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Guest Post: Where We Are Is Where Japan Has Been
Submitted by JM
Where We Are Is Where Japan Has Been
Once upon a time, there were a bunch of banks that said “Hey, forget balance sheets. If they have collateral give them a loan.” For a while it was good money. As long as they got payments, it was OK. So there were more loans, which in turn bid up the value of the collateral.
Then the worm turned, because what goes up must come down. When collateral values collapsed, so did lending. It got real hard to keep up with the loan payments. Banks started looking like they came straight out of Goodfellas.
This isn’t an American story at all. All of these types of issues are about debt resolution. It has happened for centuries, probably further back in history. You know the story, but perhaps there are some details here that may open eyes. Like why you heard about Japanese CEOs committing suicide. Often it was because to keep their businesses running, they had to pledge all their personal possessions for a loan. The insurance benefit was all that was left for their families when their businesses went bankrupt.
This collateral value collapse implies banking crisis implies real problems for a lot of voters. Anywhere this happens, it is a political crisis, and governments have to step in. This is where the story goes from bad to worse.
The chapter we are in is technically called “central bank balance sheet expansion”. The subtitle is “Bank Bailouts”. It doesn’t make any sense for a politician to let a bunch of voters lose everything. Central bank balance sheet expansion keeps this from happening: it works only if it is done in enough size to repair bank balance sheets. Thus they will expand their balance sheets and offer loans. And hopefully collateral values will reinflate.
It doesn’t seem to work anywhere. All that money just sits on bank balance sheets as cash and reserves in the large. Some portion of it goes to risk-taking in financial assets. But these banks are the last entities that need to be taking excessive risk. Ultimately, they will need more liquidity to cover their bets. This means more balance sheet expansion. Ultimately it will end in some way, but I’m not sure how.
This chapter is nowhere near being written, but I can see how it is going to play out. This summer, the Fed started to unwind its balance sheet via unwinding the Maiden Lane assets, and this is a really small piece of the Fed balance sheet. They backed off when the results of their actions were clear. Risk in the credit space (ABS, RMBS, CMBS) has yet to recover, which is profound in a way. Markets are information processors, and they are learning how to price this stuff without a floor. And of course, the Fed is going to have to take a major hit on this crap if they sell back to banks. Taxpayers will pick up the tab.
Alright. It is good to get it off one’s chest. And now you have to figure out how to protect yourself.
Money Stock Doesn’t Mean Anything
Japanese Monetary Aggregates, early naughties.
Inflation is a Mixed Bag, Year-on-Year % Changes by Component
Real estate in a long downtrend: bottomed but no rebound for years
Education doesn’t deflate because parents sacrifice for their children.
Volatile Prices in food and utilities, you know living expenses. Big ups and downs.
Source: IMF
The Big Picture Story on Rates and Inflation
Things will remain stuck because of the intrinsic interest rate risk. Rising interest rates cause significant capital losses for some insurance firms and individuals that hold bonds. Commercial banks that hold government bonds would experience a capital loss with an increase in their yields that is offset by an increase in loan demand—i.e., economic growth, so the effect is ambiguous for them. Banks can game this through repo and other tools efficiently, but the bottom line is that they can buy cheap and sell rich given their balance sheets. Anyone can do this.
This translates into liquidity risk. Financial markets are highly illiquid at times, thus subject to sudden spikes in volatility. Liquidity can dry up due to contagion (correlation) effects, there is a basic rule that serves one well: the more liquid assets you have, the better. This reduces exposure to liquidity shocks that go along with volatility.
There will be balance sheet repair. Some slow and steady, some sudden through default. Weak balance sheets are susceptible to financial strains caused by insufficient reserves of liquidity and thus try to hold more cash and cash equivalents. This will put surviving businesses in pretty good shape. You can tell this is happening by a:
- Rising liquid assets to assets ratio.
- Low Financial Book Value–the sum of total liabilities plus market capitalization divided by total assets. This measures the cost of purchasing the firm outright relative to the accounting cost valuation of assets.
- Rising Return on Equity–net income divided by book equity value in 1995.
Also, firms with more short-term debt are more exposed to the shocks, so they issue more long-term debt. This is the slow and steady.
The rougher part of the story is that there will be defaults in the process of debt resolution. A big part of debt resolution is about recovery value. Recovery value is pretty pro-cyclical, which isn’t good given the current situation. There are institutional factors of debt resolution that matter too.
