Yen Edges Toward Brink

[MachineGhost]

Every time I come to Japan to attend a conference, I am reminded of what a depression looks like in the 21st century. This time is no different: shops are not busy, restaurant owners wait anxiously outside for customers and are usually disappointed, empty taxi cabs roam the streets. Two decades after its property bubble began to deflate, Japan remains mired in deflation and contraction.

http://english.caixin.com/2012-11-12/100459252_all.html

[Gumby]

More Japanofearmongering.

The currency is engineered not to fail.

Here's how... Japan is Never Going to Default and the Kyle Bass Trade is Going To Be a Disaster

This doesn't mean the currency won't fail, or can't fail, but it won't be for the reasons outlined in the article you linked to. Perhaps Japan's currency might weaken, but the Japanese would welcome that.

[Pointedstick]

I didn't read anything in that article predicting a failure or default of the Yen. Seemed like a pretty interesting article overall, especially the part about the looming challenges stemming from a large budget deficit alongside a trade surplus, a shrinking savings rate, and lukewarm foreign appetite for bonds.

I also thought this part has some good lessons we in the USA could learn:

Japan is the fastest aging major economy. How it copes offers valuable lessons to other countries that will follow in the aging process. The first lesson is that the political process needs to change to offer more weight to the youth. Otherwise, the society won't invest in the future, which is a recipe for decline. Further, burdening the young discourages them from having children, reinforcing the aging trend.

As a young person who sees 10% (scheduled to rise to 14%) of his paycheck disappear to support the old, I heartily agree.

[Gumby]

I didn't read anything in that article predicting a failure or default of the Yen. Seemed like a pretty interesting article overall, especially the part about the looming challenges stemming from a large budget deficit alongside a trade surplus, a shrinking savings rate, and lukewarm foreign appetite for bonds.

Yes. So, it implied demise, but only predicted a weaker Yen. But, that's what everyone wants. The Yen is too strong.

I find it annoying to read articles whining about the dwindling savings rate while simultaneously whining about large deficits. The two are directly tied together in a debt-based monetary system.

When the government runs a deficit, private (and foreign) savings increases. The government's liability is the private and foreign sector's asset. When the government runs a surplus, private (and foreign) savings dwindle. Certainly investment and private credit can be a form of savings, but those are often unstable forms of savings and are hard to find during an economic depression.

Finally, the article makes the following unproven fearmongering statement:

"If the fiscal deficit doesn't decline, there isn't enough money at home to fund it. The emergence of a trade deficit now and current account deficit soon reflect a savings shortage in Japan. What foreign investors think of Japan will begin to matter to its bond market. Foreign investors are unlikely to buy into Japan's crazy policy combination"

This shows a real lack of understanding of where the money to fund the deficit comes from. Every single Yen that is issued from debt goes into the banking system and becomes fresh Yen that is available to purchase future government debt with. Japan will never run into a situation where the private and foreign sector will run out of money to buy Japanese debt.

And the idea that foreigners will lose their appetite for JGBs is unfounded. If foreigners have Yen in their pockets, and want to save it, they have an incentive to buy bonds with those Yen — rather than letting them sit idle in a bank account. And if they do let those Yen sit idle in a bank account, then the bank has an incentive (and are often required) to use those Yen to buy JGBs with.

(And finally, the Bank of Japan can buy an unlimited amount of JGBs directly from the Ministry of Finance and all the interest is returned to the Ministry of Finance. The ability to roll over an unlimited amount of interest free debt is the equivalent of printing fiat money.)

In the end, it makes no difference if domestic savers or foreign savers are holding Yen. Both have an equal incentive to trade in their Yen for bonds — much like Harry Browne recommends that we save our cash as Treasuries. Whether we live domestically or abroad makes no difference.

[melveyr]

I didn't read anything in that article predicting a failure or default of the Yen. Seemed like a pretty interesting article overall, especially the part about the looming challenges stemming from a large budget deficit alongside a trade surplus, a shrinking savings rate, and lukewarm foreign appetite for bonds.

Yes. So, it implied demise, but only predicted a weaker Yen. But, that's what everyone wants. The Yen is too strong.

I find it annoying to read articles whining about the dwindling savings rate while simultaneously whining about large deficits. The two are directly tied together in a debt-based monetary system.

When the government runs a deficit, private (and foreign) savings increases. The government's liability is the private and foreign sector's asset. When the government runs a surplus, private (and foreign) savings dwindle. Certainly investment and private credit can be a form of savings, but those are often unstable forms of savings and are hard to find during an economic depression.

