Of Interest


Wednesday, September 19, 2012

Why Japan is Not Greece

Why Japan is Not Greece

Many economists believe that Japan will become a net debtor nation. Analysts differ about when. Earlier this year we reported that Jesper Koll, managing director of research at JPMorgan Securities Japan, said, "The time is now... It’s here. It’s 'Sayonara Japan' as a net creditor country." Richard Katz believes that point is years away -- he's not even sure it is going to happen or if it does, that it will cause capital flight as has happened in Greece. Katz is editor-in-chief of the Oriental Economist Report. He is a distinguished lecturer, a former adjunct professor, and an economist who has written about Japan and US relations for three decades. Joining us to explain his latest thinking, is Katz -

Solomon: Why is Japan not going to become the next Greece?

Katz: The point at which Japan is in danger of capital flight, like Greece, is when Japan's current account becomes chronically in deficit. Some people say that could be five or ten years from now. I think it will be later -- I'm not even sure it's going to happen. Japan will most likely become a chronic trade deficit country within this decade, but the current account is different. The current account is the sum of Japan's trade balance plus the income earned on Japan's overseas assets (profits of overseas subsidiaries as well as stocks and bonds held outside Japan). Japan is not vulnerable now because it runs a big current account surplus. Even though the trade balance has been in deficit so far this year, the current account is still in surplus and will remain so for some time to come. If and when Japan does turn into a chronic deficit country, that would be a game-changer which would gradually raise the now-tiny risk of a Greek type crisis. But it would not spark an immediate crisis because Japan has a cushion of $3.3 trillion in net overseas assets.

Solomon: Why is the current account so crucial?

Katz: Running a current account deficit means that you are borrowing money from foreigners, who can easily withdraw it. All of the Euro-crisis countries had not only big government debts, but also big chronic current account deficits. Other European countries with government debts just as big, but without big current account deficits, did not go into crisis. To see this, take a look at the four quadrants of this chart. On the horizontal axis is net government debt as a percentage of GDP. The vertical axis is the current account as a percentage of GDP and presented as averages for the period from 2005 to 2010. Every one of the crisis countries -- Greece, Portugal, Spain and Ireland -- are in the right hand lower quadrant represented by the big boxes. The countries that were borrowing huge amounts of money from abroad got into trouble when the Lehman shock sent their deficits way up. They were vulnerable to capital flight; foreigners started taking their money away. 
Chart I

Yet not a single country in the upper right-hand quadrant has gone into crisis. These countries have a current account surplus, which means they can finance their debt by themselves. They're not vulnerable to capital flight. Not even all the countries in the lower-right hand quadrant have gone into crisis -- not the UK, not France, nor the US.

Even when Japan runs a current account deficit, that will not immediately make it vulnerable because it has a big cushion of built-up foreign assets. Here's the same chart, but replacing the current account as a percentage of GDP on the vertical axis with Japan's net international assets. 
Chart II

Again, crisis countries are in the lower right-hand quadrant. They owe a lot of money because they've been borrowing for many years. Yet all the countries in the upper right have been running surpluses for many years. They have built up a cushion of assets.

When a country has both internal and external imbalances, that's when you have a crisis. A domestic crisis alone is manageable. That's why Japan isn't Greece.

Solomon: How would that cushion work in practice?

Katz: Suppose Japan were running a current account deficit and, for some reason, foreigners became reluctant to lend to Japan. In that case, Japan could easily sell some of their international assets. At the end of 2011, the Ministry of Finance’s foreign exchange reserves amounted to $1.29 trillion. At today’s exchange rate, that is equal to 20% of GDP. In addition, net private overseas assets at the end of October 2011 amounted to $2 trillion (¥155 trillion). That equals another 33% of GDP. About 60% of those private assets are liquid financial assets, such as stocks, bonds and bank loans. That foreign investors can see this cushion is yet another reason they are unlikely to bet against Japan’s creditworthiness for years to come, just as deposit insurance reduces the chance of a run on the banks.

