Wednesday, April 13, 2011

Japanese default edges ever closer – but no-one dares mention the word..

Japan's government downgrades its outlook for growth

"The condition of the economy is no longer flat or at a standstill, but rather the direction is downward," said Shigeru Sugihara, director of macroeconomic analysts at the cabinet office.

Posted by uncle tom @ 09:42 AM (2177 views)
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36 thoughts on “Japanese default edges ever closer – but no-one dares mention the word..

  • mark wadsworth says:

    Default, schmefault, ain’t gonna happen.

    Although the Japanese govt owes colossal amounts of money to people (three times one year’s GDP or something) ninety per cent of that is held by Japanese banks, who in turn owe the Japanese government loads of money for having been bailed out time and time again. Japanese external debts are tiny and they have a massive amount of US govt bonds (so net external debt is probably negative as far as i can tell)

    It has reached a level of abstraction where you can fairly say that it’s not real money any more. Plus they have their own currency and can print as much as they want.

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  • mark @1: A very accurate and concise synopsis. Debt should always be put into the context of concurrent assets and to whom it’s owed. The last sentence of mw’s post is important and it is no coincidence that Ireland and Portugal got into bother in the way they did (they can’t print their own).

    At any time in the world, some people owe money and some people are owed money. Sometimes people who owe money are owed money by another party and vice versa. The two sides of the ledger are roughly equal. No half intelligent creditor will ever bankrupt himself by calling time on his best customers, so he will always forgive a bit or modify the loan to make it easier to repay. It’s just a game and we shouldn’t get carried away with the significance of the huge amounts of zeros attached to debt narratives

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  • MW,

    Personally, I think it’s a house of cards. The debt isn’t owned by the banks, it’s what the banks have invested private savings and pension funds in.

    Japan’s demographics are appalling, and the sovereign debt broadly represents their older generation’s over-expectation of the younger.

    The sovereign debt markets have been in la-la land for the last three years. Small countries like Iceland, Greece, Ireland and Portugal might be able to go financially kaput; but the possibility that a big nation like Japan or the USA might do likewise, has been off the radar, and not priced in.

    Despite paying virtually no interest on their soveriegn debt at present, Japan is politically incapable of coming anywhere close to having a balanced budget.

    With debt running at six times tax revenue, just a single percent increase in the interest paid will knock out six percent of tax revenue.

    The slightest loss of confidence in Japanese debt could spiral out of control with great speed, and with great potential for contagion across the planet.

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  • Japan has endured 20 years of falling stock markets with 15 years of almost 0% interest rates. The low interest rate policy has not worked there. I believe that we only half way through our 20 year bear market. What tools do we have left at our disposal with no more room to reduce interest rates?

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  • Thanks for posts 1 and 2, I’ve been saying this for months. Countries that issue their own currency (ie can produce it out of THIN air) clearly need borrow from no-one and cannot really have debts as we understand them.

    The fact that currencies float is really what controls their value, print too much, that is too much beyond productive capacity or towards gross mal investment and your currency will lose value fast.

    UT you confuse Japan and Greece or Portgugal. Japan neesd borrow money from no-one. This is critical to undertstand. Japan would also I fancy like a weaker currency but for all its apparent “debt” currency traders don’t see the problem you see.

    Agreed on demographics but that’s a different question.

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  • Being able to print your own money is not a positive. All it means is that once the debt becomes unmanageable (which it will), governments can go into pseudo-default by inflating and paying back the debt in worthless currency. Creditors lose out either way, but the burden is shared around with a lot of other innocent bystanders, including those who are waiting around for a house-price crash.

    Actual default would be a much more preferable (and just) outcome because it involves a rapid contraction of the money supply, an increase in interest rates and a righting of the past wrongs (asset bubbles) caused by the previous monetary inflation.

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  • UT also it is worth remembering that investment does not flee somewhere without having somewhere else to go.

