Macro Analytics 10-30-12 LESSONS FROM JAPAN

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Japan has experienced massive debt buildup, a growing interest payment burden, long term economic stagnation and now an emerging trade deficit. The question posed in this discussion between Gordon T Long and Charles High Smith is: "how has Japan avoided an economc death spiral?".

Japan has been a model and case study in stagnation and stimulus spending. Having pioneered ZIRP and Quantitative easing what can we learn from Japan? What are the lessons for the US with a similar characteristic of looming economc stagnation? What lessons MUST be learned? What should we conclude about the fact that Japan recently attempted QE 9, which failed so quickly that it actually tightened the monetary delivery mechanism versus the intended loosening of the Japanese credit markets?

It is important to appreciate that the US and Japan are different in some very critical elements. Having $3Trillion of assets and a self funded domestic debt makes a significant difference financially for Japan, compared to the US with a large percentage of its debt being foreign owned. The US 'trump card' has been the privelege of having the US dollar as the global reserve currency and the requirement for foreign countries to hold US dollars for global trade. However, that strategic advantage could be changing, as is the powerful demographic savings advantage recently held by Japan.

With 36 supporting slides this is a thought provoking review of the lessons we must learn from Japan before it is too late.

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Macro Analytics 10-30-12 LESSONS FROM JAPAN

