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May 23, 2012
Japan's bond bubble grows and grows
The only reason Japan is growing at all is excessive borrowing and zero interest rates.
Good thing that could never happen here! *sarcasm*
Japan has created a kind of singularity in superlow short-term rates that drive longer-term ones to unthinkable levels. This arrangement has the economy walking in place and financial incentives out of whack. It can not last forever.
That is exactly the dynamic that pushed me into long-term US bonds for the better part of a decade. I referred to it as a real yield infection that spreads from the short-term bonds to the longer-term bonds. I would be the first to agree that it cannot last forever. It can, however, last longer than anyone thinks is humanly possible.
Japan's central bank is essentially now there to support bond prices.
I believe it is our bond market that holds the stock market up. At some point our bond market will be too busy holding itself up. There won't be any ability left to prop anything else up. If I am correct to think this way, this would not bode well for long-term stock market investors. In January, our Fed announced a 2% inflation target and I for one believe them. That's a first step at the bond market looking out for itself.
When our government has $15 trillion in debt, it cannot pretend to afford 5% interest payments ($750 billion). It can pretend to afford 2% interest payments though (a mere $300 billion). Behold the power of pretending (i.e., can kicking)!
If we continue to go down Japan's path, then I would not be surprised to see a 1% inflation target someday. If Japan is any indicator, it won't be a very pleasant economy at that point.
Just opinions of course. What's new?
13 comments:
I happen to agree with your opinions in this piece. I also agree with William Pesek, the Japanese bond situation is a financial abomination.
I also predict a nuclear explosion in Japanese bonds, but have no clue on the timing. Japan is a stark warning to the US, but one that is ignored.
The fallout when Japan blows up might force a new Bretton Woods to restructure the entire international monetary system. I am very confident that a new system is coming, but again no clue on the timing.
The players at the Neo Bretton Woods will probably include the BRICS, the Euro core, the US, and Japan. Will the new system use an enhanced SDR? I don't know. Whatever happens, it will probably lower the living standards of most people on the planet.
People don't understand Japan at all.
Here's what I just wrote at Delong's place:
>It's better to have a bunch of retired people who can't work
Japan's retired people don't need to work. All they need is rice, fish, vegetables, and some TV programming, all that can be produced domestically.
Japan had a very small baby boom -- just 3 or 4 years really -- and thus their aged population is not going to increase much from now.
>The problems that US faces have actual policy solutions.
No we don't -- inflation isn't a solution.
The fact of the matter now is that Japan has a horrific *under* employment problem now, but that's going to go away as the working-age population declines 40% between now and 2050.
The US's working age population is going to *increase* 40% during this time.
We're going to have more mouths to feed, more energy to buy just to survive.
Where's our wealth creation going to come? Granted, even without productivity growth if we reverse the Gini change since 1980 things would be a lot better for the 99%.
But that's a big "if", given the current balance of power in Congress and in the state houses. We're just one or two elections away from slitting our own throats with suicidal policy. I would argue we already have slit our throats and just don't know it yet.
The Japanese have none of these problems. Their most recent monthly trade deficit (a new thing for them) was $6B, 10% of ours. They have $3T in global equity to earn for them, while we are the largest net debtor country by far:
http://www.financialsense.com/contributors/leslie-cuadra/2011/08/31/list-of-worlds-largest-creditor-and-debtor-nations
Japan may be screwed up in its own way, but their problems, now and on the horizon, are only about 20% as bad as ours.
Our prospect is horrifying -- Soylent Green level -- if we don't get our act together soon.
When our government has $15 trillion in debt, it cannot pretend to afford 5% interest payments ($750 billion). It can pretend to afford 2% interest payments though (a mere $300 billion). Behold the power of pretending (i.e., can kicking)!
bingo.
We've got a battle royale on the budget on the schedule early next year, and I have no clue how that's going to play out.
The most likely outcome (if we still have split govt) is that they keep the 2012 status quo going as-is somehow.
This will result in a $25T+ national debt by 2020.
5% interest on that is going to be $1.25T/yr. LOL.
If Romney wins, then we will get a big-bang tax reform coupled with monetary loosening, for whatever that's worth. Have no idea what that will look like, but I expect it to be inflationary and deflationary in equal measure.
Total gridlock and stalemate would be return to Clinton rates and the sequesters kicking in somehow. Deflationary, bad for interest rates.