    If there is a mass exodus out of the Yen it would have to go somewhere else. The collpase brigade see that as into non productive hard assets with which to better barter, people presumably having lost all faith in working, trading, productive enterprise, their countries and the global economy, which would be odd where it is this (imperfect as it is) that has point of fact delivered better standards of living than ever before

    If you forget about the apparent, and in my view largely illusionary”debt problem” the world seems to be doing better now than it has ever done before. Is the problem more imaginary than real?

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  • mark wadsworth says:

    Uncle Tom, OK, we know that in turn the banks ‘owe’ all this money to little old Japanese ladies.

    There are two things that the LOLs can do – withdraw the ‘money’ and spend it -> corporate profits -> companies can deleverage and pay tax.

    Or the LOLs can die clutching a sheaf of BOJ bonds, which their heirs then inherit; so the BOJ owes young people the money and young people have to pay these off out of their income tax in future – so really the two net off to nothing in the medium term.

    Is this a ‘house of cards’? Yes of course. But nobody dies when a house of cards collapses, it’s concrete slabs that can kill you.

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  • Capitalist printing ones own money is a fact. It is also the system that has operated as humans have progressed standards of living like never before. Sure it has negatives (like everything) but much of the risk is regulated by currencies floating in relative exchange to each other and relative to other things. You start printing widly beyond a point and you will be punished quickly with a massive loss in purchasing power and you will see it is a nil sum gain and you will likely stop.

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  • Currency and its operations are by and large fictions (house of cards) and are really just a way of managing trade and productivity etc (the construction of concrete slabs) . People who are troubled by fiat and debt seem to take the notion of currency much too seriously.

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  • Pretty much now the sound of one hand clapping – but remember how in 2009 the blogosphere was alive with rumours that a global derivatives position hundreds of times global GDP was to bring the imminent (ie that year) collapse of global finance. Of course it didn’t happen.

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  • MW,

    The LOL’s as you call them (and LOM’s) are mostly expecting their savings (translated by the banks into bonds) to keep them nicely tucked up in their retirement, until they finally snuff it at a ripe old age. Wild spending sprees are unlikely to come into fashion, whatever ill befalls.

    I’m no expert on Japanese inheritance habits, but I suspect, as happens here, that a few young people get lucky, while most of the cash gets used to pay the debts and top up the pension pots of those aged 50 – 60.

    Does it ‘net off to nothing’ ? No. This is a structural instability in Japan’s finances that shows no sign of being resolved in an orderly and managed fashion. An upset is therefore almost inevitable.

    That upset will probably shake the confidence in sovereign debt globally, raising yields, and pushing other nations with a high sovereign debt ratio in the same direction.

    The focus of attention in europe would then be on Italy, which is also incapable of balancing its budgets, has similar demographic problems, and has 118% debt (relative to GDP)

    – Italy is also too big to bail out…

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  • bellwether: My frustration with poor old xxxx is that despite him being an intelligent and personable chap, he has steadfastly failed to progress his knowledge or understanding of the worlds economic systems. There is no discernable evolution and he appears to have erected an impenetrable barrier against the essential exploration of ideas that run contrary to a persons intuitive beliefs. Maybe it’s just an unfortunate inability to tell the difference between informational wheat and chaff? By way of contrast, you have clearly grafted away for the last few years, until you have a grasp of economic theory that exceeds the comprehension of some people who were given the benefit of a formal economic education. It really is rather impressive. Can I now post that electric contraption back to you in exchange for the Scotch I promised you?

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  • Flash I’m wet with anticipation.

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  • UT I know I’m out of favour with you at present probably my fault due to a recent exchange, but bear in mind that Wadsworth and Flash are pretty pragmatic and not inexeperienced chaps. You simply cannot exclude the possibility that they are seeing something that you might be missing.

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  • mark wadsworth says:

    Bellw, thanks (I think).

    The whole “multi-quadrillion derivatives will be the death of us all” hype was just hype. The banks liked it because it made them look too big to fail, and journo’s liked it because it made them look interesting, but actually there was nothing to worry about as the banks were just all betting against each other.

    As a thought experiment, we could merge all the world’s banks into one MEGA BANK, all the gains and losses would net off nicely to precisely ZERO and then we could demerge them all again without the outside world noticing.