Solomon: Why would private parties that own foreign assets feel pressured to sell them? They're not under the control of the Japanese government.

Katz: If Japan were having a capital flight crisis that raised interest rates at home, it would pay private investors to shift some of their overseas bond and stock investments back to Japan to take advantage of those higher rates. Also, if Japan is running a big current account deficit, that means that private parties in Japan are building up debts to foreigners that they must pay in foreign hard currencies -- mostly in dollars. They need to get these dollars from somewhere. Japanese overseas assets are one source.

Solomon: Would not the government's sale of $1.29 trillion in foreign reserves simply increase the budget deficit? The ratings agencies and bond vigilantes, I think, would take notice.

Katz: They have no impact on the budget deficit, but do have an impact on the balance of payments and on the government’s cumulative balance of international assets and liabilities. That is a flow issue vs. stock issue. Rating agencies actions do not seem to have had much impact on market rates of government notes and bonds. Total overseas assets amounting to 55% of GDP, 20% owned outright by the government, should be enough to deal with bond market vigilantes.

Solomon: Can you explain why it doesn’t affect the budget deficit?

Katz: Today, Japan is running a current account surplus. Its net stock of private and government-owned foreign assets is increasing. If the current account turned negative, those assets would decrease. In this scenario, the government and private entities are not issuing new bonds to finance the current account deficit; they are selling existing assets, just as if they had sold a bridge to pay down debt. The net international assets of Japan as a whole would decline. But this action would no more increase the government budget deficit, than the Ministry of Finance increasing its reserve assets lowers the budget deficit today. The balance of payment and budget deficit issues in this case are separate issues, because Japan does not have to issue new debt to finance a current account deficit.

Solomon: Earlier this year I asked J. Koll to comment on the notion Japan had a huge cushion of overseas assets on which it could rely to finance its trade deficit. He said, "The income account is not huge. It is only 2% of GDP, almost nothing..... As anyone who has ever tried it, living off your assets is a very difficult thing to do." How do you respond?

Katz: The income account is about 3% of GDP, not 2% as you can see by the gray area in this chart. 
Chart III

The goods and services trade deficit expanded to 1.5% of GDP in the first half of 2012. It would have to double to wipe out income surplus and end the current account surplus. The trade deficit would have to triple to bring the current account to a deficit of about 1.5%. While I was wrong in expecting the trade surplus to return this year, it remains to be seen how that will go in the coming years. I still think Japan is heading to toward a chronic trade deficit, but its size is uncertain. I thought six months ago that this would occur in the 2015 to 2020 period. It may come forward a bit because of the combination of the nuclear shutdown and the ongoing troubles in Europe. A lot depends on the price of fossil fuels, which no one has been good at predicting in periods of economic uncertainty. It depends, for example, on demand from Europe and China, which is uncertain. It also depends on expansion of oil and natural gas production in the US. The upshot is the picture for the current account balance is uncertain, but I think the likelihood of Japan turning to chronic current account deficit by 2015 is very low. It will be driven by the trade situation, and the domestic investment-savings balance will adjust to that.

Solomon: Is the critical factor for Japan’s trade surplus its exports to China and Asia?

Katz: Japan’s exports to China and the rest of Asia hinge on China/Asia’s own exports to the US and Europe. 
Chart IV
Most of Japan’s exports to Asia serve as capital or parts inputs for these countries’ own exports. It is the sluggish recovery in the US and the travails in EU that count the most for Japan’s exports. It is the nuclear shutdown and price of fossil fuels that count the most for imports.

Solomon: What does all of this mean of policy going forward?

