Wednesday, January 13, 2010

Prepare for the long haul

What we can learn from Japan’s decades of trouble

Some important thoughts in this article. QE will not lead to inflation, unwinding of debt will take a long time, China may be heading for trouble. (Delete FT cookies if you can't read it.)

Posted by letthemfall @ 12:30 PM (2698 views)
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23 thoughts on “Prepare for the long haul

  • The guvnor is rather late in discovering the wisdom of RIchard Koo. And I question the accuracy of this assertion – that “Mr Koo’s argument has a weakness. It explains neither why the huge debt overhangs emerged in the first place, nor why Japan has proved so vulnerable to the global shock, now that the corporate sector’s balance-sheet adjustment is at last largely completed.”

    Koo quite explicitly says these kinds of balance sheet recessions are caused by financial bubbles. In the case of Japan in the 90s and Britain and the US now, property bubbles. And Japan is still in a mess because it was never able to get deflation and government debt out of its system.

    If you can’t see the article, google the title on google news. Those links bypass the paywall. Well worth a read.

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  • QE will not lead to inflation

    I don’t accept this, at that time no other country was engaged in QE.

    Now everybody is at it.

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  • stillthinking says:

    QE does not help companies which are carrying too much debt because of ill-considered expansion plans,
    * they don’t make money because they are not successful business ideas *.
    Turd hotdog stands do not become profitable irrespective of how much money is printed, because there is no getting round the fact nobody wants to eat them, similarly there is no getting round the inherent unprofitability of an excess of shopping centres, or widgets, flats that are in the wrong location, or the wrong size, or people with the wrong skill set, in the wrong industry. The problem is a -real- lack of demand irrespective of money.
    The worst DVD player on the market doesn’t sell because it is the WORST ONE, not because of a lack of money in the hands of consumers. Wind farms are not unprofitable because of credit restrictions, but because there are days with no wind. Estate agents are going bust because there are TOO MANY, car producers are going bust because there are TOO MANY etc etc etc
    Companies that carry too much debt and are unprofitable should go bankrupt, they should not be allowed to soak up funds that are better used elsewhere. This has always been Japan’s problem, they have diverted their considerable resources to maintaining failures while depriving themselves of new ventures at the same time. No new business, no dead businesses = long slow decline.

    The idea that printing money rescues unsuccessful businesses is completely flawed.

    However, property prices and financial assets are more truly a reflection of the amount of money out there, so conceivably the UK can flood the system with money and reset asset values by resetting the value of money, fortunately(!) not having squandered money on actual business ventures, failure or not. In which case, again pointed out many times, we swap deflation ( fair ) for inflation ( unfair ). There is no middle ground and this article doesn’t really give any useful predictors which way the UK will go over 2010/2011. The J. government swapped private debt for gov. debt, and the UK government is swapping state worker debt for gov. debt. So what.

    The UK mess is because people have made appalling investment decisions, QE can possible rescue land values (land representing a kind of currency), but it cannot rescue bad business ideas although certainly some borderline cases can straggle on for a while. Whilel there are undoubtedly many parallels I don’t see that the UK basket case can be usefully compared with Japan.

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  • mountain goat says:

    The main growth in money is bank lending. As long as that keeps contracting we will have deflation. As long as prices of houses and other assets stay at bubble levels there are not enough people willing or able to borrow money prudently or safely (without the loans going bad). So bank lending keeps slowing down. Let asset prices fall and suddenly things are affordable enough for banks to start lending again, which will cause inflation. However, letting asset prices fall means the banks go bust. So everywhere policies are put in place to stop this happening, meaning we will have a longer recession.

    The whole QE thing doesn’t cause inflation because it buys debt that has already been created. Sure it clears any indigestion in the system keeping banks afloat, but it doesn’t create more money in circulation and therefore inflation.

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  • He’s always going on about ‘excessive savings’ with regard to Asian economies. What’s his model/theory? Given flexible exchange rates and relatively unfettered capital and trade flows, and therefore all kinds of adjustment processes, why are there ‘excessive savings’ that seem to come ex nihilo?

    This can come close to the Greenspan nonsense that sees Asian ‘excessive savings’ as resposible for western credit bubbles.

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  • mark wadsworth says:

    Re inflation, as I have said before, you can’t have inflation without currency controls (whether that is in terms of volume, in terms of propping up currency or depressing currency). Take a look around the world at the countries with the highest price inflation, like Venezuala, China, or until recently Zimbabwe – they all have or had currency controls. Or remember Weimar, 1970s Britain.

    Quite what the maths and logic and psychology of this is nigh unfathomable, but in terms of correlation, it is a good rule of thumb.

    End of.

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  • mark wadsworth says:

    @ Icarus, I’m not a Fan Of Greenspan, but in that respect he is probably right. China depresses its own currency by adopting a low peg to the dollar, and props up the dollar by buying US government and corporate bonds.

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  • Ah but there’s the rub. Exchange rates with China are not flexible and trade flows are one-sided. That is one reason, I presume, that there are fears over China, as well as the explanation for the excessive savings.

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  • HPwatcher @2

    “QE will not lead to inflation. I don’t accept this”

    Erm why dont you? Both MW and MG have explained why they think it wont. Some reasoned support for such a statement might give yr position some credibility.

