for a long, long time with some inflation, some deflation, some low growth, too much unemployment, some defaults, more debt, anger, more people in poverty, more loss of freedom. It does not have to end in end times doomsday...just grim times. The world is full of companies and countries that go on and on long past sense and likely success.
I sometimes think the logic of many scenarios is that they all debate which way to a terrible end. Maybe there will be some of all these effects and a lot of less for a long time. Tougher, less to invest in, less payoff, less to spend.
From 1950 until the 1980's the logic and the smart guess is that we would eventually have a catastrophic nuclear war that would threaten mankind's existence. The probabilities were dead right likely. Inescapable.
Could happen.
Rape. Murder. Its just a shot away. Love. Children. Its just a kiss away.
acknowledgements to the Glimmer Twins
tl:dnw I agree with you (Wondering) 100%.
Is there a way for China to massively bid up the Yen using all their US treasuries, flood the world with even cheaper exports while killing Japan's export economy? If China wanted Japan out of the way economically, wouldn't killing their cheap exports accomplish that?
Spealing for myself, I'd love to hear a round table on this issue with Tyler, Mish, Gonzalo, Denninger, Timmy and good ole Benny. Man can you imagine!! Shit--invite Krugman too for some relief humor. Milestones
The catastrophic end points can be delayed far, far longer than any of us can imagine. those fuckers play the game with unimaginably lopsided advantages.
The only thing you can do is play it around the edges, chip, chip, chip, and put risk control front and center, all day, every day. The US Gov will bitchslap you everytime you go long the End Times...
Sheeesh ok ..I 'll take the bait ...1)inflation already happened 2) the US has funded world growth..nobody is funding the US .. 3) there is nobody to DUMP treasuries to.. 4) US being politically dysfunctional is useful temporary posture 5) If push comes to shove there are at least 3 simple things the US can do to maintain economic dominance 6) If you take 1000 empty barrels of credit and pour 200 barrels QE 123 into them ..you still have 800 empty barrels = deflation 7) The next inflation will happen when excess capacity with debt forgiveness and reorganization equalize and kick off a new cycle 8) Debt forgiveness has barely even begun yet (3rd inning) and excess capacity wont be balanced for 10 years unless there is a war..
US has options ..can Washington get it together politically? and more importantly do they want to?
The most important difference is the Japanese are stoics who can suffer through tons and tons of misery quietly...unlike Americans who have already entered a period of vapid T Party histrionics which will lead to only God knows what.
Populism is a tonic. The masses are feeling indigestion. IMO, it's all historical and therefore should have been entirely expected. Based on our history, what will happen next is also somewhat predictable: a populist executive will run roughshod over the other branches, fix the financial system, oppress minorities or anyone else that pisses off the nativists, and then quietly recede into the background as he (or possibly she) slowly becomes no longer needed.
define eventually. you are correct that the US isn't Japan and that eventually we will crash, but right now it is a duration game. Japan has serious structural issues that will put it to the test long before the Treasury market here in the US collapses. Japan is carrying 200% debt to GDP currently. 90% of which financed internally by an heavily aging population. They don't have the economic flexibility to move in the short term that we do. Right now, the intervention by the BoJ has some legs, but what happens if a full blown QE2 is implemented alongside further easing by the EU? How long/underwater can BoJ defend sub 82 yen level? What happens when the public isn't there continue financing Japan's Keyensian nightmare and they have to go to the market? 1% long term debt going to be acceptable? I highly doubt it. The US is definitely not Japan, but in the extend and pretend game currently in action I wouldn't want to be either, especially the one with the least flexibility.
Mr Lira said "Mr. Shedlock is affiliated with Sitka Pacific, whose performance leaves something to be desired. There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments."
Sitka Pacific returns look respectable to me and I think the average investor would love to have achieved these returns over the past years:
http://www.sitkapacific.com/files/Sitka_Pacific_Capital_Management_Absol...
http://www.sitkapacific.com/files/Sitka_Pacific_Capital_Management_Hedge...
http://www.sitkapacific.com/files/Sitka_Pacific_Capital_Management_Divid...
And how's your performance Mr. Lira?
Oh that's right you don't manage money professionally or offer investment advice, but yet you're telling everyone about this great bond bubble. You rant about hyperinflation, but if you'd been short Treasuries your returns would be worst than Sitka Pacific. I always get a laugh out of you amatuer investors always quick to critize the professionals, but never offer proof of your superior returns.
do you really want to see the proof?
thanks for the week's best laugh!
Professionals made this mess. Good job, "professional".
GL didn't claim he could or did beat so much as Sitka's Superbowl picks -- he merely stated something that could contribute to what he see's as Mish's somewhat stubborn stance. Meanwhile *you* decide it's an attack on your "profession" and get all up in somebody else's grill?
News flash -- your "profession" is a joke, and if you have any pride in it whatsoever, then you are the punchline.
The Fed will make sure there'll be no failed Treasury auctions. Of that I am sure. Primary Dealers have to buy all the debt foreigners are too smart to pick up. The Fed's POMO activity will continually bail out PDs who will continually pump stocks with the tip money. This farce can go on for years and years. Wait I learned this on ZeroHedge, who am I talking to right now.
