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Meat Puppet

Deleveraging: Depression Or Turning Japanese

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Found this analysis of how long the deleveraging process is likely to take:

http://earlywarn.blogspot.com/2010/07/how-long-and-how-fast-will-we.html

Although this looks at the US situation, with the UK having even worse debt to GDP ratios the problem is even more dire here. We all know the coalition's planned austerity measures but with UK household debt among the worst in the world surely both deleveraging at the same time will create an output gap that no amount of money printing will be able to fill.

I just don't believe the optimistic economic forecasts that Osborne went on about in his budget speech and it looks like we are headed into a profound slump. This may be better in the long run if it can be carried through, but I doubt the process will be complete within 5 years and then a new Labour government would indeed try to turn us Japanese prolonging the misery. In any case wouldn't the coalition just reverse tack if the pain became too great. Political expediency always wins in the end after all.

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Excellent find.

Private debt really does eclipse govt debt.

Perhaps Mish is right on deflation. I think his argument is any increase in public debt will be dwarfed by deleveraging in the private sector thereby reducing overall demand.

Edited by barry

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Japan was ahead of us demographically and technologically. Japan's baby boom was more in the 1920's and 1930's. And in terms of efficiency we are now where Japan was in about the early 90's. So to me it was always the most likely path that we would turn Japanese.

They have spent two decades gradually moving private debt onto the public balance sheet. I think that will happen in western nations over the next two decades.

My plan all along was to print big enough to fill the output gap. Which as you said would have to be truly monumental. But we see as in Japan the political will is just not there to do it. Ok during 2009 the will was nearly there and stimulus was the talk of the town. But now basically the whole western world is moved back to the reactive austerity phase.

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They have spent two decades gradually moving private debt onto the public balance sheet. I think that will happen in western nations over the next two decades.

And the Public debt is going to go where exactly?

Considering that there is no moral hazard for the banks, all private debt has already been moved onto the public balance sheet?

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And the Public debt is going to go where exactly?

Considering that there is no moral hazard for the banks, all private debt has already been moved onto the public balance sheet?

course, private debt that cant be paid by citizens and firms goes to the public purse, where the same citizens cant afford now the new taxes and Austerity required to pay the "new" debt.

It goes nowhere.

onle one person pays debt....the wealth creator....everything else comes from there....insufficient wealth means default.

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And the Public debt is going to go where exactly?

Considering that there is no moral hazard for the banks, all private debt has already been moved onto the public balance sheet?

True it can take multiple forms. I was thinking more outstanding private bank loans declining each year. As more is paid off than is being taken out in new loans. And this decline being matched by an expanding national debt.

The public debt doesn't need to go anywhere. It is more of an accounting entry in a debt based monetary system. It is the balancing force that grows and shrinks to control inflation.

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And default is what we need.

Some fairly big businesses need to go bankrupt, like the banks. Short term pain for long term gain.

As for the public debt, all we need is fiscal discipline and some inflation. For about 20-25 years as we could wipe out the public debt completely.

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True it can take multiple forms. I was thinking more outstanding private bank loans declining each year. As more is paid off than is being taken out in new loans. And this decline being matched by an expanding national debt.

The public debt doesn't need to go anywhere. It is more of an accounting entry in a debt based monetary system. It is the balancing force that grows and shrinks to control inflation.

from Ticker forum.

debt-to-gdp.serendipityThumb.png

post-10213-12788386065563_thumb.png

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from Ticker forum.

debt-to-gdp.serendipityThumb.png

The official statistics say the USA gdp contracted by 3.2% in 2009. Without the expansion of the public deficit to 12% of gdp.. the gdp imo would have contracted by over 10%.

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The official statistics say the USA gdp contracted by 3.2% in 2009. Without the expansion of the public deficit to 12% of gdp.. the gdp imo would have contracted by over 10%.

thats right. to avoid a double dip, they need to borrow more and more....and the private contribution just gets less and less...where are the taxes going to come from to pay for it all?

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thats right. to avoid a double dip, they need to borrow more and more....and the private contribution just gets less and less...where are the taxes going to come from to pay for it all?

They can print them, they just need to be bold about it 100 squillion billion zillion gazillion should do it

There you go saved you some fonts there aa3

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They can print them, they just need to be bold about it 100 squillion billion zillion gazillion should do it

There you go saved you some fonts there aa3

thats all very well, and I understand your irony.

but for those that think it can work that way, remember, the costs that go with inflation ALSO rise too....so no matter how much you print, it just gets worse......and worse than that, people getting wages are ALWAYS behind the curve...its them who starve...NOT the "institutions" deemed too important to fail.

But what use are institutions if they fail to serve?

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From the same blog:

http://earlywarn.blogspot.com/2010/07/eroding-mountain-range-of-debt.html

He states that paying down the private sector debt is essentially impossible and we need to find a way to write it off and that the government shouldn't be the "borrower of last resort" but the "bankruptcy trustee of last resort". Here I don't think he has a full grasp of the power that the financial elites have over the political process.