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  • the number cruncher says:

    I re-read Henry George’s ideas on money last week

    He recognised the problems of both issuance of money as debt and by Government creation. He thought on balance it should be created by Government and not by private banks as debt due to the problems we see today.

    The problem with the gold fingers on this site is they do not see how wealth is created by productive labour and that money is just a system of exchange for wealth. We are increasing our ability to do productive work all the time with enhanced manufacturing , IT etc. Therefore money supply is a reflection of wealth and productive labour, and as such should increase in line with that productivity. It has nothing to do with assets except where they are needed to do productive work and have inelastic supply.

    As long as Japan maintains and increases its productive capacity, which it is, they can maintain the debt. The debt is in effect a reflection of their vast productive capacity over the last 50 years as the money was created because of their productive labour. Trying to pay it off would be disastrous, as they would have no money left.

    The best course of action is to stop private banks issuing any more money as debt and leave it solely to a government body and adjust the money supply based on achieving zero inflation. But forget about gold, it is a historic relic and has no more to do with money than sea shells or pretty beads. The only reason it was used as it was hard to counterfeit.

    This system would of course only be stable by taking out natural resource speculation.

    I am sure Mr Wadsworth could enlighten readers of this blog which tax changes could achieve the virtual elimination of land and resource speculation.

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  • mark wadsworth says:

    TNC, remember that money as medium of exchange (coins notes etc) is a splendid idea and these might as well be issued by the government as anybody else. This is quite different to bank loans.

    As to tax reform, I’m told that my idea wouldn’t work, because apparently it’s easier to keep tabs on hundreds of millions of salary and interest payments every year, and to expect businesses to keep track of every single receipt and payment and subject each to a number of different taxes than it is to do a reasonably accurate averaged out valuation of land in about ten thousand postcode sectors, and to use that as a tax base for plots of land in each sector, which are fixed and static and change little from year to year.

    What a bl–dy shame, eh?

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  • Some decent content on here today, and I hope by that I don’t merely mean because I agree with a great deal of it.

    Number Cruncher there is much to be said for your post – especially the 3rd para. Thanks.

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  • Money is a medium of exchange. Nothing more, nothing less. There is no reason the money supply should increase with productivity. Productivity increases under a fixed money supply, such as gold, would be reflected in decreasing prices.

    An increasing money supply simply distorts the price of things. At a simple level, if the money supply is increased by 20% today, then ceteris paribus, the price of everything should increase by 20%. But what is the economic function of such an increase? There isn’t one.

    Worse, increases in the money supply do not and cannot in practice work on all prices uniformly as in that 20% price adjustment example. Instead, some portion of the populace necessarily must get hold of the new money first, and is able to spend that money before it has filtered through prices throughout the economy. This distorts the prices of some things (e.g. house prices in London) and is entirely unjust and in a more enlightened age it was equated with counterfeiting, which is precisely what it is.

    Of all the people to entrust with money, governments are the worst. When government controls the money supply you can guarantee that the first people to benefit from an expanded money supply will be government itself, and its cronies next. The point of gold as currency is to remove the ability for anyone to engage in monetary counterfeiting, but yes, I suppose that makes it a historical relic, just like outmoded concepts like liberty and justice.

    The Japanese debt has not been built on the basis of its productive labour. The debt has been imposed by force on the Japanese people, who have been desperately trying to save their wealth, by its governments. It was created way in excess of their productive capacity on the back of distortive monetary and fiscal policies in a futile and failed effort to prop up asset prices. When the price of things are distorted markets get it wrong, but in this case it is governments that have got it badly, badly wrong.

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  • the number cruncher says:

    Capitalist – I think you are fundamentally wrong in every respect of your post (apart from your first sentence obviously). If you read Progress and Poverty by Henry George, he will explain in great detail why you are wrong. The refute of you assumptions is far to long to list here, but it is very detailed and is explained with examples and intellectual coherence far beyond any neo-classical economist or from that freeloading health care scrounger Ms Rand.

