A interesting perspective on the Japanese economy and Abenomics. With regard to U.S. QE, I think Koo is looking at QE from a banking perspective, but ignoring the important connection between fiscal stimulus and QE. Where does the money for stimulus come from? It is from Treasuries sold, and therefore, ultimately, largely from QE. Had there not been QE the money used for stimulus would likely have had to have been obtained at higher interest rates. Koo, however, might argue that even without QE rates would have been low because of lack of demand for money and "Debt Trauma". Also, if I heard him correctly, he is saying that that private sector mortgage backed securities the Fed bought do not present the same risk of a QE trap as do Treasuries. The Fed could lose money on the long bond, if indeed interest rates rise, as he predicts, once the Fed begins to unload their long bond's. Will the U.S. find itself in a QE trap? If necessary the Fed can hold its long bonds to maturity and thus avoid the trap, but on the other hand create another problem. I have confidence in Yellen and company to successfully navigate the treacherous unwinding waters ahead.
Lord Skidelsky's opinion: from http://www.project-syndicate.org/commentary/does-debt-matter "... Third, the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had..." Read more at http://www.project-syndicate.org/commentary/does-debt-matter#KO4es9iEOoCzqSeJ.99
So can you explain in a concise way how the debt burden is not a liability to future generations? Who will pay the interest on debt? It will ultimately be taxed on ordinary people which is the future generation. You make up a lot of claims but you fail to actually look at markets child-like in the precise way prescribed by Peter Lynch. If you took a step back and looked at economics like a simple sum of equations you would find no other way than to admit that the money has to come from somewhere. Even if the Fed held its investments to maturity that would mean incredible amounts of money would float around the economy without anyone willing to borrow in order to invest in higher yielding ventures than the interest owed. The stock market and most assets are inflated because of future expectations of growth and prosperity. If you study what the expectations of growth are to justify current asset price levels then you would see that this means the market and government is expecting to have debt free consumers that are able and willing to consume even more than they consume now. How is that in all logic possible. The US consumer is overladen with debt and lives well beyond his/her means to afford such levels of debt. There is no way that the consumer can maintain let alone consume at even loftier levels. Hence, the whole set of expectations on which the market and all economic calculations rest are hugely unrealistic. Please think in simple terms and you should get to the exact same conclusion. This is not some sort of game. Every party has to be paid for in the end by someone. You can't possibly look at Lexington Avenue and the Upper East Side or Silicon Valley and extrapolate that they represent the American economy. The average person is economically speaking stretched to the limits as we speak. But of course if you believe a feudal state can be maintained or even increased in which you have a class system (which we largely already have) where the top 5% rule everyone else and the bottom 70% are shutting up and serving in slave like fashion then this system can be maintained. I am, however, convinced that the average American consumer will not just shut up and happily pay ever higher cost of living (rising housing prices, higher taxes, higher health care fees, insurance fees, food prices) in order to serve the upper echelons. If you look who owns American productive assets (aka stocks) then you will see that the huge masses are not participating in the wealth creation. It is rather a minority that built itself a system that benefits their own pockets. An excellent example what this leads to is the economic state of Hong Kong. One one hand: Hong Kong is by sheer numbers alone considered a wealthy part of the world, with prosperity, safety, political freedom, high heath care quality. On the other hand the average income in Hong Kong is 13,000 HKD per month (translates to roughly 1700 USD per month). Its high quality health care is only enjoyed by the upper middle and upper class, the minimum wage (on which a shockingly large percentage of people in HK depend on) sits at around 30 HKD. That is USD 3.87. The cost of housing are unaffordable for most HK citizens, making it impossible for the younger generation to go out on their own and found families without 100% dependency on parents. The economy is dominated by few tycoons that are rich beyond the wildest imagination (at least regarding the relatively small size of the HK economy) and they control government, politics, housing prices, whether low cost housing will be made available or not, the level of education. They have built for themselves a system of total control in all aspects of life. This is exactly where the US is gravitating towards. An economy that is in the hands of a few who have built themselves a system that is manipulated and controlled among themselves. The average American consumer is brainwashed into believing they have any political power where the actual truth lies in the fact that you have 2 parties that both have zero interest in representing the average American and touching parts of life that would limit the reign of the handful of power brokers. This is the real problem. The majority of people have lost control and until a much larger percentage goes bust or feels their livelihood threatened nothing is gonna change. But the time will come when the silent majority cannot take it anymore and then they will rise up. Tinfoil hat ranting? I do not think so. I am a student of history. And history has always supported my theory of things to come.