The Central Problem is Debt Resolution: Japan Compared to the United States 
How society works through cascading default is in part through basic laws of nature. Part of it is based on social tendencies. Another part is through political decisions. Within these parameters, we have yet to see how this will end.
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I think I'm turning Japanese, I think I'm turning Japanese, I really think so.
You may think you are Japanese,
but,
When you apply for admission at the airport international customs gate,
you will be very sorry that you came.
.
If "We are where Japan has been"... does that mean the USD will behave like the Yen and get stronger and stronger despite efforts to do the opposite by our central bank?
... Just trying to follow the logic of this post...
The logic of the post is that lending based on collateral as opposed to balance sheet evaluation leads to a Ponzi. Debt resolution is the central core of the solution. Societies attempt this different solutions, based on how they are configured and the policy tools at their disposal.
The main common element in the contemporary is balance sheet expansion by central banks. They exchange non-performing assets for cash. Banks will hoard this cash and put some in financial assets. There will be volatility in food and utility prices. Housing will bottom, but will not recover for years because banks underwriting standards and demand for loans will be weak.
Judging by the Japanese experience, it will be long time before they unwind.
These are the similiarties, as both Japan and the United States experienced their problems throught the prism of banks. But there are differences. Japanese companies were the ones that had to heal. They have from what I see, as they locked in long-term fixed financing and know how to downsize. Households in Japan bore the cost, and now this is a problem.
In the United States, it was not companies but households that need to repair their balance sheets.
Determining what differences are significant versus trivial is decisive. Regarding currencies, as soon as the Fed acts even remotely rational, the dollar will reverse big-time.
I'm waiting for US politicians and banksters to lose face then kill themselves like the Japanese. That'd be bullish for US for sure.
The Fed is acting rationally once you determine what principals they are acting under.
First, the purpose of the Fed is the survival and growth of the Fed. "Economics" aside, the Fed (and central banks) are private corporations and duty is to the shareholders. I am going to propose the road the US is heading down, which is similar to the Japan experience, is done because it is the most profitable and ensures survival. Most profitable for the FED, its owners and its distribution system (Wall Street). More profitable to the bribed politicians, captured regulators and academics (proposing modified economic theories). Survival means the continuing control of a nations currency.
Once the above are assured, then you will see actual dual mandate policy.
I have said for months and still maintain what the Bernanke can not stop.
We are "Worse than Japan now".
Long-John-Silver
This song is about masturbation: Japanese eyes are what you get at the most pleasurable bits!
http://www.arabianmoney.net/gold-silver/2011/09/18/awaiting-the-capitulation-event-as-stimulus-no-longer-works/
Summary
Gold to $5000 next 12-18 months
Silver right around the corner to see $50
Stay liquid.
Short equities.\
The problem with all "We are Japan of 20 years ago" analysis neglects the most important reality.
Japan never had to deal with $112 Brent.
Forever.
Barry will save us with Chevy Volts recharged with Solyndra Solar Panels!
As long as you're focused on a left-right, Democrat-Republican false dichotomy, you'll remain part of the problem. BOTH parties focused on deregulation - letting financial entities run amok, 'free trade' - the wholesale offshoring of good US jobs and the expansion of US Empire - taking by force what we can no longer buy . And BOTH parties have gutted the COnstitution, and made your individual rights and liberties a thing of the past (and in this Bush was FAR WORSE than any of his predecessors).
The only difference between parties in the US is that the Republicans are slavishly devoted to their corporate overlords while the Dempcrats arexist to provide an 'opposition' and therefore have to provide the illusion of caring about the electorate in general.
I wonder how any of the blindly partisan comments here and elsewhere are paid shills making minimum wage and living in their parent's basement - because there are no other opportunities for them. And such efforts to manipulate 'popular' perception and sentiment are far more common thatn most realize. The mainstream media is owned wholesale by corporate interests - with a few exceptions like McClatchy. But the Internet scares them - because it is not fully under their control. Their efforts to mold opinion and perception are still primitive - and efoforts to expand control of the web ongoing.
Japan also didn't have to go begging for Treasury buyers. It is a nation of savers. 98% of their gvt debt was bought by its citizens or the pension funds or insurance companies in country.
The US is already a nation of borrowers.
The US is more like Greece. 20% interest rates are in our future.
if we get to 10% interest rates there will be no USA...
Elucidate please.
10% interest on $14T is $1.4T. I believe that the government brings in $1.8T a year in taxes, leaving $400B for the running of the entire nation.
