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Deflation In Japan And Its Chances In The U.S.
By Wolf Richter www.testosteronepit.com
Deflation phobia has broken out again. James Bullard, president of the Federal Reserve Bank of St. Louis, grumbled in San Diego about inflation expectations being too low and threatened to print more money, while QEx mongers are once again pointing at the Japanese "deflation spiral" as a horrid event that we have to avoid at all cost.
In 1996, seven years after the Japanese bubble burst, I arrived in Tokyo for the first time and saw a shockingly expensive country (though the exchange rate was good, $1 = ¥110). It wasn't just me. One day, I was looking at Italian wines at a department store. The bottle of Chianti Classico in my hand was a global brand that sold for $8 in the U.S. In Tokyo, it was $53. I sucked in air and put it back down. As I drifted away, another gaijin wandered along and picked up the same bottle. He grunted in Italian. We started talking. Turns out, that Chianti cost less than $4 in Rome.
Item after item. Plain white T-shirts made in Japan, $30. Rent for a dingy 200 sq. ft. apartment in a lousy area, $1,500 a month (plus 3 months key money, plus 2 months deposit, plus 1 month rent up front, for a total upfront payment of $9,000). Public transportation, food, fuel, hotels (except love hotels), coffee, you name it. Everything was shockingly expensive.
There were reasons. During the bubble, pricing didn't matter. The more expensive an item was, the better it sold. The insular Japanese market was protected by insurmountable administrative barriers. When a company was actually able to import something, it wasn't to offer a better deal, but to offer a prestige product at a premium. A jungle of regulations, restrictions, knotty transportation issues, inefficiencies, and other hurdles made doing business expensive. But during the bubble, it didn't matter because everyone was making money, and everything kept going up.
In 1989, the hot air began to hiss out of real estate and equities. A lot of money went up in smoke. Buyers lost their exuberance. Attitudes changed. People began to look for cheaper alternatives. Some businesses figured out that they could gain market share by lowering prices. Price competition started. Import restrictions were softened. Certain aspects of the economy were deregulated in tiny and still incomplete micro steps. Year after year, the Japanese market became more competitive. Pressure to lower prices filtered into supply chains and made them efficient and cost conscious.
Now the $53 bottle of Chianti costs $8, and a Chinese-made T-shirt cost $5. Rents have come down, and new apartments are bigger and nicer. Food is cheaper, and so are meals at restaurants. Unemployment is under 5%. Wages have come down too, but not much. Infrastructure has improved. Subway and train lines have been added, extended, or four-tracked, and rush-hour trains are less crowded. Trees have been planted. Tokyo is cleaner and greener. Savers and bond investors haven't gotten ripped off by inflation. Reason has returned to Japanese prices.
In the U.S., too, the bubbles in equities, real estate, and credit blew up. But none of the other conditions that contributed to deflation in Japan exists in the US.
The massive U.S. trade deficit is proof that protectionism à la Japanese hasn't occurred in the U.S. (well, there are bizarre exceptions, like sugar). Price pressures from overseas have become even stronger during the process of globalization. Supply chains are highly efficient and integrated worldwide. In the US, that bottle of Chianti cannot drop from $53 to $8 because it already costs $8. Plus, China and other developing nations have begun to ship their red-hot inflation to the U.S.
Alas, in one category, the deflationistas have been right all along: real wages. Down nearly 9% since their peak in 1999. It is one of the reasons for the current economic malaise. Worse, without increases in real wages, servicing the growing mountain of debt will become ever more difficult.
Yet in its twisted way, the Fed favors deflation in real wages, inflation in goods and services, and negative real yields. Financial repression at its best. And while we may occasionally get a highly welcome quarter or two of deflation in goods and services, the conditions in the U.S. are unlike the conditions in Japan, and long-term deflation in goods and services is not in the cards.
But not everything is hunky-dory in Japan. How Long Can Japan Play The Endgame?
Wolf Richter www.testosteronepit.com
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Financial repression...I'm going to use that going forward. Thanks, Wolf Richter.
You forgot: USD is and will become much stronger.....like the yen. In a deflationary spiral, debt..or credit implosion is what's really taking place....just like Japan. The past 45 years of credit and debt building has popped. As result, debt destruction happens, both in private, corporate and public sectors.
No one wants credit anymore...they are vomiting debt. Banks don't want to lend or can't find those highly qualified borrowers and people don't want more loans because they either can't qualify or are drowning in debt already.