    Remember georgists are the friends of real capitalists (just not monopolists pretending to be capitalists)

    a copy is freely available:
    http://www.henrygeorge.org/pcontents.htm

    audio book:(for Dyslexics like my good self)
    http://www.hgchicago.org/audio/

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  • the number cruncher says:

    MW

    I love cycling along the crab and winkle way to Whitstable with my family. I highly recommend a number of the excellent sea food restaurants, 2 weeks ago I enjoyed a lovely lobster thermidor and a refreshing whitstable wheat bear.

    It just so happens that the most extensive study of the implementation of a Land Value Tax in the UK was done on Whitstable in the 60’s and 70’s a update is availble from this link

    http://www.lincolninst.edu/pubs/922_An-Examination-into-the-Effects-of-Land-Value-Taxation-in-the-UK

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  • tnc,

    “We are increasing our ability to do productive work all the time with enhanced manufacturing , IT etc.”

    This is a pet subject of mine. Yes it is true, but after a century of frenetic advance, the rate is now declining rapidly. Most core tech developements since the turn of the millennium have been in the fields of entertainment and medicine; areas that do not enable the populace to achieve more for the same effort. There is a long time lag between tech innovation and full integration in everyday life, and the internet still has a little way to go in improving the efficiency of the workplace – but only a little now…

    “As long as Japan maintains and increases its productive capacity, which it is, they can maintain the debt.”

    There is growing evidence that Japan’s productive capacity is at or near peak. Their population is aging and shrinking. Your presumption is widely shared, but is, I think, erroneous.

    – Note Shigeru Sugihara’s quote at the start of this thread..

    Japan needs to live within its means, or head toward default. As there is a fundamental lack of political will to deliver a balanced budget, so default begins to look inevitable.

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  • the number cruncher says:

    MW

    Also Hector Wilks, the Author of these reports, was instrumental in setting up a charity I used to work for and my office was called the ‘wilks room’ unfortunately for Hector’s memory I turned it the server room when I installed computers to the organisation in 1998 (although I am sure he would of approved of the productivity, as I increased turnover 4 fold in the next 3 years)

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  • UT Japan CANNOT default, it is de facto impossible assuming J continues to be the issuers of their own currency. This is no small/semantic point especially where the whole spectre of “default” inappropriately conjures thoughts or emotions that can only serve to mislead.

    To parallel Greece and Japan is basically flawed and you simply cannot write posts as eloquently as you do without knowing that.

    I actually think there is something in what you are saying, although in the case of Japan surely breeding, immigration and a cheaper currency would be more appropriate starting points than an attempting to balance books. The problem as you suggest is peak productivity and demographics and reducing debt certainly isn’t going to solve that – although ironically maybe a relative dose of poverty will ie the problem as you see it may be an answer on a sufficiently long time line.

    I’m also interested in your notion of contagion spreading from a loss of confidence in J but the idea seems underdeveloped in how this would happen in simple, credible and common sense terms. I’ve actually done a fair bit of searching on the internet for beliveable versions of this type of scenario because if it’s imminent I’d rather like to know of it, and also it’s where I started off in my thinking. But I’ve thus far come up with nothing

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  • the number cruncher says:

    Capitalist

    Already read Human Action but I will give what has Government Done a go

    Henry George is an order of magnitude more advanced in his thinking – his theories encapsulates all what von misis (and Ricardo and Adam Smith) mentions but extenders the thinking much further.

    Happy Reading

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  • mark wadsworth says:

    @ TNC, i was being ironic! Valuations are dead easy, even far easier than the LVT purists make out, it’s almost impossible to get them wrong as ‘free markets’ will help iron out any over- or under-valuations.

    @ Capitalist, the first link says Poll Tax better than Income Tax and cheerfully ignores LVT. Of income tax he says this:

    “The actual fiscal policies of all countries are today exclusively guided by the idea that taxes should be apportioned according to each citizen’s “ability to pay.”

    In the considerations which finally resulted in the general acceptance of the ability-to-pay principle there was some dim conception that taxing the well-to-do more heavily than those with moderate means renders a tax somewhat more neutral.