I'm thinking nothing will happen until about 2015 at the earliest. Yawn, big stretch, I'm going to bed. Wake me up when the fun starts.
Fuck me another pissing contest between Economic experts. Can't just cage match the lot of them and the winner is the one we listen too?
sorry pal,,,dont buy it,, u know shit as almost all here
#The source of the two countries’ funding is key: One produces its own stimulus from its current ac
here's key bullshit phrase... pal current account surplus have nothing todo w/ deficit.. JAPAN IS BROKEN as US is.. why ? its simple..
Japanese PRINTS 1 yen for 1 yen in federal budget... thus its 100% budget true deficit.. US is a abit better 0.8$ for 1 each$.. soo
#2
as far as current account concern.. well Japaan is biggest currency manupalator,, Japan have had ZIRP for so long,, so no wonder current account is in surplus.. YEN is mother of caryy trades around the world.. so demand is big..
but that will change,, as soon as US/EUROPE will be on ZIRP too v.v,v, soon..
alx
You're missing key point. We trade dollars for goods. They hold worthless paper we hold a good. I'll take that trade anyday. And someday those dollars will be worth even less. Sorry Sucka!
one slight differnce between Japan and USA is Japan is peaceful and quiet while the USA is uber loud and obnoxious. in my book that makes Japan a target for something horrible. they seem so nice and pretty...now when it comes to a real blow up in the muncipals i'm also betting on it starting in "some nice little state" too. Wisconsin is my pick precisely BECAUSE everything is fine there. In other words "the real bad boys have miraculously been spared--but in order to continue their bad boy ways they must blow up something cute and cuddly." Japan and Wisonsin come to mind, not Illinois or New York. California and Florida on the other hand...
Excellent post Gonzalo. Absolutely true that the Japan is not US.
And not only the Balance of payments, there is one more big difference, the people.
I have worked in japan for 3 years, can speak their language and i know their culture very well. They are hardest workers and enormous savers..Even in the best times...they save money..everybody...
When the hard times hit the world with hyperinflation ,the japanese people will feel the same difficulties like many other nations, but they will never lose their peace of mind.
I will give one example: i was working in a Japanese company and my boss had started his own business a year before i started , and totally we were only 11 people working in the same office...
My boss is a rich man( from his family), he was married with a young lady, who worked in a bank till she get married , she even had an MBA degree but she has stopped working after marrying with him and they had two young babies when i met them.
Our office needed regular cleaning once a week and guess what who was cleaning our office ?
Yes, his wife..
She was coming once in every week to clean the office... this is just a simple example to understand the how Japanese minds work..
This was 17 years ago, there are some changes now like young people spend more money than their elders , but still its not a big change..
They are not like any other people..Its quite normal to help her husband, clean his office, and save some money....
Can any rich guys wife can do this in US ?
This is the other difference you don't know.
China and Japan has been having disputes for hundred of years. Now out of nowwhwere, they started to quarrel over a patch of sea with a few islands because of the billion of barrels of oil underneath. Below is something written by china scholars about retaliation measures to counter the japanese such as buying the JPY, stop exporting rare materials to japan, stop buying japanese goods, sent in chinese navy to drill the oil.
However, this is just talk and discussion. But i like the idea of chinese buying JPY as Japan is one of the major trading partner of china. You can't get wrong buying the JPY. It is better than buying the USD these days.
Below is the news written in chinese:
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?????????????????????“????????????????????????”????????????????????????????????????????????????????????????????????????????????????????????????????????
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??????????????????19????????????????????????????????????????“???????????”?
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Well, I thought there were a couple of typos in there.
My reading of it was:
Timbo and Bennie & the gang are going for 10-15% inflation for the next decade (it has already started in foodstuffs); energy costs go sky-high, wage-caps throughout and high undercover taxation abounds.
In that way they hope to have the soft landing that their friends want, the Treasury debt gets devalued, and the standard of living of the sheeple just shrinks to nothing.
They will fail, cos the banks can't keep up.
The battle will be over the alternative currency, and can they stop one reaching critical mass (ie Gold)
The biggest difference between Japan and the US are aircraft carriers. They are what has allowed the US to get to this point and what will prolong the current system for awhile longer. When they come home, the US will be in trouble.
http://www.ibtimes.com/articles/62761/20100916/boj-intervention-us-dolla...
Gonzalo,
Your case is well thought out and as far as it goes, does make clear distinctions in key macro variables. It is flawed in one major way though. You say that Japan operates a trade surplus and all its debt is financed internally without tapping "foreigners" for Government debt or selling assets. Japan therefore is not the US.
I agree that Japan is a closed economy with a culture for the persistence of quality improvements via a wish to not lose face. I leave aside the issue of racism via a national identity that views all non-Japanese as inferior at this time. (They may be right, but hell, ughhh).