By the way some interesting stuff elsewhere on this blog about peak oil, climate change and especially the replacement of more and more workers by automation.

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thats all very well, and I understand your irony.

but for those that think it can work that way, remember, the costs that go with inflation ALSO rise too....so no matter how much you print, it just gets worse......and worse than that, people getting wages are ALWAYS behind the curve...its them who starve...NOT the "institutions" deemed too important to fail.

But what use are institutions if they fail to serve?

The federal reserve as an institution has a mandate and stated goal of having inflation of ~2% each year. If inflation starts pushing above that and trending up the institution has to restrict credit growth. Otoh if inflation is 1% and trending down hard like now, the institution has to loosen monetary policy.

Other institutions in society are failing though, like why are average wages not keeping up with productivity and the 2% inflation? Thats why I agree with others that we need a comprehensive reforms.

Also policies in other areas can cause inflation regardless of monetary policy. For example having mass immigration while at the same time not allowing new building of housing, will cause an inflation in house prices. Supply and demand.

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The federal reserve as an institution has a mandate and stated goal of having inflation of ~2% each year. If inflation starts pushing above that and trending up the institution has to restrict credit growth. Otoh if inflation is 1% and trending down hard like now, the institution has to loosen monetary policy.

How does 2% inflation work with it's stated goals of price stability and full employment.

At 2% YoY inflation you will hit the exponential growth problem. Mathematically it cannot be avoided.

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I've done this before, but I'll do it again.

The bubble in Japan saw comemrcial real estate sell for $1 million a square metre in the Ginza district of Tokyo. This was their peak.

The joke was that you had to ask youself a question - if you take the largest denomination of bank note recognised by the BoJ (10,000 Yen - see here: http://www.boj.or.jp/en/type/list/yuko/data/now.htm) then if you folded it to its smallest size and let it fall out of your hands, would it buy the area of land it covered as it hit the ground?

You can fold a piece of paper with the aspect ratio of a Japanese bank note about 7 times. From the above link, the size of a 10,000 Yen note is 7.6cm by 16cm, i.e. 121.6 square centimetres. If you fold it 7 times, you divide the area in half 7 times, i.e. the total area is now divided by 2 raised to the power of 7 (=128). So the folded bank note is about 121.6/128 or 0.95 square centimetres, i.e. very close to 1 sq. centimetre.

The land it covered when it came to rest on the ground at the peak of the Japanese property bubble in Ginza, Tokyo, was worth $1m divided by 100 * 100, i.e. the cost of 1m-squared of land divided by the number of square-centimetres in it (100 in X and 100 in Y = 10000). I.e. the land the bank note fell on was worth about $100.

The exchange rate at the time of the crash went from $1 = 125Y in 1988 up to about $1 = 155Y in 1989 and then straight down to $1 = 80Y in 1995. I.e., the average exchange rate of about $1 = 115Y means the folded 10,000Y put 0.95cm squared of land at a price of $87, i.e. 1cm squared of land at $92 - very close to the $100 per sqauare centimetre implied by the peak $1m per metre squared prices quoted for Ginza.

So the joke was - if you could buy the land the folded bank note fell on to with the bank note, it was under-priced. If you couldn't, it was over-priced.

People who say hyper-inflation kicks in when the paper currency is no longer a compact form of representing wealth will no doubt have something to say here. The fact that the price of gold at $1200 represents 60 $20 notes that together weigh 60g compared to one ounce of gold at 31g is also a dead give away of huge monetary inflation.

In the UK, the most costly property deal was the sale of the HSBC HQ in Canary Wharf, for £1.09b (http://www.guardian.co.uk/business/2007/apr/30/money2). At an exchange rate of £1 = $2, this is £545 million. In the article, the tower is 45 stories high and has 1.1m square feet of office space, i.e. 24444 square feet per floor, which is also the footprint or land area. As 1m squared is 10.76 feet squared, the land area is 2270 metres squared. If you take the 2270 metres squared figure and divide the sale price by this, you get $480,000 per square metre or £240,000 per square metre. The price of a square centimetre is therefore $50 (approximately) and £25 (appromximately).

A £50 note has a different size to that of a 10,000Y note (http://www.bankofengland.co.uk/banknotes/current/index.htm) meaning it can only be folded 6 times to give a possible land purchase area of 15.6 * 8.5cm / 2^6 = 2.07cm squared. That puts one centimetre squared at about £25 or $50 - the same as that implied by the peak sale price.

My conclusion is that the UK boom was every bit as large as the Japanese boom if measured in nominal bank note wealth. In real terms, the boom in Japan occured 20 years before the boom in UK and there has been at least a 100% devaluation of the dollar and pound since then.

We're either as bad as Japan if we deflate and the pound and dollar strengthen significantly (at least double in real terms) or half as bad if we inflate at Japanese-like rates (1-2%) over the next 10 years or more.

I'm leaning towards the latter but you can see why people always mention the former.

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  • 258 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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