Japan won’t even be a developed country after 2050, how long will it take for US to fall into 3rd world status? The last time I was in lantana florida, I thought we were already there, in just a few decades it went from first to third world…
Inviting economic suicide?
By KEVIN RAFFERTY
The International Monetary Fund has just reported that India has overtaken Japan as the world’s third biggest economy in purchasing power parity (PPP) — the measure of the amount of money needed to purchase the same goods and services.
Now it is at least semi-official: Japan’s economy is on the skids. A report just released by a think tank of the Nippon Keidanren, the country’s most powerful business organization, says that by 2050, Japan will no longer be a developed country, predicting years of negative growth from 2030 onward.
It’s not just that we are in a liquidity trap, with short-term Treasury rates effectively at zero and short-term Treasury bonds perfect substitutes for or dominated by cash. It’s that we are expected to remain in a liquidity trap for a long time to come.
A normalization of the 10-year TIPS rate–a return of the 10-Year TIPS yield to 2%/year–would produce an instant 20% loss to holders of TIPS. Yet TIPS holders find options in other asset classes so unattractive that they are willing to run that risk and pay the U.S. Treasury 0.25%/year in real terms for the privilege of running that risk.
That is a very powerful statement of how low market tolerance for risk and how pessimistic market expectations of continued profits are.
If the option is simply holding cash–which it appears to be–then the liquidity trap has, if normalization is the alternative, a risk-neutral probability measure expected lifetime of ten years: just one chance in ten that we will see normalization next year, and a 37% chance that we will still be in this liquidity trap a decade hence with the same outlook relative to potential we have now.
Now continued liquidity trap and full normalization aren’t the only states the economy can be in, and RNPMs aren’t probabilities (they are probabilities multiplied by swing investor relative marginal utilities and scaled to sum to one).
And we certainly hope that the bond market is irrationally depressed.
But I must say I never expected to see anything like this in a fiat-money managed-currency world. Yes, I knew that under a gold standard things like this could happen: that by itself was sufficient reason to drop the gold standard. But I never imagined that central bankers claiming to be technocrats would wedge the economy here, and then refuse to take the actions they could take to get us out, and that fiscal authorities would similarly shy at the jump, and that banking and housing regulators would sit on their hands as well…
Ed starts right out saying: “Both countries can issue debt in unlimited quantities …”
That kills it right there.
1) issuing T-securities after the fact – to drain banking reserves – is NOT, I repeat NOT issuing debt.
[you cannot win an argument by agreeing to use broken semantics]
2) with with floating fx, non-convertible currency, there is no such thing as a national debt; it’s broken semantics at best;
3) the real battle is between currency-holders & labor/asset holders, over freezing the purchasing power of fiat currency, or letting it too float;
(We’re mostly letting labor & innovation value float, in a stupid attempt to freeze the value of floating-value fiat! That’s even more fundamentally inane than fixed-fx rates.)
Face it. Constantly devaluing (by some metrics) fiat currency is the negligible price we pay, for letting the value of fiat float freely enough to denominate any & all innovations & sheer output scale that we come up with. We’re constraining our national output for the most base of reasons. It’s sheer ignorance & stupidity.
It’s entirely akin to a math teacher trying to limit use of numerals by a whole town, ‘cuz he likes the prestige & personal value of having most use to himself. Vote with your feet, ‘cuz our fate is in our fiat. :) Politely ignore the Deficit Terrorists. The deficit is in their intellect, not in our fiat.
Ed / Warren,
How do you look at the often heard explanation for low JGB yields, namely that most of them are held domestically and this sector is less likely to turn its back on its own currency?
This compared to the US where a larger part is held by the foreign sector.
We know Japan has (used to have) trade surpluses and the US trade deficits. Obviously Japan’s domestic sector has a huge savings desire. As far as I understand it’s their corporates, for their population (private households) is aging and already saving negatively.
We also know that any exporter that may change his perception to the usd risks losing market share in the US. But as we saw, last year China, angry after QE2, all of a sudden stopped buying short term US treasuries.
@Colin, Its all good, I don’t mind laughter when in the company of ideas like that of professor delong, at that community college you say is a joke, who knew the budget cuts at berkeley would sink us so low ;) But he worked with the treasury department in the clinton administration, what are your references colin? I know warrens, yours I do not, neways delong says more: