TMC#16! Lower real interest rates and credit creation help generating (the illusion of) increasing wealth: can it go on forever? Japan says ''not really''.
Hello Alfonso. All along the reading of you article I have your last word in mind, how funny.
What's your stance on the Fed (and other central banks I suppose) pushing to short-circuit the split money system (i.e. central bank money and Com. bank money) through the introduction of CBDC?
In very particular, the influence (since exactly 09/2019 during the repo crisis) of the reserve deposit (per Fed: "Liabilities and capital: liabilities deposit") on the previously unaffected retail deposit (per Fed :"deposit, All commercial banks"), for the latter was growing steadily and independently of the central banks' money the past 40years+. Both derivatives seem to follow the same law.
By driving up demand for treasuries (pushing real yield down), I believe that the central banks are pushing to get more "tools" to respond to the next downturns, and not only by playing with interest rates anymore. I believe they try to find a way to "go direct" in accordance with the talks of 'BlackRock' by pumping the stock market with all that QE money. I also believe that we have just entered the "QEternity" like you mentioned last time in order to make those big monetary policy moves in the next decade, likely resulting from propositions to deal with a possible "dramatic" downturn. The latter that could be 'cooked up' and gather momentum as we speak through this burning tightrope we walk on (market doubling with poor economic basing).
I guess your stance will be given in the next post! See you then.
What are the sovereign debt servicing costs as a percentage of GDP for Japan USA EU etc ? I have heard that for Japan it is 4% GDP but I do not know where I can check this for accuracy. Another great post by AP.
A great post but you've left way too much hanging in the air for someone (like me) who doesn't understand how CBDCs change the money creation and private balance sheet dynamics. Can't wait for the 2nd installment!
Dumb question but what did the government do in the 1980 to 1993 period to get the private sector to increase debt so much and why can't they do that now?
Excellent ideias... however Alfonso, I'd like to ask your opinion on the following differences beween USA versus EU/JAPAN:
- NIIP is 67% negative for USA... and positive for EU and highly positive for Japan
- population is way younger in USA then in EU/Japan
- Current Account is very negative for USA and positive for EU/Japan
These are basically BIG differences... which would imply a bigger ''equilibrium'' inflation rate if the USA start an ONGOING NON-STOP ''FISCAL+QE MARRIAGE''....LOL
According to the inflation camp, the difference between Japan and the US is that the former increased their base money supply but the increase in the broad money supply was insignificant unlike the US. How would you comment on that?
Also, what would stop the government from engaging in other socialist policies like the stimulus checks funded by debt?
Hi Alfonso. I've been living in Japan since the early 90th and until 2 years ago, and though I didn't even touch the stock market at the time, I experienced what it was like to be "on the ground".
There was one big mistake that Japan did (repeatedly), but I see that most analysts don't mention it: several consumer tax hikes. The keyword here is "consumer" - as you know, that's a tax that hits the necessities most of all.
I wasn't there for the first consumption tax (3% in 1989), but subsequent ones - to 5% in 1997, 8% in 2014, and the latest one - to 10% in 2019, hit the middle class (and even more so low-income families), rebalancing their spending towards groceries, utilities, and transportation, away from everything else. It also scared people into trying to save instead of spending. I've been raising small children and working, and I can confirm the same feelings among young mothers, housewives, unmarried coworkers, elderly people - with each tax hike, we have been cutting our expenses. It's worth mentioning that salaries did not grow in tune with these taxes - when the monthly payment would increase, the bonus would decline, or overtime pay would be cut off so that in the end it was the same or less per year. It was not just in my sector (I've been working mainly in tourism), but everywhere. Tourism is like a canary in a coal mine: when people stop spending, it gets hit. That was very evident during my time in Japan: travel companies started to rebalance from outbound tourism (taking Japanese tourists abroad) to inbound (working with foreign visitors). Japanese tourists have been spending less and less on travel.
I don't have statistics to prove what I'm saying, it's just my notes from what I have seen.
As long as the US won't hit its middle class in favor of the wealthy 5% again, we have a chance for a better outcome.
Hi Alfonso. Thanks for the great article. I do wonder if QE will be more effective if/when they start directly injecting money in our bank accounts?
I'm also curious why they don't change the law for banks to something like "if you get QE funds, you are mandated to lend at least 50% of them".
If we assume the U.S. will play out exactly like Japan, which assets should one be in? Even if we get a deflationary crash in the next ~5 years, long term if nothing else QE will prop up the market and real estate right?
I'm a trader and like to use Hypothesis to plan my 2 year , 5 year and 10 year outlook. Japan is hindsight but there are lessons learned. How does this History help me prepare my trading plan? What signals would help me alter my plan and pivot? This is a big asset bubble Japan is 4% of GDP can the bubble grow 25 times more? My current hypothesis since 2009 is that technology will dominate this asset bubble makes me think the game ends some day but I sleep well because I am Hedged. The negative carry is hard to take but I don't think their is anything else you can do unless someone tells me the exact date all this ends. Any thoughts on portfolio construction as the bubble grows larger and larger?