The 94% Plunge That Shows Abenomics Losing Global Investors By Yuji Nakamura and Yuko Takeo Dec 29, 2014 1:22 AM ET Save Foreign investors have had just about enough of Abenomics. After pumping record amounts of cash into Japanese shares last year, they’ve hardly added to holdings in 2014. Inflows are down 94 percent this year to 898 billion yen ($7.5 billion), on pace for the smallest annual amount since the 2008 global financial crisis. The month of April 2013 alone registered almost three times as much foreign investment in the stock market as all of 2014. These figures provide the clearest look at how global investors have become disillusioned with Prime Minister Shinzo Abe after he pushed through a tax increase in April that sent Japan into recession. Fund managers from Sumitomo Mitsui Trust Bank Ltd. to MV Financial say to lure investors back, Abe needs to move beyond short-term stimulus and start enacting the structural changes he laid out in his initial plan, dubbed Abenomics, to end Japan’s two-decade economic malaise. “We need to see a framework where growth isn’t dependent on monetary easing,” Ayako Sera, a market strategist at Sumitomo Mitsui Trust, which oversees $325 billion in assets. “If not growth, then at least a way to increase productivity. For now there’s nothing like that, so I imagine it’ll be hard for stocks to keep going higher and for foreigners to take an interest in them.” Purchases of the nation’s shares through Dec. 19 by investors outside Japan were less than a tenth of the 15.1 trillion yen they bought last year, according to data from the Tokyo Stock Exchange. Trust banks, which typically trade on behalf of pension funds, added 2.7 trillion yen, after offloading about 4 trillion yen of equities in 2013. Individuals were net sellers for a fourth straight year. ‘Buy Abenomics’ “Where is the Japanese Facebook? Where is the Japanese Google?” Katrina Lamb, head of investment strategy and research at MV Financial in Bethesda, Maryland, said in a phone interview. The firm oversees $500 million and has been avoiding Japanese stocks in its international portfolios. “They have lost their place as global leaders. The potential exists in Japan for recapturing some of that, but it requires profound changes and changes are just not something that Japanese are good at.” Foreigners were more optimistic in 2013, making record purchases of Japanese equities as Abe embarked on his economic policies of monetary easing, fiscal stimulus and structural overhaul, known as the three arrows. The Topix index soared 51 percent to crown Japan as the best-performing developed market. Economy Stalls The premier has courted international investors, exhorting Wall Street in a September 2013 speech to “buy my Abenomics.” A year later, the higher consumption levy had pushed the nation back into recession. Non-domestic investors were net sellers of equities this year until the central bank’s surprise easing on Oct. 31. While the Topix has climbed 9.4 percent in 2014, a weakening yen means that in dollar terms, the share gauge is poised for a 4.4 percent loss. “The sales-tax hike hit Japan before Abe’s third arrow could emerge, and the economy completely stalled,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co. in Tokyo, which oversees about $857 million. “It hasn’t been a market where foreigners had reasons to aggressively buy stocks, and it’s difficult to paint a strong growth story from this point onwards as well.” With overseas demand for shares drying up, domestic policy changes are filling the gap with state and pension-fund cash. The Government Pension Investment Fund, the world’s largest manager of retirement savings with 130.9 trillion yen in assets, pledged on Oct. 31 to more than double its target allocation for domestic shares. At the time, that implied buying another 9.8 trillion yen of Japanese stocks, according to calculations by Bloomberg. BOJ Easing The same day, the Bank of Japan unveiled an expansion of its asset-purchasing program, including tripling investments in exchange-traded funds to about 3 trillion yen a year. While the Topix soared 4.3 percent on Oct. 31, the rally was short-lived compared with gains spurred by the round of BOJ easing in April 2013. The gauge climbed 13 percent from the last day of October through a December peak, adding 62 trillion yen in value. Last year, it surged 26 percent from the announcement on April 4 through a May high, which made investors 92 trillion yen richer. Average daily trading volume on the Topix was 40 percent lower this time. “It’s the foreigners who pull Japanese stocks up,” said Tatsushi Maeno, head of Japanese equities at Pinebridge Investments Japan in Tokyo, which oversees about $3.1 billion. “If we start off next year with modest gains, foreign investors might come back. But it won’t be as extreme as when Abenomics first began.” ‘Momentum Jockeys’ Trust banks bought 972 billion yen in shares from Oct. 27 through the most recent data on Dec. 19, while foreign investors added 2 trillion yen. Individuals sold 2.7 trillion yen during that period, as the Topix gained 12 percent. Foreigners are “momentum jockeys” who tend to follow the trend, while individuals usually do the opposite, buying when the market is weak, said Jonathan Allum, a London-based strategist at SMBC Nikko Capital Markets Ltd. “The interesting group are the trust banks, who seem to be on something of a buying spree, which I expect to continue into the new year.” Fund flows from the central bank and GPIF underpin Morgan Stanley MUFG Securities Co.’s forecast for the Topix to