I say to you that the trade surplus and the assumption of internalising fical deficits are an illusion. Just because a country has a trade surplus as the result of government intervention does not mean that the surplus is real or desirable. It means that the future wealth of the country is being "hollowed out". There is a reason why the Nikkei is down from a peak of 39,000 to 10,000 in the last 20 years. It is because of this "hollowing out" of the future of domestically oriented Japanese companies living off the fat of that Government spending that is required to achieve the trade surplus. This fat (structural deficits) and escalating debt means that Japan is the US (and is Russia come to that) because the politics of totalitiariansim has morphed into economics and fiat money. Monetary economics is the mdoern politics. The sad thing is we can dress it up and compare differences, but its all the same. Government intervention is the only game in town, with the Government picking its winners (exporters in Japan, health care currently in the US).
Anyway, it is clear that you give a shit and are rational. But I maintain that the Japan is the US, just manifesting totalitarianism within a different sector.
Picture this, the government borrows money from its own citizens to pay for the losses made on exporting goods and you have the right of it.
Japan is not the US, thats for sure. Japan had the largest banks in the world in the late 80's early 90's by balance sheet size. The US has only just been ovetaken in the last few years by "bubble butt bank" China.
Hooligan,
Try flipping this situation on its head: In a global economy characterized by persistent glut of capital and labor, Germany, Japan and China are busily trying to expand their exports. Meanwhile the US has chosen to let all other countries fight to export and quietly absorbs the superfluous mass of goods from every country.
The more US industrial capacity is idled, the more every other nation provides it their goods gratis - or, what is the same thing, in return for worthless promissory notes. In a not to ingenious way, the US has converted every other nation into its colony - erecting a mercantalist system based on an inflated dollar.
This alone makes the US different from Japan.
The anger of the rest of the world is that this mercantilist system allows the US to defy economic laws and run unprecedented global trade deficits. It does not have to have a trade surplus. But, if the rest of the world were able to put an end to this system, they could no longer run persistent surpluses.
Which is to say this: in exchange for running persistent trade surpluses, Germany, China and Japan have to share the profits of those nations with the US. They have no choice in this matter. Without the dollar being inflated and these currencies undervalued, global production would grind to a halt.
The other part of the trade imbalance is that the commodity exporting countries have small populations for the most part and quite often the commodities are controlled by a small number of people who horde the wealth. So, there is no way to have balanced trade with these countries. The only solution, if we want to continue with current production levels and recognize the current ownership of the commodities, is to sell our paper to the producers. The arabs have been on board with this for a long time. Until someone else comes along who can keep them in power, they will stick with the current system.
Absolutely beautiful , I like your work , made me laugh a lot !
I suspect the Japanese are using usa treasurys to create artificial reefs.
Where did you get those condoms? I need to get some more (exact same specification) before the price goes up!
Mish is a fool who has already taken enough rope to hang himself several times over. Why argue with a fool?
Also, trying to pick a hyperinflation 'trigger' is foolish; it is like trying to pick the price of gold when hyperinflation happens. Who knows? Who cares? You just want to be right on the direction, the rest will take care of itself. There are an infinite number of possible hyperinflation triggers, and when it happens it won't matter which one set things off.
Maybe you'll be right on hyperinflation but you should really tone down your hyperarrogance.
You can't predict the future with 100% certainty, from a few of your nifty charts, no matter how much you'd like to think so.
Hooligan raises a second aspect to the comparison: if I read him right, while the US prints the reserve currency, Japan has two global export advantages, it's own assets plus the carry trade. Aside from demographically-trended earnings, japan faces two other quandries- of slowing of Demand hurting Japan's export income and that other currencies are becoming carry instruments.
Stability, of a sort, used to be useful for the dollar. By funding worldwide transactions it was important as a store of wealth. Seen in that sense, even if there were an excess supply of dollars, this would only serve to displace local currencies. ..of course, if the Savings in the US were to fall at the same time then that does slow the quantity of worldwide transactions.
But what if.. worldwide transactions are of marginal importance- isay, if 90% of all trade is undertaken by 5% of the corporations, then the dollar doesn't need to be a store? This could be a precursor to a japanification of the US condition.
A lot of the world trades with the US and right now a lot of income is being provisionally lost because that trade flow is an unknown amount going forward. If the dollar continues to decline relatively then it is inevitable that real deflation will result, certainly outside the US. ..unless a new engine of consumerism emerges.
spot on tic-tok
The US is the same as Japan in the sense that it has not fully deleveraged from the last 2 bubbles (i.e. dot-com and real estate). While Japan's real estate bubble was much more severe in magnitude than the US real estate bubble, the long-term problems that the US faces is still supporting old debt in place pre-crisis.
Until more aggressively deleveraging and restructuring takes place, the US is delaying the inevitable, just like Japan has for the past 20 years.
There is no difference between the 2. Any crack addict will tell you he's (completely) different from the other crack addicts in the room. Denial at its finest.
In your list of recommendations I was disappointed not to see a really good ice wine.
Gonzalo, This is a very good piece. You can improve by leaving out all negatives on Mish or
anyone else in your writings. Stick to your point and leave the rest to the comments section.
The readers here will take care of the criticism part for you. Good job!
Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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