Everyone wants cash! Companies don't want to part with their cash by not hiring or increasing wages. People don't want to lose their cash by not spending....all of these lead to implosiong of credit availability.
Once the HUGE debt begins to implode, all hyperinflationists will not only experience the effects of deflation, but will realize they were right to think hyperinflation...but only after we cross the valley of deflation.
This is why Gold will go to $480; Silver will go to $0.75; S&P to 40; DOW to 1,000; etc.
@Bazooka
It is hard to believe this because (almost) no one is alive you can remember an instance of it happening in their lives. Sure, fads like the cabbage patch dolls and such have flamed out, but (almost) no one has lived through systemic deflation. I believe this will happen, but it's a tough sell.
zero hedge view of ben is ironic over & over the site berates him (which of course he deserves) and then states he will succeed; bruce is right the one thing america can't handle would be a strong dollar thus ben desperately tries to devalue it; in the end he will fail(i don't have time to list all the reasons he will fail) to understand some of this check out doug at prudent bear
In deflation, USD will become so strong that Fed will be powerless. Look at the Yen....every time BOJ tries to intervene, even globaly coordinated interventions can't decrease its strength.
There is a point where Fed will be powerless to influence dollar value ascent....it's when the $300 trillion in debt just crashes down and everyone wants the physical dollar over anything: credit, gold, silver...
And, at the bottom, that $USD will have 10x buying power compared to today...because in deflation, prices deflate too.
Physical Dollar? You mean paper with ink on it that is available in unlimited supply?
that is used to monetize the debt thus meaning you and i only see it if we get a government check. how do you get your government money...Mr. Liquor? Anywho if this scenario is a fact and not theoretical you will see massive mergers and aquisitions. A "mega beer company" like ImBev comes to mind. We'll see if such extreme declines are in fact in order. The dollar has already been devalued MASSIVELY so I wouldn't be surprised to see a market rally here in the USA given our own experience in the Great Depression. I could be wrong but my view is that we will see such an experience appear in Continental Europe and what we are experiencing through the vix here in the USA is a signal of a massive "deflationary implosion" going on "over there." We will know--sooner rather than later i might add--so this will not be stuck in the realm of the theoretical as presented here so far.
Available in unlimited supply?
You have been herded into the "something for nothing" mentality.
Which is more profitable if you owned the currency which serviced the debts of all the assets that are liened up? Print and let them pay the debts in "worthless currency" or don't print and let them walk away from the assets and the assets become property of the shareholders of the "worthless currency"?
I vote for soul crushing deflation.
You have been herded into the 'fiat has value' mentality.
Debt based currencies cannot survive without inflation. Crushing deflation? Certainly, with the collapse of all fiat currencies.
We have deflation in jobs, home prices (i.e. middle class assets), interest income, wages, and Social Security. We have rampant inflation in government spending, education, taxes, utilities, food, energy, consumer products, incidental fees, autos, appliances, unemployment, fines, and water/sewer fees.
The result is rapid loss of our standard of living. It's the "Third Worlding" of America.
this in fact is not true. one of the marks of this "lack of recovery" has been a decline in government employment as well. in other words the Obama stimulus has completely failed in as much there is an attempt at creating a recovery through it. Moreover Jamie Dimon et al have anticipated this as well. Too bad no one told Goldman Sachs or Morgan Stanley apparently.
deflation is really misunderstood, and isn't bad at all. why it is demonized is beyond me. Why, and the reasons these fed reserve people keep up the mantra is beyond me.
Deflation is good for 'The People' but bad for the Banksters. Banks want inflation, deflation causes defaults.
As the author points out, Japan is in serious trouble. So what happens to the +- trillion in UST?
Further thoughts on Bancor de facto in H2 2012:
I started this Idea here:
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2860#p34267
Could not resist to expand it here-oil jumped 3 times when nixon nixed gold standard, why can not silver or other commodities jump 3 times when USA reserve currency status is out of the window? Total inflation will probably be less than 300%, though who knows?
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2860#p34329
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2860#p34330
ivars
I fully expect it to do just that, and likely more.
Where is your link to the chart you did on 100 silver, I am sure I saw one, or your reasoning for it, coming soon.
It might be helpful if people would set aside all talk about money and interest and debt
and start talking, instead, about value.
At least, for the last twenty years, the japanese were producing quite a lot of consumer goods
which were valuable to people, both inside their own country and for the US, China, and others.
In the US, look at what we call "productivity"....
20% of our "workforce" has been involved in the field if finance, which produces nothing whatever
and serves ONLY the participants.