Keep in mind that social security pays out that much money annually and you can see the headaches that this would generate.
If banks start charging 10% interest rates. Americans with guns will start showing up at branches all over the country. It won't be lonf for martial law to be enacted, and the preppers will be on one side, and the military/TPTB will be on the other. The sheeple will be stuck in te middle wondering what the heck is going on.
That is my guess of what will start to happen.
"If banks start charging 10%"---have you checked what your credit card bank is charging you on balances carried over?
"If banks start charging 10% interest rates. Americans with guns will start showing up at branches all over the country. "
...to pawn their guns?
It would only require a small sacrifice of the people for a few decades.
Just look up how businesses enjoyed the 80's. How cities enjoyed the 80's. How people enjoyed the 80's...
factor that 5 times worse and you've got your endgame scenario.
That's right. Similar conditions, However, the value of the variables has changed.
Hence, the results could be amplified for example.
The result is a Fractal Pattern of it, a "Variation on a Theme" so to speak.
Peak Oil will have to be recognized as a very powerful variable have changed. Which... Will Change Everything.... So to Speak.
the difference is - Japan is a net-exporting country
I likes me some charts. http://thecivillibertarian.blogspot.com/2011/08/japanese-comparison.html
Where's my darn samurai sword ... ?!?!?!
Hocked up to it's hilt in a pawn shop so you could buy that I-pad II.
a guys gotta eat....an iPad in every pot and a chevy volt in every garage....
Do you get a couple of Solyndra Solar Panels with that Chevy Volt?
Though Japan seems determined to prove that you can't fix Keynesianism (i.e. stupid), they have a few things the US hasn't had recently - a positive savings rate, an export based economy, an income distribution hovering around middle class, a financially sustainable military, and an orderly (if apathetic) society. They'll muddle through. The US? Not so sure this frat party will clean up as well...
Not being a nationalist or anything, but Japan is fucked. Reason? Demographics (same as with U.S.), lack of energy (they're an island w/o a lot of natural resources that are required in this "modern" era) and a economic downturns in their export countries.
The U.S. could operate for quite a while, though only if it really cut back on its reckless energy consumption. Oh, and only after a major default: but the world is already posed to default all the way around, so everyone has the pieces in the game that they have now. And what's that saying in real estate? location, location, location!? Got farmland?
The error starts with the decision to turn society inside out and to destroy the lives of millions in an attempt to repay loans which: (1) should not have been made in the first place; and (2) will never be repaid in any event.
In bankruptcy, it is always best if everyone recognizes reality early and gets on with what is actually doable rather than struggling and sacrificing for years trying to achieve the unachiveable.
"The error starts with the decision to turn society inside out and to destroy the lives of millions in an attempt to repay loans"
Sounds/plays well, but the logic just doesn't support the notion that someone is sitting back and making a "decision" to fuck up society. Power NEVER wants to mess with the existing status quo.
It's the consequence of greed. But, we're all guilty. We've all partook in the debauchery. We consumed WAY past the capacity of the planet to sustain our appetites.
Much of the problem is that bankruptcies are several layers deep, claims are stacked up. Everything was way over-leveraged, meaning, only a small percentage of those "owed" will see anything. ANY settling of debts will expose this fragility. This is why extend-and-pretend has been the "solution" for several years now.
In Japan inflation is low because people husband their money. In the usa the lumpen spend every nickel they can earn, beg, borrow, or steal. This has led to usd debauchery abroad due to the trade deficit. big difference.
That may or may not be true judging from the reduction in private sector debt. This reduction could be mainly due to default, I don't know for sure.
This reduction in debt means that central banks will probably not commence reducing their balance sheet for a long time.
There are differences and similarities. Knowing what is substantial and what is fluff is the crux. The common end game is debt resolution.
I agree Buzz, Japanese have been more prudent savers and thinkers re longer term personal finances. If it didn't help them it does not bode well for collapse of the Western lifestyle and USD WRC. "Lumpen" {snort}
The US is not Japan.
Apples to Oranges.
Would you like to wager a few OZ of metal the outcomes will diverge in a spectacular fashion. Of course you will wager that the outcomes will be similar.
You will lose and I will take your metal.
Jeez,
You have an Extremely Ugly Avatar.
Hope it does not actually look like you.
If so, my condolances.
.
What inflation charts are those for ; Japan?
Yeah, sorry about the missed label.
"we have yet to see how this will end."