Katz: The good news is there is no urgency to raise taxes when the global economy is still weak and uncertain. The consumption tax hike passed by the Diet should be delayed until Japan is in better economic health. Second, Japan has the breathing room to apply structural reform to improve long-term growth while being able to use fiscal stimulus as the anesthesia to make the pain of structural reform bearable. Fiscal stimulus need not mean bridges to nowhere. It could be a combination of temporary consumer-oriented tax cuts and public works that help the economy. For example, linking suburban and semi-rural homes to sewage lines and gas pipelines -- homes now served by septic tanks and propane gas tanks -- would greatly reduce air and water pollution while cutting Japan’s energy needs. That would eliminate the need for trucks to service the septic tanks and propane tanks.

Richard Katz is editor-in-chief of The Oriental Economist Report. Katz has written about Japan and US relations for over three decades. He was a visiting lecturer in economics at the State University of New York in Stony Brook and an adjunct professor of economics at New York University Stern School of Business. He's authored two books about Japan -- "Japan, the System That Soured: The Rise and Fall of the Japanese Economic Miracle" and "Japanese Phoenix: The Long Road to Economic Revival". In “A Nordic Mirror”, he explained why Scandinavia has recovered from similar structural defects far more quickly than Japan. Richard holds a BA in history from Columbia University (1973) and holds a masters degree in economics from NYU (1996). www.orientaleconomist.com 

Sunday, September 16, 2012

Plans for a new Yamanote Line station was announced this year. in 2012

Plans for a new Yamanote Line station was announced this year. in 2012

East Japan Railway Co. may build the first new station on the Yamanote Line since 1971, adding the site would be between Shinagawa and Tamachi stations.
JR East is looking to start building the 30th station on the Tokyo commuter loop line in fiscal 2014 as part of its redevelopment of 50 to 75 percent of a 20-hectare rail yard located between the two stations in Minato Ward, the sources said.

The story below (Heading above) in the Japan Times highlights the application for a real estate buying strategy in Tokyo. The East Japan Railway Co is building a new railway station between Shinagawa and Tamachi stations.

Sites to look at are in areas where subways might be extended or new stations added. a principle guiding decision will be:
1. Local minimum population density - look at neighbouring areas
2. Distance between train stations - look for anomalies
3. Explanation for anomalies - why is there no station there? Topographic anomaly so no settlement; perhaps a park, etc.
4. Growing population density - historical evidence that the area is growing in population. High rise developments, new stores like HokkaHokkaTai-obento shops or Mackers,etc are good signs to keep an eye out for, take a look at Japan's very good population statistics. They offer monthly changes in demographics.

5. Space for growth - stations need to be supported by near-station development. It is harder to develop a station if the railway company cannot build some type of shopping precinct to service it.

Buying mortgagee bank owned property to 'hold' as a rental property to profit from anticipated future development. After a proposed new station is announced, you could expect property prices (Cap Gains) do very well.

QE3 & the Ponzitards

As depicted by the thtle of this post, we are now witnessing geopolitical/economic/environmental meltdown in real-time.  It's an accelerating train wreck that has the public paralyzed - frogs in boiling water.  Their only recourse is American Idol, South Park and Faux News

No sooner had I written my most recent diatribe against the alpha males who bulldozed their way to the top by repeating the same moronic strategies over and over again, than I am presented with yet more mind boggling examples.

First off, with respect to Monetary Policy, I was remiss in not pointing out the most egregious (albeit obvious) aspect of the latest policy moves.  Which is the constantly overlooked fact that monetary policy - cheap money - got us into this mess in the first place.  Once again, it's the signature of the Idiocracy to believe that the way to get out of a problem is to just apply MORE of the same bad policy that caused the problem to begin with.  As a reminder, both the ECB (via OMT) and the Fed (via QE3) this past week declared that they will print as much money as necessary to resolve these ongoing debt problems that were created by easy money.  

With respect to Fiscal Policy, that Full Retard moment has been building for years across all Western Nations.  However, the recent climactic moment occurred when non other than Larry Summers - Dean of Harvard and a key architect of the 2008 meltdown, said that the best way for the U.S. to get out of debt is to borrow MORE money.  

