Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

[c1ue]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

Largo,

Up until fairly recently - Japanese as evidenced by the ones I personally know were very investment naive. For them the world consisted of Japan - anything outside of that was pretty much irrelevant and unknowable.

Stocks were bad - everyone has still strong memories of getting burned in the 1990s bubble.

Real Estate was bad - everyone still owns property with loans growing in proportion to property value.

Bonds - 0.5%.

Bank deposits: 0.2% - 1M yen yields something like 200 yen a month. Equal to a pack of cigarettes.

So why not just toss it all in the postal pension scheme with its convenient neighborhood office? (and ATM)

In the last 5 years, more and more Japanese were starting to mess with the carry trade abroad - the Mrs. Watanabe thing.

Well, that experiment is ending badly. As I noted in another thread - losses of 30%, 40% and more are not unusua - and that was before the yen collapsed to 89/$.

You can be pretty sure that those affected aren't going to try that again.

[LargoWinch]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

Largo,

Japan's been able to survive thus far because of a combination of 2 things:

1) debt is owed to itself. Japanese as individuals and as a society have (had) a very high savings rate. Almost all of their debt is owned by Japanese individuals and corporations - a big chunk is via the postal pension system.

Why does this matter? Because owing the debt to itself means Japan has been able to set its own interest rates even though it owes huge sums. Having a national interest rate of almost 0% means the Japanese government not having to pay much money out to support its existing debt burden.

Thanks C1ue, that is very insightful.

That begs the question however, why are Japanese savers elect to "save" their hard-earned money elsewhere than domestically at 0%?

Are they not aware that markets are global and that ETFs are just a mouse click away? or are they simply so risk averse that they love their crispy Yen notes at the bank? Or perhaps they are simply happy with their savings gaining in purchasing power despite the 0% rate?

[c1ue]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

Largo,

Japan's been able to survive thus far because of a combination of 2 things:

1) debt is owed to itself. Japanese as individuals and as a society have (had) a very high savings rate. Almost all of their debt is owned by Japanese individuals and corporations - a big chunk is via the postal pension system.

Why does this matter? Because owing the debt to itself means Japan has been able to set its own interest rates even though it owes huge sums. Having a national interest rate of almost 0% means the Japanese government not having to pay much money out to support its existing debt burden.

It is the interest payments which normally start a negative cycle for governments, or at least make governments vulnerable to some other extraneous event.

2) The trade surplus: this is actually more indirect. Having a trade surplus means Japan can pay for imports using proceeds from exports. The debt owed to self is helpful only in the negative sense - because it doesn't consume foreign exchange used to pay interest.

The US avoids this problem by having debts denominated in its own currency; what Japan is doing is a non-reserve currency equivalent.

In contrast most other nations borrow money in foreign currencies then get a double whammy as both rising borrowing needs and lowering domestic incomes sink their domestic currency exchange rates - thus making both principal and interest payments even more difficult.

Japan's problem - then - is a severe demographic one, with a major economic one now as well. Normally a bout of currency appreciation such as Japan has experienced can be offset by printing of money. But too much printing means it is likely domestic interest rates will rise - as the system is already thoroughly stuffed with existing debt. These rising interest rates in turn will force much higher interest payments on debt which may force Japan to start borrowing abroad.

But if the currency situation isn't reversed, then the Japanese economy is going to have a significant reverse - as we're already seeing.

[LargoWinch]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

yes it was. it was, after all, better than the usa 1930s or japan after the war.

no 25% unemployment. no beggars in the streets.

success!!!

the strategy for japan was to make sure that by the time the economy collapsed the population was too old to revolt.

Something bugs me about Japan.

How can any country maintains a 190% (or so) Debt to GDP ratio and not see its currency collapse? Rogers was (maybe still is) a big fan of the yen and does not like gold too much. What is going on here?

This is especially puzzling given that Japan population is expected to be around 90 million in 2050 down from 120 million or so now.

I understand the trade surplus but still...

[Willette]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

My comment was not focusing just on asset price declines. The topic, and my quote have all to do with government induced inflation in response to credit (and asset price) collapse. First the ka, then the poom.

My thought is that the super-rich hold most of their wealth in tangible assets (farms, factories, real estate, businesses) rather than in fiat dollar denominated promises to pay. They are not likely to suffer any lack of food, clothing or shelter during the dislocations. The super-rich are known for their tendency to plan for the long term. Prices may go down and up, fiat currency may depreciate or become worthless. But after the crisis passes, the super-rich emerge still owning the same productive assets, and probably more that they were prepared to buy at the bottom. They were (typically) not forced to sell at the bottom since they are not highly leveraged.