Finally, the article makes the following unproven fearmongering statement:

"If the fiscal deficit doesn't decline, there isn't enough money at home to fund it. The emergence of a trade deficit now and current account deficit soon reflect a savings shortage in Japan. What foreign investors think of Japan will begin to matter to its bond market. Foreign investors are unlikely to buy into Japan's crazy policy combination"

This shows a real lack of understanding of where the money to fund the deficit comes from. Every single Yen that is issued from debt goes into the banking system and becomes fresh Yen that is available to purchase future government debt with. Japan will never run into a situation where the private and foreign sector will run out of money to buy Japanese debt.

And the idea that foreigners will lose their appetite for JGBs is unfounded. If foreigners have Yen in their pockets, and want to save it, they have an incentive to buy bonds with those Yen — rather than letting them sit idle in a bank account. And if they do let those Yen sit idle in a bank account, then the bank has an incentive (and are often required) to use those Yen to buy JGBs with.

(And finally, the Bank of Japan can buy an unlimited amount of JGBs directly from the Ministry of Finance and all the interest is returned to the Ministry of Finance. The ability to roll over an unlimited amount of interest free debt is the equivalent of printing fiat money.)

In the end, it makes no difference if domestic savers or foreign savers are holding Yen. Both have an equal incentive to trade in their Yen for bonds — much like Harry Browne recommends that we save our cash as Treasuries. Whether we live domestically or abroad makes no difference.

Sometimes I wish I never learned any of this stuff because it is so frustrating reading the news. I kind of missing being scared of this stuff and being part of the herd. Combining that with having the PP as one's investment portfolio it is hard to not feel very disconnected and somewhat lonely.

[doodle]

Our entire system is bound to fail if it is based on the idea of constant exponential growth. That is a system that contradicts the very laws of nature. Someone above pulled out a quote from the article that referenced Japans declining population as an economic problem. Well, at some point in time populations are going to have to level off or even decline unless we all want to be packed into chicken coop like cages fighting over scraps of natural resources. Economics certainly lives up to its name as the dismal science when its paradigm for the world contradicts natural reality.

[melveyr]

Our entire system is bound to fail if it is based on the idea of constant exponential growth. That is a system that contradicts the very laws of nature. Someone above pulled out a quote from the article that referenced Japans declining population as an economic problem. Well, at some point in time populations are going to have to level off or even decline unless we all want to be packed into chicken coop like cages fighting over scraps of natural resources. Economics certainly lives up to its name as the dismal science when its paradigm for the world contradicts natural reality.

I agree that there are limits to exponential growth with physical items (real economic activity) and that is a serious problem with regards to energy production in particular. However, there is nothing physical about Japan's currency or their general financial woes. Their problems stem from a lack of demand which is an entirely abstract concept, one that has to do with social relationships expressing themselves through the monetary system in a dysfunctional way that leads to idle labor and physical capital.

[doodle]

Maybe the Japanese are all afflicted with ERE philosophy. Maybe a lack of growth in demand is rational once an economy produces enough to satisfy ones basic necessities. I tend to think of voracious consumer demand for material products a more troubling affliction than simple contentment. Of course, our present economic system finds it problematic that a group of people refuse to continually gorge themselves on lifes buffet cart of material garbage. The fact that the monetary system is ill adapted to deal with sane human behavior comes down to a design flaw in the money system, not that of the humans that it supossedly serves.

[MachineGhost]

Sometimes I wish I never learned any of this stuff because it is so frustrating reading the news. I kind of missing being scared of this stuff and being part of the herd. Combining that with having the PP as one's investment portfolio it is hard to not feel very disconnected and somewhat lonely.

Buy a Japanese toilet and feel even MORE lonely.

[Gumby]

My reading of it was that they thought the Postal Bank and Pension would have to start selling bonds to meet cashflow.  That tends to drive up yield to the point where the other banks (or foreigners) are willing to clear it.

The BOJ is responsible for providing liquidity to banks, by swapping bonds for cash, during a liquidity crisis (i.e. Quantitative Easing, for instance). They are basically a giant change machine.

[melveyr]

Maybe the Japanese are all afflicted with ERE philosophy. Maybe a lack of growth in demand is rational once an economy produces enough to satisfy ones basic necessities. I tend to think of voracious consumer demand for material products a more troubling affliction than simple contentment. Of course, our present economic system finds it problematic that a group of people refuse to continually gorge themselves on lifes buffet cart of material garbage. The fact that the monetary system is ill adapted to deal with sane human behavior comes down to a design flaw in the money system, not that of the humans that it supossedly serves.

Yes, I agree entirely. The government's monetary system is not accommodating the private sectors demand to save currency. If I could have some fancy shmancy Milton Friedman-esque quote attributed to me it would be "Unemployment is strictly a monetary phenomenon."