I try not to get too political since I have outright disgust for the two party pseudo-democratic system, but when Mitt Romney indicated that his election platform involves yet another tax cut for the wealthy, I almost shit a brick.  Bush's tax cut from a decade ago is still baselined into the recurring deficit and requires ongoing borrowing i.e. it's a tax cut paid for by America's grandchildren.  And apparently paying for 60% of the Federal budget (borrowing the rest) is just too much burden for today's 'taxpayer'.  So, they need a bigger break.  Leave aside the fact that the wealthy, including Romney himself, already pay a lower tax rate than the middle class and they keep their real money in offshore bank accounts paying 0% tax.  Meanwhile, lest we forget, Bernanke's latest lubing of the stock market (and all risk assets) is a direct income benefit to the wealthy and a commodity inflation tax on the middle class.

The Economist Goes Mad Magazine
Speaking of insanity, the subject that spawned this latest diatribe - geopolitics.  Just this week "The Economist", in examining the recent spate of Anti-American protests across the entire Muslim world, declared that the best response for the U.S. was to interfere MORE in the region.  So again, the best response to a failed policy leading to widespread anarchy, poverty and disillusion is to just double down on the same bad policy.  To be specific, "The Economist", which is ostensibly an economics-oriented magazine devoted an entire article giving glib armchair general advice on how the U.S. should provide military support to the rebels in Syria.  I didn't realize that the pencil necked geeks at "The Economist" were military strategists.  Of course, the same magazine was a proponent of U.S. involvement in Libya where the U.S. embassy was just blown up.  Who knew that intervention could have such high and immediate ROI?  And dare I state the obvious, but if a Danish cartoon or homemade video on YouTube can cause a billion Muslims to go apeshit, then stay tuned for a lot more cartoons and homemade videos...

Wow, this shit is melting down in real time and the only thing preventing public acknowledgement of the fact is the new season of NFL football commanding attention.  Also redirecting attention away from reality is the impending election to determine which of two Harvard buffoons will be the best spokeman for the 14,000 special interest groups operating in D.C.

Lastly, with respect to iPhoney 5 (really 6, but who's counting), as expected, the Idiocracy really, really wants one: lol this is hilarious... 

Sunday, September 9, 2012

Angus & Julia Stone - Mango Tree (Live at the Vanguard)

A Microcosm of Japan’s Tough Future?

A Microcosm of Japan’s Tough Future?

The population of Yubari in Hokkaido has shrunk more than 90% of its peak, services are vanishing and white elephant public works projects have left the greying inhabitants with a mountain of debt. Welcome to Yubari, Japan in miniature. 

If the city of Yubari is, indeed,  a glimpse of future Japan,  this may be what the Nikkei has been or starting to discount.  The index is still down a stunning 77 percent from its December 29, 1989  all-time high and has only managed a 27 percent bounce off the October 2008 low.
It’s the economy demographics,  stupid!

Japan has suffered through severe trials and tribulations, including the bursting of a real estate and stock market bubble, a prolonged depression,  and a tragic earthquake and tsunami.   One can only wonder about the social stability of, say, the U.S.  or other western countries if they were to experience the same scale of testing.  Just imagine a similar stock market nightmare which would put the S&P500 at 282.99 in August 2026.  Ouch!
What a testament to the non-entitlement  mentality of the Japanese people.   Godspeed, our Japanese friends.

Friday, September 7, 2012

Steve Keen Study Economics At UWS September 2012

Steve gave the talk at UWS's Open Day, as an intoduction to economics for prospective university students. 

the Economics & Finance program at UWS has been almost unique amongst economics departments around the world in deliberately pursuing a "pluralist" approach to economics.

Robert Glasper - The Spirit of Jazz - Reflection of Society

Rob hits so many good points regarding the current state of jazz.Its both refreshing and fantastic that Glasper is pushing the genre forward as apposed to staying in the nostalgic style of play. it's like jazz quit progressing after the 80s. the 70's was like the last major shift in jazz and as a result it stagnated . I love what the Experiment are doing! 

Peter Schiff - US Real Estate & Stocks outlook 08-06-12.