Those of the middle and lower economic classes ARE subject to all four of your points a - d as a result of being whipsawed by the ka-poom and not having sufficient resources to ride it out in comfort. Decline of asset prices is only one phase of this process.

[LargoWinch]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

The truly wealthy will be little affected because they already own the majority of the world's productive assets, which are unaffected by all this money jiggering. The nominal price may change, but who cares if you own it free and clear?

Willette, your statement is somewhat counter-intuitive to me. Let me explain:

Asset owners, whether they financed that asset or not, are the most affected by a decline in asset values (equities and RE got most affected lately, but art and collectibles also tanked).

The “poor” on the other hand who is renting and living paycheck to paycheck is a lot less (if at all) affected by a decline in assets ; unless he

a) loses his job
b) is ravaged by inflation (different topic)
c) had 401k in equities or other paper assets
d) is taxed as a result of this debacle

All of this has nothing to do directly to a decline in asset prices no?

[metalman]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

I mean, you are absolutely right. Richard Koo, etc., how rosy it all looked before the global depression took hold. No external demand, no internal demand, no economy. Man are the Japanese f'd.

SAYS JAPAN YEARNS FOR WORLD PEACE; Prince Tokugawa Proclaims Militarism of His Nation to Be a Thing of the Past. CITES FIRST TREATY WITH US Spirit of Sincere Amity It Breathed Still Cherished by Japanese People, He Asserts.

December 12, 1921, Monday
Page 2, 867 words
WASHINGTON, Dec. 11.--Declaring that Japanese "militarism" is a thing of the past, and praising the injection of American idealism into international affairs, Prince Iyegato Tokugawa of the ...

[Chomsky]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

yes it was. it was, after all, better than the usa 1930s or japan after the war.

no 25% unemployment. no beggars in the streets.

success!!!

the strategy for japan was to make sure that by the time the economy collapsed the population was too old to revolt.

I mean, you are absolutely right. Richard Koo, etc., how rosy it all looked before the global depression took hold. No external demand, no internal demand, no economy. Man are the Japanese f'd.

[vanvaley1]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

Yeah, difficult to be a revolutionary when ya forget how to release the brake on your wheelchair. But don't sell us ole timers short...we'll figure it out eventually.

[metalman]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

i think a google search on "lost decade" will show that japan was NOT considered a model of success.

yes it was. it was, after all, better than the usa 1930s or japan after the war.

no 25% unemployment. no beggars in the streets.

success!!!

the strategy for japan was to make sure that by the time the economy collapsed the population was too old to revolt.

[jk]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

maybe i'm getting old and forgetful but until last week or so... wasn't the japanese model for fighting deflation the model of success?

i think a google search on "lost decade" will show that japan was NOT considered a model of success.

[metalman]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

http://www.nytimes.com/2009/02/22/bu...2&ref=business


Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.

maybe i'm getting old and forgetful but until last week or so... wasn't the japanese model for fighting deflation the model of success?

[globaleconomicollaps]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

http://www.nytimes.com/2009/02/22/bu...2&ref=business


Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.

[photoncounter]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

Thanks Bart !

There's both some incorrect or incomplete facts there and its also missing many other stat comparisons.

Monetary & fiscal stat comparisons, 1929 and now

[Willette]

Re: Deflationistas, inflationistas, and hyperinflationistas - Eric Janszen

O.O. - I agree with you: I think EJ got entangled in his terminology here.

"The political question is, in this scenario, which savers are losing? Remember, savers lose when debt is written off, either explicitly or via inflation. The answer is that in inflation, all savers lose. Politically, inflation is a tax on all savers to pay all creditors, but the creditors pay, too, by loss of purchasing power of debts collected. The political advantages of inflation in a debt deflation crisis are obvious: savers and creditors share the pain, and to accomplish it all the government has to do is continue to do what it is already doing, without changing course."

Savers of money and creditors are indeed almost the same thing, unless these savers are personally holding gold, silver or dead presidents. I would say that by hyperinflation debtors and creditors share the pain of a destroyed real economy where normal business activity becomes difficult to impossible.

Also, many debtors just do not realize that they are also creditors by virtue of holding dollar denominated promises of future government benefits like social security and medicare, etc. So while their Loan balances are inflating away, their retirement benefits are doing the same.

Because of the delay between money creation and price inflation, governments can continue to spend, while acting like they just don't understand what is happening and never saw it coming and have only the best motives of saving the world, but aren't really responsible.

The truly wealthy will be little affected because they already own the majority of the world's productive assets, which are unaffected by all this money jiggering. The nominal price may change, but who cares if you own it free and clear?