Bernanke is right

[benwm]

Quote from Martinghoul:

Quick, someone let the Japs know... The poor dears are at their wits ends, trying to deal with their deflation problem. If only they realised that all these things they're so unhappy about

What makes you think that ordinary Japanese are unhappy? Low prices, 100 yen shops, houses they can afford, land that can be snapped up on the cheap, inexpensive holidays abroad, low personal debt relative the West. The Japanese I know (and I married one) are quite happy with this situation.

Actually there is big disconnect here between what Western economic 'experts' write about the dire straits of the economy and the experience of the ordinary Japanese. Sure, politicians and bankers with vested interests would like some inflation to pay off their debts. True, it is harder for corporations - profit margins are tight and they would like to charge higher prices to consumers and have it easier with a weaker yen.

Twenty years ago they said "Rich Japan, Poor Japanese", now it should be "Poor Japan, Rich Japanese".

Economic theory loves to simplify. But the world is not so simple, there are always winners and losers.

In the West we use to (and still) love to talk down the Japanese economy, it made us actually believe our economies were so f***ing great. Everyone used to laugh at Japan's perma-zero rate policy and say they should let the banks fail, "stop propping up lame ducks", they screamed!

What a f***ing joke!!

 

[denner]

Quote from Martinghoul:

I will retort with whatever I think is appropriate. If you don't like it, there isn't much I can do about it, is there?

Generally, I am not sure I see the point you're making. Why does it have to be such a ridiculously trivialised false dilemma? Either it's deflation or 20+ years of continuous QE... You don't think you're overdramatizing things a bit now, do ya? Personally, I see no good reason why US follows one of your arbitrary extreme scenarios. You are certainly not offering any rational reasons, just dire predictions.

It's become a binary event. The leveraging up and concentration of risk in a handful of TBTF's has basically forced us into a situation where an ever increasing amount of subsidy is required for us not to enter a period of mass defaults and counter party contagion. Instead of unwinding the risk and gradually de-leveraging the system by way of breaking apart these financial institutions, we have dug ourselves this grave.

At this point, I fail to see how there is a middle ground, which is something that you are clearly alluding to. Just look at the markets as a metaphor for this binary event. They either melt up or melt down on rhetoric about whether or not perpetual stimulus and subsidy is forthcoming.

 

[Martinghoul]

Quote from denner:
It's become a binary event. The leveraging up and concentration of risk in a handful of TBTF's has basically forced us into a situation where an ever increasing amount of subsidy is required for us not to enter a period of mass defaults and counter party contagion. Instead of unwinding the risk and gradually de-leveraging the system by way of breaking apart these financial institutions, we have dug ourselves this grave.

At this point, I fail to see how there is a middle ground, which is something that you are clearly alluding to. Just look at the markets as a metaphor for this binary event. They either melt up or melt down on rhetoric about whether or not perpetual stimulus and subsidy is forthcoming.

Yeah, fine, but you're looking at the mkt over way too short of a horizon. Let me give you an analogy. I have been watching Greek bonds all year and they've been doing exactly what you describe, i.e. melt ups followed by melt downs on the back of random rumors, bailout speculation etc. However, that really doesn't matter, 'cause in the end we have seen reality prevail. I am trying to suggest that what you're seeing globally is precisely the unwinding of the risk and the gradual deleveraging of the system that you talk about. Yes, TBTF is still an issue, but you can't have everything.

Ultimately, here's what I think: the need for deleveraging and the unwinding of the imbalances in the Western economies is like a force of nature. It's going to happen, one way or another; it's going to take a while, whatever the Fed or anyone else does. The best that the Fed/govt can hope for is to make this unwinding/rebalancing process an orderly one in order to prevent a Japan-like spiral. That is precisely what they're trying to do. Fine, I agree with you that there are all sorts of possible extreme scenarios. However, I just don't see any reason to assume they're likely.

 

[sumfuka]

Quote from benwm:

The Japanese I know

Is it true that the Japanese corporate monkeys work 16 hour days, Drink for 2 hours, Sleeps for 6 hours. Then repeats the process again over and over? That is what the media portrays.

 

[Martinghoul]

Quote from benwm:
What makes you think that ordinary Japanese are unhappy? Low prices, 100 yen shops, houses they can afford, land that can be snapped up on the cheap, inexpensive holidays abroad, low personal debt relative the West. The Japanese I know (and I married one) are quite happy with this situation.

Actually there is big disconnect here between what Western economic 'experts' write about the dire straits of the economy and the experience of the ordinary Japanese. Sure, politicians and bankers with vested interests would like some inflation to pay off their debts. True, it is harder for corporations - profit margins are tight and they would like to charge higher prices to consumers and have it easier with a weaker yen.

Twenty years ago they said "Rich Japan, Poor Japanese", now it should be "Poor Japan, Rich Japanese".

Economic theory loves to simplify. But the world is not so simple, there are always winners and losers.