Peter Schiff bearish when it comes to the US dollar and economy. He as an ardent opponent of the Federal Reserve, and proposes reduced government spending and taxes and increased personal savings as the solution to the US debt problem. He blames the collapse in housing prices on unrestrained lending by banks and predicts a similar economic collapse in the near future triggered by sovereign debt.

Sunday, September 2, 2012

Two Guys in Bow-ties Jim Grant

The bow-tied-and-bespectacled bringer-of-truth was on Bloomberg tv this providing his own clarifying perspective on what we should hope for (and what we should not) from Jacksons Hole this weekend. Jim Grant's acerbic comments on Krugman's view of the world, on the gold standard as a "force for growth and stability", and the "unproven and truly radical methods" of the SNB and Fed, pale in significance when he is asked about the stock market distortions: "I think we live in a hall of mirrors in finance thanks to the zero interest rate regime and the chronic nonstop interventions," and when asked when Bernanke should start raising rates, the simple (yet complex) response is "Last Year! And Eric Rosengren would be in a different line of work." Must watch to understand the central-banker-meme-du-decade.

Saturday, September 1, 2012


KONDRATIEFF WAVES (or, for short, K-waves) may be defined as a pattern of regularity characteristic of structural change in the modern world economy. Some 60 years in length, it consists of an alternation of periods of high sectoral growth with others, start-up periods of slower growth. The study of this pattern helps to trace the evolution of the global economy, and aids in politico-economic prediction.
One of my earliest introductions to the world of economics came from someone who was a true believer in the Kondratieff Wave – the idea that there is a much longer cycle, lasting approximately fifty years, which overlays the ordinary, and shorter business cycle. You'll be pleased to know that if the present crisis marks the start of a classic Kondratieff downswing, then we've got between five and thirty-six years of slump still to come.
In any case, it was a delight to have my attention drawn to an article, published back in October 1987, which postulated that the stock market crash of that month marked the crest of a Kondratieff Wave, ergo it would therefore be downhill from then on for the next 20-30 years. Well there was a recession shortly afterwards, albeit shallow and shortlived, but thereafter decent levels of growth resumed and continued but for another brief hiccup around the turn of the century right up to the present crisis.
Nor was this the only error in prediction. Kondratieff Waves tend to be associated with the eclipse of one world superpower and the rise of another, so it was logical to assume back then that the still apparently unstoppable rise of Japan would eventually dislodge the United States from its position of economic hegemony. How wrong can you be?
However, none of this disproves the Kondratieff theory. The mistake made in article may have been merely to misread the cycle. Kondratieff, a Russian economist who died in Stalin's Gulags, identied three distinct long waves, the dates of which you can see in the table below. The downswing in the last of these waves begins during the First World War or shortly afterwards.
Subsequent students of Kondratieff cycles have placed the end of this third cycle during or shortly after the Second World War, which seems logical enough, and have identified a further two cycles thereafter, with the fifth upswing beginning in the 1980s and ending with the current crisis. On past durations, we are now in a downswing phase lasting anything between ten and forty one years. Dating the beginning of the crisis from 2008, that's between five and thirty six years to go (See table below).
Part of the difficulty with Kondratieff is deciding precisely what the cycle is. Kondratieff himself observed the waves first in capital investment dynamics – high periods of investment followed by low periods – and then later in production of pig iron. Subsequent followers have observed the cycles in price indices, or relatively elevated periods of inflation followed by low ones. A further explanation connects them with waves of technological innovation. Kondratieff himself observed that "during the recession of the long waves, an especially large number of important discoveries and inventions in the technique of production and communication are made, which however are usually applied on a large scale only at the beginning of the next long upswing".
The Austrian economist, Schumpeter, was also a disciple of this latter explanation. Intuitively, it seems likely there is something in it. Periods of very high, transformational innovation are followed by rapid development and high investment as the new infrastructure is rolled out. The consequent increase in productively leads to big gains in living standards. But then the development phase comes to an end and there is a pause for breath before the next big thing comes along. In the modern age, there have been five or six great transformations, starting in Britain with the industrial revolution and then on to the transport revolution brought about by rail. Subsequently there was the era of electricity and the automobile, then came eletronics, air travel, and televisions. The present one, perhaps now largely over, is that of mass communications.
Oh come off it, If you are talking about the intermittent march of progress, that's one thing, but to connect it with a discernible, time specific wave of ebbing and flowing economic activity is quite another. Well maybe, but research by Andrey Korotayev and Sergey Tsirel published by the University of California on its eScholarship website suggests that there is indeed some correlation between the long K-cycle and world GDP.
However, somewhat confusingly, their analysis suggests two interpretations of the current global economic crisis. One is that it doesn't mark the start of the fifth Kondratieff downswing at all, but can be interpreted as a temporary depression between two peaks on the upswing, where the second peak may even exceed the first. On this interpretation, the big meltdown doesn't begin until 2018-2020 (memo to self: liquidate all positions by 2020).
However, there is also quite a bit of evidence to suggest that the current financial crisis does indeed mark the start of the downswing. Given that this is not a normal recession, but a downturn caused by an all-embracing banking crisis, 2008-2010 seems the more likely inflection point. It also correlates quite closely with the separate "40 year rule", an old piece of Wall Street folklore which has it that really serious banking crises only happen once every forty years because this is how long it takes for all institutional recollection of the last one completely to die out, allowing the new generation of banking hotheads to let rip once more.