    However this may be, it is certain that any reference to tax neutrality was very soon entirely discarded. The ability-to-pay principle has been raised to the dignity of a postulate of social justice.”

    As a Land Value Taxer, I’m heartily sick of people who over-occupy wailing about ‘ability to pay’ so had the author of the first book applied his mind to the topic he would have realised that LVT is better than either Poll Tax or Income Tax.

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  • the number cruncher says:

    UT

    While I agree humans are much lazier and do far more non productive things I still think we are increasing our productive capacity in an economic sense and that includes Japan even though its age structure is one of the worst in the world.

    In economic matters I think your prejudices are getting the better of rational thought, as I think advances in productivity far outstrip our laziness and venality. The advances in other economies, such as china and India, will enhance Japan as economics is not a zero sum game (except for land and resource speculation)

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  • I found this thread very interesting and thought I had understood something

    Now having sat for a while, I feel cheated

    Surely all this debt can’t just cancel itself out, because every deal with every bank has involved ‘charges’ or money coming out of the system into someones pocket

    If bankers make profits and the spend the medium of exchange on some hard asset/commodity, they then really ‘have something’ and the system may have notional debt and notional credit but they won’t cancel any more

    I think that my mistake is that the huge derivatives will mostly cancel out as MW said but that doesn’t matter when the bankers have pies to eat and I have worthless ‘means of exchange’

    Smoke and mirrors…

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  • tnc

    You keep making these assertions about authors you like and don’t like, which is fine because it’s your business what you post, but that’s all they are, assertions.

    mark wadsworth

    Did you miss the fact that “the author” was Ludwig von Mises, or do you even know who he is? Not everyone shares your particular obsession, and I’m not sure that if von Mises were alive he would care much one way or the other about your feelings on any particular issue. That said, if I can ever be bothered, I might one day post some materials that do deal with your land fixation and you can have at it to your heart’s content.

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  • I sometimes wonder if there is also this thought that what economic activity needs to achieve is incredibly complex, in the end it’s just eat, shelter, sleep, socialise, reproduce, be secure, rule of law, productive work, leisure, sleep, disease prevention, death.

    If these things are getting better and in the main they evidently are, I find it very difficult to then say this is all illusory and built on a house of cards when in fact its all very real. Remember that something remains even after mal investment (or mal investment is only relatively so) eg houses after the housing bubble or technology after the tech bubble, or weapons after you’ve “blown” your military budget. The asset side cannot be ignored and that is often what happens when you look at things from a purely deficit perspective – eg what the US gains/might gain in the future by investing in its military cannot even be quantified in these terms .

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  • the number cruncher says:

    Capitalist

    I have read Von Mises and found his writings wanting, not in what he says as to the efficiency of markets or the limitations of government, in many ways I agree with much of what he says. The trouble is he just does not discuss monopoly, rents or land and as such many of his conclusions and prescriptions are wrong and counter productive, even though he means well.

    You read Progress and Poverty and get back to me with a critical analysis when you get your head around just how land speculation and rents distort the efficiency of markets and we can have a proper discussion.

    As you are man who has tried to study economics I am keen to discuss the finer points of economics with regard to House price crashes, A journey I hope many of the posters hear will embark on.

    Looking forward to it…

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  • tnc – well said sir…

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  • mark wadsworth says:

    Capitalist, yes I am aware of it. He himself said that Poll Tax (per person) was the least-bad tax but admitted it had shortcomings. A ‘Poll Tax’ on land values (i.e. for every £1 capital land value you pay 10p tax, or whatever) has all the advantages of a Poll Tax but none of the disadvantages (easier to collect, relates to ‘ability to pay’ because if you can trade up or down to your heart’s content, encourages governments to spend money on things which boost land rental values, such as low or no income tax, less regulation, more generous planning etc).

    Further, a Georgist system would very much lead to ‘sound money’ and put an end to credit bubbles because it would keep land values (on which credit bubbles are always based) low and stable.

    What’s not to like?

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