That last part is certainly true. And yes, Japan started out at a higher level of savings and built-in demand for their treasury issuance.
Yes, we suffer from crony capitalism, or what Michael Strong calls crapitalism. Japan had this in spades compared to the U.S. Given the poor political leadership, Bernanke is doing what he can as a central banker.
If the last two elections hold as a guide, every two years only 10% of the political scum will be cleaned out. Given that, maybe you should stop focusing so much on the wrong things being done by politicians to protect their phony baloney jobs. If appears that our way out may NOT come from that direction anytime soon.
I look to the private sector. Politically captured Fed, Treasury, SEC and Justice Dept. failing to pursue and prosecute mortgage origination, securitization, and ratings agency fraud? Private investors have already begun to act after seeing no action taken at the Federal level. Consider the suits against BAC/Countrywide to be just the beginning of a flood. Floods can change the status quo in unpredictable ways.
"Bernanke is doing what he can as a central banker."
It's ALL kabuki theatre! It's ALL based on a Ponzi. Therefore, everyone "doing what he can" is absolutely meaningless as long as the same game is being played.
Just as Bernanke was handed a pile of shit from his predecessor, Alan Greenspan, all the politicos were also handed piles of shit: forced to cater to the same huge lobbying forces ("defense," Israel etc. etc.). The party pussies that make me want to puke try to put lame-ass angles on their loser-side hoping that their inadequacies will be hidden/helped when their favorite shit-tenders get in to office (and, unless you're already up in the game, it ain't going to happen).
It's like blaming your dog for peeing on your carpet AFTER you failed to let it out for a day! The situation was what it was, the outcome was more than predictable.
And unless anyone can come up with a system that isn't predicated on perpetual growth on a finite planet one is only talking shit (likely with some angle to try and get ahead in this faulty game- ha ha... going for the "prize" and you don't even know what the fuck it is cause it's changing!).
Debt that can't be serviced remedied by more debt is a Ponzi. Debt resolution that makes existing debt servicable again is no longer a Ponzi.
Human systems can heal themselves. It doesn't have to be total collapse. Total collapse is not inevitable nor is it likely.
Japan?
Oh it will be much worse, and anyone that believes this is practicing in self delusion.
Think of this in terms of central bank balance sheets.
At some point if they unwind it means taking a huge loss unless they generate inflation to cover the loss.
But they can hold assets on balance sheet for decades, so inflation doesn't have to be around the corner.
think fuk_u doesn't "count"?
think again!
It's Japan's underbelly. It highlights its weakness- highly dependent on energy imports. Geez, this has been going on for quite some time: US provoked them into war (WWII) by blockading shipping lanes for their oil imports.
Nothing like wiping out competitors by suckering them into a corner: energy poor countries getting hopped up on energy-consumptive lifestyles/manufacturing. China's been hooked as well, though it has some contracts locked for a while (but paper is, as we know, just paper).
Blah blah blah japan blah blah blah. We should only hope we will be like japan over the next decade or so
I was in Japan in the 80's while in the Marines. Little did I realize that I was witnessing (at the time) the largest stock and RE bubble in modern history. I just thought the place was really expensive because it was crowded and they seemed to have enough money to buy up the world. I was 19, and into the bars and partying anyway. I thought "bubble" meant gum or something. Fast forward to the late 90's. I saw the Nasdaq approaching 6k and even my subordinates talking about their Lucent stock at work and such. I got caught up in it too, but only lost about 1-2k when the market crashed as I was late to the chirade. But the LESSON WAS LEARNED. I put 2 and 2 together, and I now knew what a "bubble" was. Fast forward to the mid-2000s. I was based in SOCAL, and once again I heard folks bragging about the money they "made", this time in RE due to house appreciation. Thank the Lord, I already saw this movie a few times before. I held my ground, and I rented. And eventually watched many colleagues go bankrupt and/or foreclose. Or continue to pay enormous, stressful mortgages. Those were Japan's choices. They are now ours. NO WAY OUT!!
Neat comment, containing a lot of common sense.
I never could see the point of buying a house, though a couple of wifeys insisted ... and guess how that all ended, but at least they have to pay the insurance. pay the taxes, pay for the maintenance I used to do and so on.
Now I rent, with a secure lease.
A house - if well-built and low-maintenance - can be OK to own, but it is more of a liability than an asset ... rather like a car, but in a maybe 10X time frame; leaving bubbles in vintage cars and housing aside.