For all of Japan's foibles, they just owe that quadrillion yen to themselves, and the JPY is just monopoly money wrt the rest of the world.
The Japanese could use a little more work, and with their population pyramid, they're going to get it.
Us, on the other hand, are going to have 20% population expansion between 2010 and 2030, and 40% of us are going to be obese by then (Japan's population is going to fall ~10% by 2030).
http://www.bloomberg.com/news/2012-05-07/more-than-40-of-u-s-may-be-obese-by-2030-study-says-correct-.html
Mr Slippery & Troy,
I think we're going to be okay. I asked a financial expert if there was ever going to be another economic crisis.
MY SOURCES SAY NO
I should probably mention that I had to ask about 10 times to get that answer, lol. ;)
Pesek has been thoroughly educated with mainstream eCONomic nonsense. That's why he has the job he has - he's a perfect dupe to spread eCONomic propaganda.
There is no bond bubble in Japan. As proof, do a google search on the number of articles referencing Japan's future financing woes.
Heck, Japan has actively been trying to weaken their currency and they still have the lowest interest rates on the planet.
Here's the skinny. Interest rates are not set in a free market. Bond vigilantes are a myth. Thanks to propaganda, people now attribute interest rate moves to bond vigilantes rather than to policy choices.
Japan made a huge mistake allowing a credit bubble. That said, I expect they'll fare better than the U.S. due to better management, at least as far as the average person is concerned.
The U.S. eCONo-political system has never been this thoroughly corrupt. It's being managed by and for thieves and traitors (parasites).
Preservation of the system of debt makes deflation the likely outcome.
mab,
In my opinion, you are being way too hard on William Pesek. I think he's pretty much been spot on. Does the following sound like mainstream propaganda?
September 6, 2007
Let Them Eat Cake!
Rarely have monetary-policy makers faced a more daunting assortment of things that could go awry. They include a global credit crunch, swooning stock markets, out-of-whack currencies, hedge-fund blowups and whether to fret more about inflation or recession -- or both.
Or how about this one from Pesek?
July 11, 2008
Pop Goes the Weasel (Musical Tribute)
Policy makers are merely putting off the inevitable and treating the symptoms of what ails the global economy. If they aren't careful, Japan's experience during the 1990s will become a familiar one.
``It's not a scenario many expect for the West or for Asia,'' Chan says. ``But I'm not sure it can be ruled out.''
First, in a way I regret being so blunt. You run a very informative and thoughtful blog.
That said, I'm not talking about Pesek's past predictions (or guesses). His statements regarding Japan are tripe, be it willful or unintentional.
None of this is necessary. Seriously, how hard would it be for Bernanke to come clean with the American people and CONgress regarding the nature of Gov't "debt"???????
And why is it that the few economists and financial professionals that do tell it like it is are given little if any mainstream press???? Heck, even those that understand the system like Buffett are afraid to speak out truthfully and have become part of the propaganda machine. Given the circumstances, it's hard for me to attribute the silence and mis-direction to patriotism.
Too many coincidences!!!!!!
I didn't find anything particularly objectionable with what Pesek wrote in the FPP.
He's saying tax rises & spending cuts will be deflationary.
Duh.
He's calling for QE n+1 from the BOJ to soften the shock.
With the yen at 79, clearly the BOJ could be much more interventionary that it has been.
I agree that the US economy has turned into a con job. It's my thesis that we're in ca. year 1979 in the Soviet's collapsification pattern.
We just haad to mess it up with Afghanistan, eh.
mab,
I don't think you are as far away from Pesek as you think you are. Here's a quote from the article within this post.
Is the world's biggest bond bubble about to burst? Not necessarily. Tokyo has proved adept at stabilising yields in times of trouble.
We are also very adept, much to the dismay of those shorting US treasuries!
Speaking of which, I offer an inside joke just for you.
12 days to go!
For those reading this who don't get the joke, you'll have to be patient. I certainly am, lol.
Troy,
I agree that the US economy has turned into a con job.
I think we can all agree on that.
The interesting part to me is how we each decide to protect ourselves from it. By planning for a -2% long-term real return after taxes, I'm basically embracing Greenspan. Sigh.
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)
The -2% is looking iffy now that real yields have fallen so much. That said, the market doesn't care much what we want or need.
http://research.stlouisfed.org/fred2/graph/?g=7qW
The Beatles - You Never Give Me Your Money/Carry That Weight
Troy,
Interesting chart and tribute!
I just did one too.
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