climb to 1,680 by the end of 2015, an 18 percent jump from the last close. A lower currency will buoy earnings and return on equity is improving, according to the brokerage. The median projection of 10 analysts and investors surveyed by Bloomberg is for the Topix to gain 16 percent to 1,650. Earnings Forecasts Companies have been slow to adjust earnings forecasts to the weakening yen, which has declined 12 percent this year against the greenback and touched a seven-year low Dec. 8. Japanese businesses expect the currency at 103.88 per dollar in the fiscal year ending March, the BOJ’s quarterly Tankan survey showed this month, despite the yen trading at an average level of 118.24 during the period the survey was conducted. “Companies that haven’t already revised their earnings forecasts will probably do so by the end of this fiscal year,” said Kenji Shiomura, a Tokyo-based senior strategist at Daiwa Securities Group Inc. “With yen weakness expected to continue next year, businesses with overseas demand will provide a tailwind for the market.” Aggregate net income will rise 16 percent to a record 21.4 trillion yen this fiscal year at 219 of the country’s largest firms, based on analyst estimates compiled by Bloomberg. Abe’s Focus After winning a second term from voters earlier this month, Abe’s initial focus in 2015 will be a fiscal-stimulus package and lower corporate taxes. The government approved 3.5 trillion yen of extra spending to aid the economy over the weekend, including shopping vouchers, subsidized heating fuel for the poor and low interest loans for small businesses hurt by rising input costs. A panel will submit a draft plan for a company tax cut of “slightly more than” 2.5 percentage points for the next fiscal year, NHK reported Dec. 26. Investors are also waiting for a loosening of labor rules, agreement on the Trans-Pacific Partnership trade pact and for companies to buy into Abenomics by raising wages and spending record cash hoards on business investment. “If an eye-opening growth strategy was proposed, foreigners might come back and start buying again,” Sumitomo Mitsui Trust’s Sera said. “But if we haven’t seen one by now, there’s almost no chance we ever will.” To contact the reporters on this story: Yuji Nakamura in Tokyo at ynakamura56@bloomberg.net; Yuko Takeo in Tokyo at ytakeo2@bloomberg.net To contact the editors responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net Tom Redmond
I am concerned about many of the same things you are relative to the U.S. economy. I have posted extensively on the income distribution problem, what I believe are its root causes, and how the redistribution of wealth from the middle classes upward that has taken place since the 1980s can be reversed to some extent. Holding bonds to maturity, for the Fed, is a way to circumvent Koo's "QE trap". But it causes other problems, one of which you mention. I am not suggesting that this is what the Fed should do, nor am I qualified to tell them what to do. I haven't at all a concise way of explaining how it is that public debt, when financed internally, does not become a burden for future generations. I'm working on that. Did you read Lord Skidelsky's opinion piece?: "Does Debt Matter?" He gives a reason why public debt financed by a country's own citizens does not become a burden for future generations, but i don't think it is particularly clear. And there is more to it. One might also say the people who are borrowing are getting back the debt, so there is no future debt burden. But that's just a statement. It doesn't really explain it. At this point I have no way to offer the explanation any more concisely than that and at the same time make it clear. I'm working on it. Skidelsky also goes into the most common misconceptions re public debt. These arise because we can't help equating public debt to our own private debt experiences. And while it's understandable why we do this, it's quite wrong. That's why, if you haven't already, you might want to read Skidelsky's piece. He does do a good job of explaining how public debt is different from private, individual debt. I think what we are seeing in Japan is what I suggested will happen there, as in any other country -- it is human nature! There are those who will not understand Abe's economists and therefore throw up roadblocks or counter measures, perhaps without even realizing what they are doing. We have already seen that in the consumption tax, introduced at precisely the wrong time, and that had to be quickly rescinded. Then there is Abe's the call for stimulus and corporate tax reductions. The latter is also precisely the wrong move. During recessions you want corporate tax incentives to borrow and spend to be effective, but reducing corporate taxes reduces the effectiveness of these measures, as corporations then don't gain as much from taking advantage of the incentives. If you think of this in the reverse direction it may make sense to you. Think of the higher corporate tax, if you don't take advantage of the incentives, as a punishment for not borrowing, spending, and investing. What Abe's economists are trying to do is not that easily done. It is difficult anywhere because of what Koo called "debt trauma". ( I thought that was a good term for it.) You have got to get people to stop saving so much (in Japan!) and start spending, exactly the opposite of what they want to do in a recession. You've got to get corporations to invest. You have got to get those bank reserves working! If the private sector won't do it, then the Government must create demand by spending.