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  • “QE will not lead to inflation”

    Martin Wolf and anyone else in the deflation camp is either asleep, only pays attention to Government statistics or has a Butler who does all their shopping.

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  • “Root causes of hyperinflation:
    The main cause of hyperinflation is a massive and rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services.”

    …..so if “massive and rapid increase in the amount of money” = QE

    ….and “(negative) growth in the output of goods and services” = Falling GDP

    And the UK satifies both factors; doesnt that equate to the oposite of what this article claims?

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  • Yup HPW a bit of reasoning/intellectual rigour would be good.

    I’d also suggest that if everyone is engaged in QE to the same extent then inflation (which if nothing else, is a relative phenonenon) becomes impossible.

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  • Off point but worth watching if you invest

    “Bullish sentiment continues to increase as measured by both the weekly II data and a Bloomberg survey. II said Bulls rose to 53.4 from 48.3, the highest since Dec ‘07 while Bears fell 1 pt to 15.9, just shy of the lowest since Apr ‘87. Bloomberg said bulls on the US market rose to the highest since ‘07. “

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  • mark w @7. China alone can’t dictate a Yuan-dollar rate. Surely the larger economy has a say in this?

    Dollars flow out of the US through the trade and current account deficits and flow back in through the capital account (re-invested in dollar-denominated assets). US asset prices or interest rates adjust to retain those foreign creditors as willing holders of those assets (though it’s possible for foreigners to dump them).

    Foreign savings and foreign capital inflows inflows into the US weren’t required to create the US credit bubbles. All this needed was US households with equity in their homes willing to borrow and a bank willing to expand its balance sheet (loans on the asset side, borrowers’ line of credit on the liability side) with home loans creating deposits out of thin air (and of course, securitisation to get gullible investors to buy the resulting bonds). Nobody in the US or elsewhere needed to have saved beforehand for this balance sheet expansion to take place. (This is similar to the idea that mark w seems to subscribe to, namely that stuffing the banks with reserves will not create credit since the first requirement of credit is creditworthy, willing borrowers and once the bank has got such borrowers it will find a way to fund the loan, e.g. the inter-bank market.)

    When the bubble bursts everything that was expanding starts to shrink or go into reverse – bank balance sheets, household deficit spending, US trade deficits, foreign net saving of dollars and inflows into the US of foreign capital. It seems that foreign $ saving and capital inflows to the US are more the result of what goes on in the US financial system than the cause.

    (Leaving now. Sorry can’t respond for a few hours.)

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  • paranoia blue says:

    A question re: everybody is doing it i.e. QE.
    Will there not be some sort of devaluation of “fiat money,” as one sees often in shares when lots are issued to raise cash – a dilution. Thus other “concrete things” like commodities etc. gain in real value?

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  • “QE will not lead to inflation”

    Throughout history, increases in the money supply has always led to inflation. QE is effectively being used to keep borrowing costs down and so house prices high – that’s the inflation, it is supporting what should be dropping.

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  • mountain goat says:

    PB following on from what I wrote above. QE and other debt asset purchases by central banks, is really about clearing up the mess of the past (giving distressed and gov debt a home) not creating more money as such. The money was created by the banks when they wrote those dodgy 100% mortgages at 5x peoples annual salaries etc in the first place.

    Hpwatcher – you are right that QE helps keep borrowing costs down, making more people appear credit worthy.

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  • Mark Wadsworth says:

    Icarus: “China alone can’t dictate a Yuan-dollar rate. Surely the larger economy has a say in this?”

    In the short run they CAN dictate the rate, as I outlined above. They have kept this up for a decade or so, sure, market forces will take over in the end, but China is ruthless – they even censor the internet, site by site, blog by blog, BY HAND! And they can suppress all manner of dissent, they are happy to kill protestors if it suits them. As corruption etc (i.e. circumventing capital controls) carries a death penalty, what makes you think they can’t enforce currency controls?

    Compared to this, between East & West Germany was more or less a free market as far as swapping Ostmark for Deutschmark was concerned.

    I’d agree with the rest of what you wrote, and you do quote me correctly.

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  • estrader ” anyone else in the deflation camp is either asleep, only pays attention to Government statistics or has a Butler who does all their shopping.”

    Bloody Jeeves has just woke me up – “bloody hell Jeeves has Beluga and champers come down that much at Aldi? – I say Jeeves!!”

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  • @17, Techieman, too bad you sent Jeeves out to buy Champers instead of Oil 😉

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  • its good to disagree with a smile! Nice one estrader!

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  • The Aldi champers is not to be recommended but their olive oil is good.

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  • English Refugee In Asia says:

    If new bank loans decline whilst existing loans are paid back, the money supply sure does contract. If however, existing loans are defaulted on, that money, rather than being destroyed on repayment like it should, gets stuck in the system.

    In this case the money should be sucked from depositors into the banks’ black hole caused by the non repaymnet of the debt, with the banks going bust – thus keeping the money supply steady.

    But no; Government steps in and saves the banks with QE – and we have an increase in the money supply, whether new debts are issued or not.

    That is why printing money always leads to inflation.

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