If you think about it, the idea of unemployment is impossible in a barter economy. In a barter economy people simply create things of value, and exchange them with other things of value. If I can create something of value I will do so. Most neoclassical economists assume we are operating in a barter economy which is why they absolutely suck at explaining unemployment.

In a monetized economy we are forced to interface through the monetary system. If I can create something of value, and you can create something of value, we are both forced to acquire this external thing (money) to facilitate a transfer that leaves both of us better off.

[MediumTex]

Maybe the Japanese are all afflicted with ERE philosophy. Maybe a lack of growth in demand is rational once an economy produces enough to satisfy ones basic necessities.

I think that the demographic shift explanation makes a lot more sense.

The average consumer goes through different stages of consumption, peaking in the age 45-54 band, when a typical consumer may be supporting himself or herself, several children (some of whom may be in college), perhaps one or more former spouses, and perhaps an elderly parent. 

Once a person moves past this period of life overall consumption tends to decline as a result of fewer dependents, lower living expenses, fewer work and education-related expenses, etc.

When an economy is seeing its age 45-54 demographic segment increasing in relation to the overall population, the economy tends to do well.  When it is contracting it tends to do poorly.  These periods tend to line up well with secular bear markets for stocks.

[Gumby]

Yep. A lot of data to support that idea. (Check out India!)

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[align=center]Source: The World in 2030: Super-cycle or Grey Age?[/align]

[Greg]

Maybe the Japanese are all afflicted with ERE philosophy. Maybe a lack of growth in demand is rational once an economy produces enough to satisfy ones basic necessities. I tend to think of voracious consumer demand for material products a more troubling affliction than simple contentment. Of course, our present economic system finds it problematic that a group of people refuse to continually gorge themselves on lifes buffet cart of material garbage. The fact that the monetary system is ill adapted to deal with sane human behavior comes down to a design flaw in the money system, not that of the humans that it supossedly serves.

Yes, I agree entirely. The government's monetary system is not accommodating the private sectors demand to save currency. If I could have some fancy shmancy Milton Friedman-esque quote attributed to me it would be "Unemployment is strictly a monetary phenomenon."

If you think about it, the idea of unemployment is impossible in a barter economy. In a barter economy people simply create things of value, and exchange them with other things of value. If I can create something of value I will do so. Most neoclassical economists assume we are operating in a barter economy which is why they absolutely suck at explaining unemployment.

In a monetized economy we are forced to interface through the monetary system. If I can create something of value, and you can create something of value, we are both forced to acquire this external thing (money) to facilitate a transfer that leaves both of us better off.

There might not be unemployment in a barter economy but what if someone is producing something that no one values? You state "if" I can create something of value, which perhaps a lot of people can't. Wouldn't that be a group of people then in the barter economy that are building buggy-whips when everyone else is driving and trading cars? No one wants what they are selling but buggy-whips are all they know how to make currently.

[Gumby]

Look out below...

http://businessinsider.com/japanese-10- ... ds-2012-11

[melveyr]

Maybe the Japanese are all afflicted with ERE philosophy. Maybe a lack of growth in demand is rational once an economy produces enough to satisfy ones basic necessities. I tend to think of voracious consumer demand for material products a more troubling affliction than simple contentment. Of course, our present economic system finds it problematic that a group of people refuse to continually gorge themselves on lifes buffet cart of material garbage. The fact that the monetary system is ill adapted to deal with sane human behavior comes down to a design flaw in the money system, not that of the humans that it supossedly serves.

Yes, I agree entirely. The government's monetary system is not accommodating the private sectors demand to save currency. If I could have some fancy shmancy Milton Friedman-esque quote attributed to me it would be "Unemployment is strictly a monetary phenomenon."

If you think about it, the idea of unemployment is impossible in a barter economy. In a barter economy people simply create things of value, and exchange them with other things of value. If I can create something of value I will do so. Most neoclassical economists assume we are operating in a barter economy which is why they absolutely suck at explaining unemployment.

In a monetized economy we are forced to interface through the monetary system. If I can create something of value, and you can create something of value, we are both forced to acquire this external thing (money) to facilitate a transfer that leaves both of us better off.

There might not be unemployment in a barter economy but what if someone is producing something that no one values? You state "if" I can create something of value, which perhaps a lot of people can't. Wouldn't that be a group of people then in the barter economy that are building buggy-whips when everyone else is driving and trading cars? No one wants what they are selling but buggy-whips are all they know how to make currently.

If I was using more precise language I would have said cyclical unemployment is strictly a monetary phenomenon. You are correct that structural and frictional unemployment would still exist in a barter economy.