  1. 1. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  2. 2. Macro Analytics October 30th, 2012 Lesson’s from Japan Gordon T Long GordonTLong.com Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  3. 3. Macro Analytics October 30th, 2012 Lesson’s from Japan Charles Hugh Smith DIRECT AMAZON LINK OfTwoMinds.com Link to info page and FREE Chapters at OfTwoMinds site: Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  4. 4. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  5. 5. Macro Analytics October 30th, 2012 Lesson’s from Japan What can we learn from Japan’s two decades of stagnation?  Japan and the Exhaustion of Consumerism (October 18, 2012)  The Hidden Cost of the "New Economy": New-Type Depression (October 17, 2012)  The Future of America Is Japan: Stagnation (October 16, 2012)  The Future of America Is Japan: Runaway Deficits, Runaway Debts (October 15, 2012)  Narcissistic Consumerism and Self-Destruction (October 20, 2012)  Narcissism, Consumerism and the End of Growth (October 19, 2012) . Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  6. 6. Macro Analytics October 30th, 2012 Lesson’s from Japan DEMOGRAPHIC DRAG The percentage of the population in the workforce declines as the country ages and as opportunity diminishes. Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  7. 7. Macro Analytics October 30th, 2012 Lesson’s from Japan The U.S. workforce-to-population ratio is back to levels of the late 1970s and early 1980s. How can household incomes and tax revenues increase when fewer people are earning wages? Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  8. 8. Macro Analytics October 30th, 2012 Lesson’s from Japan Here’s another look at the stagnating U.S. workforce: those with fulltime jobs: Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  9. 9. Macro Analytics October 30th, 2012 Lesson’s from Japan U.S. wages and household incomes have also stagnated: Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  10. 10. Macro Analytics October 30th, 2012 Lesson’s from Japan U.S. wages and household incomes have also stagnated: Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  11. 11. Macro Analytics October 30th, 2012 Lesson’s from Japan Japan’s private-sector economy continued expanding in the exporting-to-China boom that coincided with the global credit/housing bubble (2000-2007). Once that one-off boom ended, GDP minus government spending declined. In other words, the government is borrowing and spending more money but it is not growing GDP. It appears Government spending is yielding diminishing returns. Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  12. 12. Macro Analytics October 30th, 2012 Lesson’s from Japan As a percentage of GDP, U.S. Federal spending has been increasing for decades. During the one-off boom, the GDP grew faster than government spending. Now Federal spending is once again rising faster than GDP. How much longer can Federal spending rise faster than GDP? Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  13. 13. Macro Analytics October 30th, 2012 Lesson’s from Japan Japan’s Consumer Price Index (CPI) rose during the first decade of low growth and has since flat- lined, recently falling into deflation. Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  14. 14. Macro Analytics October 30th, 2012 Lesson’s from Japan Here is the U.S. CPI and core CPI—moderate, stable. Is deflation in our future? Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  15. 15. Macro Analytics October 30th, 2012 Lesson’s from Japan Here is Japan’s skyrocketing debt. Note that 95% of Japan’s government debt is owned domestically by banks, pension funds, insurance companies, the Postal Savings system, and citizens. Since Japan’s debt is “owed to itself,” it is a stable albeit low-yield income stream for the domestic economy. Japan also owns $3 trillion in overseas assets, so it is somewhat misleading to only look at the debt ledger. Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  16. 16. Macro Analytics October 30th, 2012 Lesson’s from Japan SOVEREIGN DEBT TO GDP: Reinhart & Rogoff 90% Rule Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  17. 17. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  18. 18. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  19. 19. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  20. 20. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  21. 21. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  22. 22. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  23. 23. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  24. 24. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  25. 25. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  26. 26. Macro Analytics October 30th, 2012 Lesson’s from Japan Sovereign DEBT to REVENUE Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  27. 27. Macro Analytics October 30th, 2012 Lesson’s from Japan U.S. Credit Market Debt: Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  28. 28. Macro Analytics October 30th, 2012 Lesson’s from Japan Ownership of U.S. Treasury bonds: roughly half are owned by foreign entities. This is the inevitable result of current account deficits: other nations have dollars they need to park somewhere, and Treasuries are a liquid market. This is unlikely to change unless U.S. trade deficits shrink. As it stands, trade deficits actually create a large pool of U.S. Treasury buyers. Triffin’s Paradox explains that the country with the global reserve currency must run trade deficits to fuel global demand for dollars. Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  29. 29. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  30. 30. Macro Analytics October 30th, 2012 Lesson’s from Japan Ownership of U.S. Treasury bonds: roughly half are owned by foreign entities. This is the inevitable result of current account deficits: other nations have dollars they need to park somewhere, and Treasuries are a liquid market. This is unlikely to change unless U.S. trade deficits shrink. As it stands, trade deficits actually create a large pool of U.S. Treasury buyers. Triffin’s Paradox explains that the country with the global reserve currency must run trade deficits to fuel global demand for dollars. Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  31. 31. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  32. 32. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  33. 33. Macro Analytics October 30th, 2012 Lesson’s from Japan Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  34. 34. Macro Analytics October 30th, 2012 Lesson’s from Japan CONCLUSION Any comparison of Japan and the U.S. must be nuanced. 1. DEMOGRAPHIC DRAG: Both share a demographic drag and some version of a “fiscal cliff,” as the workforce and household earnings are stagnant. How can tax revenues increase when wages and the workforce are both declining? 2. SELF FUNDED v FOREIGN DEBT: Japan is a nation of savers, with relatively few investment options and a conservative interlocking financial system. They have self-funded their debt, though demographics and lower opportunity for younger workers will erode their ability to keep self-funding their rising debt. 3. US DOLLAR DEMAND: The U.S. issues the global reserve currency, and as a result there is demand for dollars for trade and reserves. That is unlikely to change soon despite news stories about nations “abandoning” the dollar. As a result, there is demand for U.S. Treasuries globally, and so the U.S. has a market for its debt—as long as the U.S. trade deficit doesn’t shrink too much and the U.S. doesn’t try to borrow too much. 4. STAGNATION & DEFLATION: Japan’s GDP and CPI might offer a “roadmap” for the U.S. GDP stagnates as government borrowing and spending rise--diminishing returns on new debt. CPI can rise during the first phase of stagnation but eventually deflation sets in despite fiscal stimulus. 5. UNIQUENESS: We must be careful not to extrapolate lessons from unique economies to others. Both Japan and the U.S. are unique in significant ways.The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  35. 35. Macro Analytics October 30th, 2012 Charles Hugh Smith’s Writings Charles Hugh Smith DIRECT AMAZON LINK OfTwoMinds.com Link to info page and FREE Chapters at OfTwoMinds site: Listen to the original podcast for this slide at www.GordonTLong.com/Macro_AnalyticsThe content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of thisslide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
  36. 36. DISCLOSURE STATEMENT AND TERMS OF USETHE CONTENT OF THIS SLIDE PRESENTATION AND ITS ACCOMPANYING RECORDED AUDIO DISCUSSION AREINTENDED FOR EDUCATIONAL PURPOSES ONLY.This slide presentation and its accompanying recorded audio discussion are not a solicitation to trade or invest, andany analysis is the opinion of the author and is not to be used or relied upon as investment advice. Trading andinvesting can involve substantial risk of loss. Past performance is no guarantee of future returns/results. Commentaryis only the opinions of the authors and should not to be used for investment decisions. You must carefully examinethe risks associated with investing of any sort and whether investment programs are suitable for you. You shouldnever invest or consider investments without a complete set of disclosure documents, and should consider the risksprior to investing. This slide presentation and its accompanying recorded audio discussion are not in any way asubstitution for disclosure. Suitability of investing decisions rests solely with the investor. Your acknowledgement ofthis Disclosure and Term of Use Statement is a condition of access to it. Furthermore, any investments you may makeare your sole responsibility.THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OFFUTURE RESULTS. Listen to the original podcast for this slide at www.GordonTLong.com/Macro_Analytics

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