Another 25% has been working for the government, and while some branches of government have
some limited value (say, the weather department, teachers, meat inspectors), most are not contributing
their fair share.
The next 20% have been involved in the real estate industry ... some of them have actually been in construction, building houses which are far larger than people need or can afford to furnish or heat,
but constructed with cheap structural materials and expensive veneers so they won't last long ...
but the rest have been involved in selling and reselling, in mortgage making and servicing,
in title insurance, appraisals, landscaping, and a thousand and one other chores with only very, very marginal utility ....
The simple fact is that, while the US is experiencing the lowest percentage of able-bodied people actually participating in the workforcefor several generations, even those who have salaried positions are not
really doing anything of value ... just look at the number of people who are hoping to find jobs as massage therapists, web site designers, personal trainers, sports coaches, and so forth ...
And no one seems to understand why this is a problem ....
There are still a lot of areas where the USA excels. Software, aerospace, medical devices, pharma, agri-business, mining, construction equipment to name a few. Furthermore, you may po-po retail but between UPS, FedEx, Wal-Mart and Amazon.com we are the masters of supply-chain management. I work in private industry and witness first hand intelligence and dedication everyday. Your point about an over-sized financial sector is taken. I would be short financials for decades to come. However, the USA has a lot going for it and I am confident that, if we can just get government and looters out of the way, we will kick some serious globalization ass.
chistletoe
And no one seems to understand why this is a problem ....
Sure we do, it's called a SERVICE ECONOMY.
We have been suckered into allowing ourselves into being a nation that produces nothing of value(durables), and have become a SERVICE economy.
A service Economy left alone ong enough, becomes a SERF economy.And one that withers and dies.
Where we are right now.
In china, how much is manufacturing a part of their GDP and how much is construction. Construction is much greater than manufacturing, something like 60 percent of GDP, while US is 4 percent....our infrastructure rots while constuction workers lat around collecting unemployment
no...the word you should use is "trade" not "value." The Japanese were building...CARS. No one is claiming "Americans don't build cars." What the American consumer was claiming and still is is "Americans build shitty cars." These industries never bothered to compete with the Japanese FOR THE AMERICAN CONSUMER DOLLAR. They should have failed and but for the war on terror they would have. Americans will keep buying the better Japanese cars of course because "the only things bailouts sell is more shit." At some point at a lower price (AGAIN.) So...no...what you say is NOT where we are right now. Get into the realm of electronics and the only question you need to ask is "how is Sony doing?" We're the best in the world and have been for decades. That can change of course--but the reason we know we are the best is because there are NO barriers to entry for these goods. And of course the consumer benefits massively. What's that Dell laptop going for now? $150? Soon you'll be getting tablets for $25....
chistletoe,
You mentioned "government", but didn't specifically mention the military (60% of federal civil servants work for the Pentagon, the CIA, or Homeland Security). Then there are all the suppliers for the military, both at home and abroad.
There is also the waste of Prohibition reprise and the huge prison/court/enforcement industry.
The true extent of the human and physical waste should be measured against potential better use.
e.g. The American Society of Civil Engineers’ infrastructure report card:
2009 Grades
Aviation D
Bridges C
Dams D
Drinking Water D-
Energy D+
Hazardous Waste D
Inland Waterways D-
Levees D-
Public Parks and Recreation C-
Rail C-
Roads D-
Schools D
Solid Waste C+
Transit D
Wastewater D-
http://www.infrastructurereportcard.org/
(60% of federal civil servants work for the Pentagon, the CIA, or Homeland Security). Then there are all the suppliers for the military, both at home and abroad.
This is what is killing us.
Over 40% of the total US workforce are now gov employed, and produce nothing.
What happens to you,at your job if you do not produce?, you lose your job.
What happens when a position/s is created that is not needed,but filled, and salary and bennies get paid into it.
In short order it destroys the company.
You cannot have a company, nor a nation that has more consumers than producers it equals death.
At least half of military is a complete waste but public works and are a net gain because it pays primarily private, pretty efficient and competitive businesses to build things, and those things serve the economy and make communities nicer, more livable. The military sends guys to unnecessary foreign conflicts, spends a lot of money on foreign contractors to feed and supply soldiers, and sends back soldiers with PSTD, ripping apart families, increasing their suicide rates enormously...meanwhile defense contractors at ho,e are not competitive but tend to cost 2 to 3 times more than govt workers./soldiers...compare that to private construction contractors that often compete tightly for private and govt projects
The 60% figure was extracted from info provided at
http://en.wikipedia.org/wiki/United_States_civil_service
So true. The government has seen fit to send all the productive jobs overseas.
My solution: outsource government!
One of the best reasoned contributions I've seen in a while!
When 4 nuclear power plants go KABOOM from an earthquake that was said to be a Category 9 but didn't rattle cups and saucers, you have to wonder what is really going on. It is clear we are being lied to about Fukishima.
There is no way I wish to go anywhere near Japan.
For every outrage over the past 10 years and beyond, you always end up with one word.......ISRAEL !
http://www.jimstonefreelance.com/links.html
It is worth your while to spend the time on that link, and you will come to the same inevitable conclusion.
Not rattle cup and saucers?? Friens of mine in Ibaraki, the nextdoor province, spoke of "the truck jumping in the courtyard" and such a strong shock that a stove in the workshop broke free and started a fire. The lady in the house on the second floor had to "hold on to the tatami floor on all fours" and was unable to stand straight.
Jesus H! I live 350 miles away to the north of Fukushima and I thought my house was coming down.
Before you go and start talking shit, you may actually want to clean some of it out from between your ears.
Fucking Nazi.
You have the seismic data.
"I thought my house was coming down."
It obviously didn't !
Reactor 4 had nothing in it that could go bang. It was down for maintenance.
Jesus. Of course there was an earthquake - a fucking big one. Do you think the Japanese might not have noticed?
The earthquake and following tsunami damaged thereactors' cooling systems. Reactor 4 had tonnes of highly radioactive fuel in an upper floor cooling pool. Once the pool's cooling shut down, it was just a matter of time.
Not you contemptible nutjobs again...or maybe there's just one of you posting under different names. Cups didn't rattle? Oh, you were there. How anti-climactic a "Category" 9 earthquake must have been for you. BTW earthquakes are measured on the Richter Scale, not by Category. But I guess science never was your strong suit. Since a picture is worth a thousand words perhaps you can explain to me what shook the car, tree,building, parked car, and man standing on the corner at 00:16?
http://www.wimp.com/japanesetsunami/
Or was that staged too? I've seen the damage with my own eyes. You have no idea what you're talking about.
Don't you know the difference between a tsunami and an earthquake?
Richter or Categaory. Who cares ?
In your vid, there is nothing there that can blow up 4 reactors.
MacHuh? -
I do know the difference between a tsunami and an earthquake. The former is caused by the latter and the video shows that a massive earthquake hit, followed shortly thereafter by the massive tsunami.
Richter or Category - I care, as the reader. It speaks to your credibility and intelligence.
In my vid: If you don't think that a 9+ magnitude earthquake and then a 20 foot tsunami can crack, swamp, debilitate, or throw off kilter a nuclear power plant (leading to a potential melt down and....wait for it....explosion), then I don't know what to tell you. A trained sword juggler can do his act just fine, ad infinitum, but if someone comes along and kicks him in the nuts, all bets are off.
Got any theories on how the Mossad is responsible for the Tunguska Event or the Galveston Flood?
I don't know about Israel---that brings in a religious angle--- that likely has no part or only as in a receiver of donations-- in the lives of secular jews. BUT the Jewish clan of Sumnmers, Greenspan, Rubin, Fuld, Madoff, Black, Bernanke, Geithner, Kashkari, Orszag, Blankfein, Schwartzmann, Fink, Gensler, Frank, Shapiro, and so many more Goldman Sucks' jewish alumni all over the world in control of every key financial move and nexus of the last 30 years is certainly more than just suspect.
It wouldn't be a coincidence if only say, Romani, Sicilians, Irish, Germans, or Finns were somehow to be found--- as a small minority---wielding such power if a conspiracy of some nefarious nature was not involved or afoot.
There would be far more in the media that points the finger at this very striking anomaly and accusing it of more than a coincidence of interests, magically merging into a single nationality controlling our lives, while representing less than 10% of our population.
Who doesn't ask themselves why, is being the proverbial ostrich.
yeah it will be nice to see bottle of wine for less then 1 dollar. like thats going to happen in the states. Hyperinflation seems to be the path we already took.
close enough to a dollar for me.
Trader Joe's 'Two-Buck Chuck' Wine
The one point that the deflationists never discuss is how you can have deflation once they print the currency into oblivion. I agree we are in deflation, but we are also in a predicament that requires us to print huge sums of money to kick the can, and it's clear they are going to do just that. They won't CALL it printing, but the end result is the same, continued existence of the system requires destruction of the currency. Hopefully they push the reset button before then.