In the West we use to (and still) love to talk down the Japanese economy, it made us actually believe our economies were so f***ing great. Everyone used to laugh at Japan's perma-zero rate policy and say they should let the banks fail, "stop propping up lame ducks", they screamed!

What a f***ing joke!!

Well, I don't know, man...

As long as we're going all anecdotal, I know a few Japanese peeps... They were so deliriously happy with their lives in Japan, they just couldn't get out of there fast enough.

At any rate, I would happily agree that, in reality, things are a lot more complicated. However, to me, there's undeniable tangible evidence that Japanese society as a whole has suffered as a result of the last couple of decades of deflation. Let me know if you care to discuss.

 

[intradaybill]

Quote from Martinghoul:

Ultimately, here's what I think: the need for deleveraging and the unwinding of the imbalances in the Western economies is like a force of nature. It's going to happen, one way or another; it's going to take a while, whatever the Fed or anyone else does. The best that the Fed/govt can hope for is to make this unwinding/rebalancing process an orderly one in order to prevent a Japan-like spiral. That is precisely what they're trying to do. Fine, I agree with you that there are all sorts of possible extreme scenarios. However, I just don't see any reason to assume they're likely.

This is exactly what is happening. QE is a means to lead to an orderly deleveraging, a soft landing of a sort.

Good post.

 

[benwm]

Quote from Martinghoul:

However, to me, there's undeniable tangible evidence that Japanese society as a whole has suffered as a result of the last couple of decades of deflation.

Please could you share with my the evidence. I know the GDP numbers have flattened off for the last 15 years. But is GDP GROWTH really such a great indicator of prosperity? Is Japan is really worse off, or did they just plateau at a higher level?

If you consider GDP for example, it doesn't include the enormous black economy for one, is boosted whenever the Government spends money it hasn't got at the taxpayer's expense, and if they fudge the inflation numbers down for a given nominal GDP, 'real' GDP will go up! So one way out of the US crisis is just to create 5% inflation, change the way CPI is calculated (didn't they already do that?!) and tell us CPI is 0% and hey presto, 'real GDP' is 5%...--> we're in a boom!

Consider some basic differences between Japan and the US today:-
1. Unemployment is ~5% in Japan, ~10% in US
2. Personal debt is much lower in Japan: they save, we borrow - hence the personal balance sheet of most individuals in Japan is much healthier
3. Even with a ridiculously strong currency Japan industry is STILL competitive - imagine it was the USD that had been rising against JPY for the last few years not the other way round: do you think if USD.JPY was back at 120 and EUR.USD at 1.80, US industry would be able to compete? They're already squealing in the US about China's unfair advantage.
4. Ever sat on a Japanese train/subway/plane and compared the experience to that of transport in Europe or the US?
5. As I said: 100yen shops, a decent sit down lunch in Tokyo for 1000 yen, cheap holidays, affordable housing, land...
6. Food is way better and cheap - ok, maybe life expectancy should not be included in this discussion, but hardly points to abject economic misery and suffering in Japan.

Maybe I'm missing something? It's just my experience with my own eyes and ears doesn't square with all the tales of woe from economists who have never even been to Japan but claim to be experts when they pick up the latest GDP print from their Reuters terminal in NY or London.

Please put me straight on the matter, I genuinely want to know what I am missing. It looks a damn sight rosier than the situation in US and Europe. I agree massive deflation say, -10% to -20% is not helpful to the economy, just as inflation of +10% to 20% is bad...too much instability not helpful to business etc. But mild deflation of -1% to -2% per year ala Japan? Is that SO bad??

Maybe others will also join the discussion, I think it is an interesting one. Fundamentally Bernanke sees the Japan story as his justification for QE+ because he thinks the Japan version of QE didn't go far enough.

 

[zdreg]

Quote from Martinghoul:

Quick, someone let the Japs know... The poor dears are at their wits ends, trying to deal with their deflation problem. If only they realised that all these things they're so unhappy about are actually good for them, they might just get to relax and enjoy themselves.

quick prove that the average japanese is upset by the so called "deflation problem." it is time to leave behind the hysteria about deflation . this "deflation problem" is an invention of the American press who are fearful that their liberal agenda might become an impossibility if there was deflation.

 

[zdreg]

Quote from intradaybill:

This is exactly what is happening. QE is a means to lead to an orderly deleveraging, a soft landing of a sort.

Good post.

a soft lending is a pipe dream. it is part of the same pipe dream that central banks can smooth out business cycles. the results are always the same. it is debasement of the currency and lost productivity because of market distortions.

 

[Martinghoul]

benwm, I am also genuinely interested in this, so would be very happy to discuss...

I'll dig up some specific hard data that I have been looking at. Also, one caveat is that it's difficult to decompose the impact of economic conditions from that caused by dysfunctional politics.

The one big problem with the developments in Japan is what it does to the govt. Because private balance sheets have been shrinking as a result of deflation, the govt has been compelled to offset this. Hence, both Japan's debt/GDP and the almost permanent BoJ QE. What would Japanese deflation look like without this permanent stimulus?