you spending maniacs have to stop suggesting the world to spend money. People have a free will what to do with their money. Even most often times artificially luring people to spend does not work. People spend and invest when they feel safe about the future. Japan is anything but safe regarding future pension payouts, inflation, job security (for lack of corporate innovation...). Stop making anyone believe that spending is the only solution. It is almost never the right solution. Hundreds of billions have been spent in Europe to save Spain, Greece, ... and what has that done? Please please please do not suggest that the evil Germans delayed the rescue packages and thats why they were ineffective. (Then you should have told all of us at the point in time when you thought no spending at all would save the PIIGS). If you look at Ireland vs Greece, you see that the huge difference is structural reform implementations in Ireland and you can see what a difference it made. It had zero to do with spending; Greece receive and has done nothing to implement structural changes and they remain the same goat fuckers and cheese eaters today than they were 2000 years ago. Ireland has swallowed the bitter pill and has implemented drastic structural changes. I could name you dozens of economies where spending more lead only to a protracted disaster. P.S.; If you cannot explain some concept or idea in one sentence when being asked (why domestic debt issuance is not harming future generations) may I suggest you have actually not understand the concept yourself?
I'm afraid you have confused two entirely different kinds of economic problems. Greece is not Japan, and Japan is not Greece. When attempting to bring a country out of recession, one approach or the other should be tried. But if the alternatives are opposite to one another, then both should not be applied at the same time. History shows us repeated examples of austerity only making recessions worse. When the private sector leverages down, the public sector must compensate by leveraging up. History shows this works.
a) I never compared Japan and Greece. Please read carefully. b) I made the point that spending your way out of a recession hardly ever lead to a persistent road to recovery. Please cite your historical examples if you may. And please let's look at examples where we by now see the whole picture. You can hardly argue that the US in its most recent recession in 2008 is an example because we have so far not even touched on the repercussions their insane money printing has on the real economy. I insist that you will hardly find a single example where your spending model worked. Look at Japan alone: How many times in the past 20 years have they embarked on spending sprees only to come to the realization that it did not work at all. On the other hand I can easily give you 20 examples of economies and times where austerity might have hurt in the short-term but has truly fixed the underlying problem (which is actually overspending). How can you in all sanity suggest that the solution to overspending is overspending? Are you honestly suggesting that to be the solution? Most in the western world are overspending. Overspending and hence over borrowing was the exact root cause of the most recent recession. You now come along and try to tell us that spending more will solve the problem? Seriously? You like Stieglitz are suggesting pumping insane amounts of money into Greece and Spain will fix their broken ways of thinking how to handle their finances? Wow, absolutely shocking!!! HISTORY HAS SHOWN THAT IT DOES NOT WORK! You are talking out of your ass without being able to back up your wild thoughts and you are even unable to summarize your claim that domestic debt issuance does not hurt future generations. So, any domestic debt issuance does not hurt future generations? If I take on credit card debt or load up in general on debt it wont impact my family and kids? If my government is loaded up on debt it wont hurt its own citizens? You are insane!!!