07/02/10 London, England – “Data raise fears over faltering economy,” says this morning’s Financial Times.
What a surprise! What happened to the recovery?
The Dow fell another 41 points. Gold got hammered for a $39 loss.
Why would gold go down so much? Because people are finally realizing that deflation is the real risk, not inflation. Gold could continue to slip and slide for a long time now… It’s hard to say. It can rise in a deflation. But it depends on how volatile and uncertain the markets appear. In a stable, Japanese-style slump, gold could go down and stay down for many years.
But you know our thoughts on the subject. We’ll see all kinds of ‘flation’ before this crisis is over. Deflation. Inflation. Stagflation. Hyperinflation. You name it!
The latest news tells us that jobs are down. Treasury bonds are trading at their highest point in 14 months. A 10-year Treasury note yields just 2.93%.
As dear readers know, the feds can’t really make bad debt go away. All they can do is move it around. The parties to the transaction – creditors and debtors – usually decide among themselves who bears the losses. Typically, if the debtor can’t pay, the creditor loses his money. But when the feds step in almost anything can happen. But nothing good.
The general government plan is to collectivize losses – either by moving them onto the taxpayers or by moving them onto the general public. When the government borrows money to fund its bailouts and boondoggles, for example, it is taking losses away from the people who deserve them and sticking them on the taxpayer.
If they can manage to boil up a little consumer price inflation that is even better. Then losses seem to disappear into the air…like noxious fumes. The entire public breathes them in and gets a little lightheaded. It doesn’t know what to think or who to blame.
In the present case, some economists favor sticking taxpayers with the losses. Others are squarely against it, preferring to force the losses on the general public by means of inflation.
The trouble is, these cockamamie plans tend to have unanticipated consequences.
The Japanese feds really pulled a fast one, in this regard. They borrowed from their own people in order to fund a 20-year bailout/boondoggle program. The idea was to provide “counter-cyclical stimulus.”
Naturally, the stimulus never seemed to stimulate anything but more stimulus. The program went on for two decades…and, as far as we know, the Japanese economy is still limping along.
The effect economists did not anticipate was that the economy did not take off. Instead, there followed two decades of on-again, off-again slump. Which is why it would have been better to let the creditor and debtors work out their problems on their on…let them take their losses back in 1990…and be done with it!
Another unanticipated result has not yet been fully realized. The government took savings from Japanese households and spent it. Now, a whole generation of Japanese old people looks to government bonds as the source of its retirement wealth. Trouble is, there is no wealth there. The feds took credits and turned them into debits. They took the surplus wealth of an entire generation and squandered it. Now, instead of looking to stored-up wealth for their retirements, the Japanese have to hope that the next generation will be kind enough – and able – to keep up with the debts laid upon them.
Trouble is, the next generation has too much debt to carry. Government bonds outstanding equal nearly 200% of GDP. At zero interest rate, it’s not too hard to keep up with the interest payments. But even the Prime Minister is beginning to wonder how those debts will ever be repaid. And interest rates will not stay low forever.
Imagine that inflation rose…and that investors got nervous. Imagine that the carrying cost of that debt rose in Japan as it did in the ’70s in the US. At 10% interest, the cost would be one fifth of GDP – or about as much as the entire government budget.
Obviously, the system will fall apart first…leaving Japanese retirees with a lot less money than they thought they had.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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There’s one factor I believe you’re leaving out of the picture in this analysis: culture.
While it’s true that the US is heading in the policy direction of the hand-holding Japanese government, Japanese and American cultures are polar opposites.
In Japan, the individual must conform to the expectations of others, especially the government. People do not question what their government does in Japan. Once a decision is made, it is simply accepted. Lots of denial and acquiescence because of their “shouganai” (trans: it can’t be helped) attitude.
Americans are different. People here fight tooth and nail for their rights if they feel they are being violated by the government. Also, the US is a diverse and entrepreneurial country. We invite free thinkers from the four corners of the world, albeit in an admittedly much less inviting manner since 9/11.
Japan is 99% ethnic Japanese, with the majority of the other 1% constituting “zainichi” of Korean descent who were forced into essentially slave labor in Japan during WWII. They are still second-class citizens, and every well-educated zainichi I know has packed up and moved to the states because as a stigmatized minority they have few opportunities to succeed in Japan.
While the US government’s bailout bonanza should be abhorred, just consider this. America began bailouts within the past two years and already most Americans find them wasteful and ineffective.
Compare that to the “shouganai” Japanese who’ve sat on their hinds with their hands out to the government for the past two decades while their economy has lost ground to cheaper Asian competitors.
I would say there’s absolutely no comparison. If you ask American kids what they want to be when they grow up you get responses like astronaut or president or the next Bill Gates.
When you ask Japanese kids what they want to be when they grow up, they all tell you the same thing. The boys want to be “salarymen” like their fathers and the girls want to be stay-at-home moms.
I would know as I taught there for two years. Bunch of drones, if you ask me.