On a long-enough time frame cars return to iron oxide (rust) and houses to dust.
In Japan when a CEO destroys the company he is responsible to operate.....he commits suicide. In America when a CEO destroys the company he is responsible to operate....he gives himself a bonus and retires.
This isn't fair on so many levels. Concensus and cooperation is the hallmark of Japanese business behavior. Japanese companies are offered far longer extensions of days to pay, so they accumulated massive arrears. Businesses are given many chances to turn the corner before judicial rfemedy. Thus bankruptcy in Japan (as far as my experience) was pretty much a self-fulfilling event. That may have changed in time with the Koizumi reforms.
The United States is based on limited liability, so businesses cut their losses far sooner and debt doesn't accumulate as much and judicial bankruptcy still offers recovery.
In these ways they are quite different.
Dup.
It's a fire sale over here. 6 hour waiting times at the gold buyers. I'm getting 99.999% gold proofs at 10% under spot. Call me a vulture if you want, but I'm buying everything in sight before the commies shut the party down.
The myth of the Japanese saver is long dead.
http://www.wisebread.com/comparing-savings-rates-us-vs-japan
Working young people over here are living in internet cafes or sponging off the parents. Most of them are not working, nor are they even venturing outside.
You're not Japan - you're actually in a far better position in that America, at the very least, has a future - something that this country does not.
You would be doing a service to readers if we could hear more.
The view from finanical statements is that Japanese company balance sheets are in good shape, and equities are trading at less than book value. Are the statements misleading?
Why are employment statistics so different than what you describe?
Yes, they are most certainly misleading in a country where profits must be buried in needless expansion to avoid the punitive taxes - where the largest "corporation" is the national roads and highways division of the MOT.
These "jobs" they speak of are largely shovel ready tasks that trained monkeys could and should be doing.
The employment statistics are not different form what I describe, as I've only pointed at young people. http://dontai.com/wp/2010/10/15/new-graduate-unemployment-in-japan-china-canada/
I run three niche market businesses here and I see a country dying, as if from an undiscovered cancer. it only looks functional on the surface.
My friends tell me something similar... that corporate hopes lie in overseas expansion. See Mizuho buying into Vietnam, Aeon into China, etc.
It's sad and I hope things change.
Are you implying Fukushima as the death-knell of Japan (on top of everything else)?
If so: have you kept up with fall-out in the US?
Have you kept up with the financial fall-out in America and all around the world?
Nowhere has "has a future" in any way we all got used to since WW2.
Japan is 'just' the "canary in the coal mine" ... the first to expire from both toxic nuclear and toxic financial products.
Any country with a limited population and lots of natural resources has a future just fine ignoring WW3.
I'll sum this up as best I can.
Japan has no resources. ZERO. Hence, no future.
Japan has PLENTY of radioactive elements - though what good those can do is debatable......
Fukashima is worse than Chernobyl - and remains uncontrolled and unsealed.
lol
I guess Charles Darwins theory on Survival of the fittest applies to all and everything on this planet. You start messing with these underlying mechanisms you end up blowing yourself up. And that is exactly what is about to happen here if Politicians tirelessly continue to play God by trying to avoid the inevitable. And it is inevitable, its a no-brainer and they know it.
Actually they do not know it ... they are "gods unto theyselves" (psychopaths) and immune from understanding consequences.
Little Dubya, as a child, used to blow up frogs with fire-crackers for fun.
He went on to blow up the world.
Now the O'Bomber is continuing in doing that.
You make the same mistake that I and all fairly sane people make, e.g. we like to think that people who run our world have a conscience, but they DO NOT.
great article, great posts ........l learn so much here, ZH is a an island of knowledge and realty, in the ocean of Samsara (the sea of illusion).
... reality "not realty"
Zero Down Loans....NINJA loans...No job, No money, No assets...and they still got a loan.
Hey, the dismal news is the FHA is still writing Zero down loans (or near zero down).
3.5% is nothing when the buyer can get that small amoutn from another fed agency or wrap it into th eloan.
RE will plunge for years as Shiller predicts. We need the 20% down back.....and let RE settle to its proper level without artifical support...then we will have recovery.
Demographics....... Coming soon to a theatre near you.
http://blogs.the-american-interest.com/wrm/2011/09/16/the-war-on-the-you...
Old versus young is only a reaosbaly good proxy. The conflict is between creditors (past claims) and debtors (future growth).
Both have to give something
Difference: The Bank of Japan is not privately owned by bankers.