Of course there will be inflation if they print money into oblivion, but has the current "printing" come anywhere close to the destruction of value in real estate (which still is nowhere close to being fully recognized)? It seems to me that the Fed is trying to replace the "money" that is being destroyed from falling home prices. The "money" created during the boom is still out there in the hands of those who sold properties (and made fees off of real estate transactions, mbs, etc.), but it is also supposed to represent an equal amount of "money" in the form of assests of home"owners". As the values of real estate continue to decline all of that "money" the home"owners" thought they had is destroyed, so there is actually less "money" in total -- just what was created during the boom and in the hands of those smart enough to sell while the selling was good. Shouldn't the dollar increase in value as real estate loses value -- i.e. there will be less dollars in total and those holding them will be able to use them to buy up depreciated assets? Then won't cash be king? Why would the rich want to print money into oblivion if they hold all of the cash from the boomtime and can purchase all of the assets for pennies on the dollar from the bust and then resell them, starting the whole game over? (By the way, deflation would also be good for savers -- i.e. those holding capital rather than debt -- and those in younger generations who have not saddled themselves with too much debt (e.g. like from college))
That is the part of the inflation argument I don't get -- what about all of the "money" being destroyed on the other side of the equation? Won't the amount of printing first have to surpass that? Also, there aren't many ready, willing, and able to take on debt right now to purchase houses and other things on credit. How will the Fed get this printed money into the system if noone is borrowing? And with high unemployment, how will the salaries inflate for the people to get the money to pay off the debts in devalued dollars? If they allow deflation, don't they end up with the money and the assets (through foreclosure once the robosigning scandal is settled)?
Yes, some of 'the rich' will be buying assets for pennies on the dollar, particularly if they managed to cash out their own assets before the crash. But 'the rich' who have influence on monetary policy are connected to the finance system, and their balance sheets are getting hammered by deflation. QE puts money straight into their hands, which enables them to buy assets cheaply before the money trickles through the economy and bids prices up. Remember QE boosts base money, so it's just sitting there waiting for velocity to pick up.
Higgs writes more on this topic here:
http://blog.independent.org/2011/06/23/the-continuing-puzzle-of-the-hype...
@Smiddywesson
Where's the *printing*? Physical currency has remained relatively constant for the last 2 years. Yes, digital money has grown and has filtered into financial markets, which has increased asset and commodity prices which has, in turn, increased consumer prices, BUT, when the worm turns and we experience rolling defualts, there will not be enough physical or digital dollars to cover the debt.
Isn't hyperinflation where stuff gets MORE expensive? Just askin'.
no the stuff doesn't get more expensive, just your currency gets hyper worthless.
is there actually any question as to japan's crushed economy after fukushima plaza accords have been dead for at least 6 months jpan is dead unless it massively changes it's manufacuring base which it actually is well positiioned to do #Meti #LDP #DPJ aint gonna happen #Amakudari
I had to look up "financial repression:"
Financial Repression is the academic term for how governments can pay down enormous debts by forcing interest rates below the rate of inflation, and then systematically confiscate the purchasing power of their citizens' savings over time, while keeping people from being able to escape or defend themselves.
http://news.goldseek.com/GoldSeek/1315849716.php
Excellent summation of a confusing subject for some. Milestones
It might backfire on them as deflationary forces take hold. By incomes being lower and the goverment trying to capture purchasing power through taxes, the middle class will not be spending as much. This will translate to lower supply and demand and lower prices.
exactly. add in a load of "beggar they neighbor" and a massive amount of protectionism and "bing, bang, boom" deflation is a done deal. Of course you ain't Auntie M and this America ain't Kansas of the dustbowl either. These clowns from Chicago are blowing this country apart...with the gas pedal to the metal courtesy of the media of course. Guess they just want to be "head of the class" as they say.
Um, last I checked Japan's debt to GDP ratio is through the roof and net savings are just now beginning to go negative. When they have to look to the outside for funding they're done. They have not even begun to deal with the debt overhang which is going to be massively painful.
Just as in the US, the debt will need to be dealt with - anyone can grow an economy with debt, just like anyone can live beyond their means for a season.
The story of the King of Can Kickers has not been written yet. Spoiler Alert: the last few chapters of the Japan story are really ugly and the hero dies in the end... Sorry, you can't live in debt la la land forever - at some point the creditors come knocking at the door - It's happened over and over and over throughout history. Is everyone really this asleep????