Yet another good  way to expand your knowledge is check out the website of the Long Wave Group whose publications cover the global economy from the long-term prospective.  You will discover that over the past decade the company's President, Mr. Ian Gordon has accurately predicted the banking crisis , the housing crisis, the stock market crash, the pension crisis, the sovereign debt crisis and  the double bottom of the gold bullion market in 1999-2001. 

One last point worth adding, no school of Economics has a theory of technology, yet it is technology improvements that drive wealth improvements in general.
At the moment we are in a situations where an awful lot of easy gains over the past thirty years have stopped happening, due to the maturing of computer technology.  For example, an iPad is an innovation, but it is only a marginal one from a laptop and does not completely replace it.  It is a much smaller gain than from desktop to laptop, or from PC to multimedia PC and multimedia to Internet.
Now humanity is back in our usual position of having to find something new to do.  And greatly impeded by the metastatic growth of government that computerisation has allowed, effectively rendering further computerisation almost useless and economically harmful. 
So here we remain until something happens in someone's garage to open things up again, assuming their garage is located in a entrepreneur friendly jurisdiction, so nowhere in the West.
Something similar happened in the 1930s with the motor car.  All the easy gains from replacing horses over the previous 30 years stopped dead.  Suddenly it was all about marginal improvements and on the back of that change there was the most enormous recession.  Same thing in the 1840s about railway technology, and again in the 1870s.

If Kondratieff was right. If is the the key word here.  Because frankly a Soviet-era Socialist economist has probably very little to teach us.  
I use the term Soviet-era Socialist economist in the sense of schools of economics. Classical, Neoclaissical, Keynsian, Monetarist, Socialist, Fascist, and Austrian/Neo Austrian. 
The Fascist school is also known as Corporatist in modern parlance. Monetarist could also be called Neo-Keynesian. What is techically Neo-Austrian is usually just refered to as Austrian today. Of them all, the (Neo)Austrian school is the best, but there is much that is not explained by any school, such as the role of technological development.

Instead of parroting bien-peasant economic theories popular with those who don't actually think about it, why not take a look at Austrian economics.  The Austrian school is able to explain why there is a depression much more effectively than Kondratieff voodoo, and what to do to exit the recession - stop diverting productive resources by inflating the money supply and radically shrink back the metastatic state, and allow liquidation of bankrupt assets.
Austrian economists were predicting a major depression of unlimited duration since the early/mid 2000s,
Food for thought.