US hours worked
With less work available, tax receipts fall making it difficult for government to maintain spending levels.
This means there is less work to support each non-working individual.
Retrospective analysis of roots of the financial crisis
A worthwhile read at Naked Capitalism:
Was it “Nobody Saw It Coming” or “Everybody Who Saw It Coming Was a Nobody”?
“A number of economists, economic policymakers, regulators, and central bankers have attempted to explain away their failure to both foresee and mitigate the current financial crisis by asserting that no one saw it coming. The inference is that they cannot be held accountable for something so unusual, so extraordinary, and so unforecastable that that no one saw it coming.”
The essay demolishes this inference.
A scenario for Japan’s public finances
A few days back there were rumblings of dissatisfaction from the market about Ministry of Finance projected issuance:
Japan’s Bonds Drop a 4th Day After 20-Year Auction Demand Cools – Bloomberg.com
It’s possible that the new government will have to limit its borrowing for “stimulus” spending, as the demand for additional JGB’s is limited.
It seems to me the scenario would work like this:
Ministry of Finance has to raise rates to sell enough debt
Yen spikes short term due to the interest rate differential, crushing exports more
Increased rates mean the increased interest cost can’t be covered by new issuance
BoJ prints yen to cover debt burden; yen collapses as the market flees rapidly devaluing currency
My theory about yen movement is based on the idea that a rise in rates would attract money to Japan short term, but that over time the size of the government debt burden and the higher interest payments would require yen printing.
I could be completely off base.
This just hit Bloomberg: Japan’s Bond Futures Fall as Fujii Signals Debt Supply to Rise – Bloomberg.com
“Japanese bonds fell after Finance Minister Hirohisa Fujii said the government will likely use debt sales to meet a tax revenue shortfall, raising concern increased supply will overwhelm demand.”
Japanese fiscal crisis
It is Japan we should be worrying about, not America
“The IMF expects Japan’s gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014…
The savings rate has crashed from 15pc in 1990 to near 2pc today, half America’s rate. Japan’s $1.5 trillion state pension fund (the world’s biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.
Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan’s bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.
Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised “a real risk that Japan could end up in a major default”.
It is somewhat surprising that Japan’s postal system authorities would resist MoF requests to buy more bonds. If Japan’s pension funds are selling domestic govt bonds, can Treasuries be far behind? I think not. Dis-saving may be under way.
Japanese Finance Minister Hirohisa Fujii said :
“that Japan Post, the national mail carrier that also has banking and insurance units, should lower its weighting in Japanese government bonds and lend funds to small- and medium-sized enterprises, but that such a shift would take time. Fujii also said the government shouldn’t tap Japan Post as if it were a piggybank or a second budget. Japan Post, which controls around 330 trillion yen in assets, has said a significant portion of its investments are in government bonds. The Democrats’ plan to cancel the privatisation of Japan Post has raised concerns the government could reach a tacit agreement with the mail carrier to buy more bonds.”
Oct 20, 2009 Japan’s Bonds Drop a 4th Day After 20-Year Auction Demand Cools
“Japan Post Holdings Co. may choose to shift away from bonds. The government lender should diversify its investments away from Japanese government bonds and Treasuries, Financial Services Minister Shizuka Kamei was quoted as saying in an interview published today by the Wall Street Journal.”
Simon Johnson on the way forward for the US economy
Professor Johnson posted his testimony to a Congressional committee here. His discussion of analogies between Japan and the US is particularly educational. I don’t think I’ve seen many discussions of Japan having manufacturing overcapacity as a key driver of their long term problems:
“Japan was – and largely remains – a bank-based finance system. And their nonfinancial corporate sector was generally much more indebted (often using borrowed money to buy land, but also over-expanding their manufacturing capacity) than was the case in the US. Total Japanese corporate debt was 200 percent of GDP in 1992 – more than double its value in 1984. The implication was a long period of disinvestment and saving by the corporate sector – in fact, this change from the 1980s to 1990s explains most of Japan’s increased current account surplus after the crisis. Since Japanese corporates had accumulated too much capital, they exhibited low returns in the post-crisis period. The US has strong bond and equity markets, and our corporate sector is not heavily indebted – so the cash flow of the nonfinancial sector should bounce back strongly.”
Comparing China today to Japan 25 years ago
Yves Smith discusses this subject here.
The analogy of Japan in 1984 to China today is worth careful consideration. Japan responded to reduced exports caused by revaluation negotiated in the Plaza Accord with inflationary policy which created a real estate bubble. When the bubble blew up, Japanese authorities responded with even more inflationary policy…deficit spending, rock bottom interest rates, and quantitative easing. None of which was sufficient to avoid two “lost decades”.
Today, China must respond to reduced exports to the US due to consumers having run out of savings and credit. China is pursuing inflationary policies, which is clearly driving asset price bubbles. The rest of the story…look to Japan.
A short history of China’s modern economy
posted here
Of Bubbles and Busts: Which Way for China?
which includes this solid analysis:
“In 1994 China tried to cure the serious problems in their domestic economy by devaluing the yuan from 5 to 8.3 to the US dollar in order to facilitate an export driven recovery. That is a 40% devaluation! All your costs were just marked down 40% relative to the competition.
China was able to make key investments in the 1996 Democratic party campaign, and Bill Clinton championed China’s favored nation status in 1998, smoothing the way for China’s admission into the World Trade Organization in 2000, while still maintaining a deeply devalued currency that was ‘pegged’ to the US dollar. As a general note, a country does not engage in unrestricted trade with another country that maintains a currency peg after a devaluation, unless there is some significant ulterior motive. The rational economic response is to first maintain trade tariffs to control the flow of goods and the de facto subsidies and barriers imposed by an artificially manipulated currency. Whenever anyone says that a currency that is ‘pegged’ and subject to tight exchange controls is notmanipulated, except in highly unusual circumstances such as a gold standard, the people in the room just should laugh them on their way out the door.
Pegging the yuan to the dollar helped to encourage foreign direct investment, and helped to stabilize the artificially low prices that US importers could achieve, most notably the Arkansas based WalMart.”
Giving China the favorable trade status without requiring them to eliminate the currency peg was a tremendous blunder.
Russia now world’s largest oil exporter
Russia Gains at OPEC’s Expense
“Already the world’s largest oil producing nation, Russia, pumping prodigiously through the downturn, this summer passed another milestone. As Saudi Arabia tightened its belt to live by OPEC cuts, Russia surpassed it to become the world’s largest exporter.”
The USA should be working really really hard to build positive relations with Russia. They are now the world’s largest oil exporter, and Russian government and society is a model of transparency and openness compared to the Saudis.
Plus, on a cultural level, the US has a lot more in common with Russia than practically any other oil exporting country.