Hello Alfonso. Good Article about Japan. Thanks for that.
I have some recommendations for you when it goes to Japan. Have you ever heard from Richard Werner? He lived in Japan and worked there and he talked with lots of BOJ staff and bank staff. Additionally he wrote a book about Japan around1950 to 2000 . I highly recommend this book to you "Princes of the Yen" (if you haven´t read it yet). In this book he shows empirically why asset prices and land prices increases that much. He find out that it was "window guidance". A form of credit control from the BOJ through the supervision of the MOF. Until the 70s the MOF had power of the BOJ, this also was the reason of the asian miracle and the reason why asian countries grew bigger, faster and more equal then UK and US (there is a paper from the world bank which describe this very good), until the BOJ begann to confound the MOF and the public that interest rates are the most important monetary tool for monetary policy. (It isn´t - Werner also found empircal tests that interest rate follows ecnonomic growth and the causation goes form growth to interest rates). The BOJ instead instructed the banks to keep increase their loans until they didn´t find any "sustainable" borrowers which take them to this point where they lend to speculators and unsustainable borrowers. Which then led to the crazy time where even firms like toyota speculate on the real estate market and made enormous returns. In the early 90s the BOJ instructed the banks to decrease the loan growth enormous which bursted the bubble. In addition, the BOJ would have been able to avoid the coming recession with a simple trick like they did after WW2. Buy the non performing assets from the banks with newly created purchasing power. The banks in japan would be healthy in a short time.
Also the problem with QE. Richard Werner was the "inventor" of it. But advised a different QE in 1992. He wanted to solve a banking crises fast and wanted to make banks healthy quickly without burden the taxpayer. (1) Buy the non-performing assets from the banks with newly created purchasing power and (2) instruct them to create credit for productive GDP-Transactions and forbid loans for speculators and minimise loans for consumers. But what do CB´s today. An assets swap *LOL*.
I really recommend Richard Werner and his book to you. Also his paper on the "Quantity theory of disaggregated credit". Maybe you get some new incentives to your enormous framework. I would appreciate to hear your opinion to all this. I am at the beginning on the never ending road to understand the global economy so I would appreciate to hear from you. Maybe I overlooked something. I am also on the path to find out if the ECB is on the same path the BOJ was so maybe you have also some ideas to that. Would help me a lot with my bachelor work. Thanks in advance.
Thank you for this great post. How can CBDC avoid the increase in defaults that comes when the private sector is overleveraged and real yields don’t decline anymore?
I don't think we will have such a long and gentle deleveraging of the private sector in the US - maybe in the EU? Probably quicker, more brutal and a proper reset in US if it happens.
First great post. I want to comment on the lack of borrowing by companies in Japan. During this time we saw the rise of China. I deal with some Japanese companies and they have sent all their low priced manufacturing to China. So you don’t have to borrow to build manufacturing since you are outsourcing it. Also Japanese companies keep a huge amount of cash on their balance sheet ( think Apple )So less borrowing. Finally the last point is that a huge amount of capex has moved to software borrowing. I am not sure how this is reflected on balance sheets in Japan. I have had huge arguments with top Wall Street economists about this. In house software writing is the new smokestack. I don’t know much about Europe but it’s tough to compare Japan to the US. We let in 800,000 legal immigrants a year and only the Lord knows how many through our Southern border. In other words I don’t think we will have the same demographic issues. As far as your other points I totally agree. I am still trying to get my head around how the US funds it’s non Fed held debt if rates go up substantially. I guess they never go up much.
Excellent analysis and not an example to follow in terms of monetary policy for other developed economies. What I would like to see at the end is a summary and commentary on what you think the next few decades will bring for Japan. Can they continue at this or is the rise in rates with high private debt going to cause it to end ?
Hello Alfonso. All along the reading of you article I have your last word in mind, how funny.
What's your stance on the Fed (and other central banks I suppose) pushing to short-circuit the split money system (i.e. central bank money and Com. bank money) through the introduction of CBDC?
In very particular, the influence (since exactly 09/2019 during the repo crisis) of the reserve deposit (per Fed: "Liabilities and capital: liabilities deposit") on the previously unaffected retail deposit (per Fed :"deposit, All commercial banks"), for the latter was growing steadily and independently of the central banks' money the past 40years+. Both derivatives seem to follow the same law.
By driving up demand for treasuries (pushing real yield down), I believe that the central banks are pushing to get more "tools" to respond to the next downturns, and not only by playing with interest rates anymore. I believe they try to find a way to "go direct" in accordance with the talks of 'BlackRock' by pumping the stock market with all that QE money. I also believe that we have just entered the "QEternity" like you mentioned last time in order to make those big monetary policy moves in the next decade, likely resulting from propositions to deal with a possible "dramatic" downturn. The latter that could be 'cooked up' and gather momentum as we speak through this burning tightrope we walk on (market doubling with poor economic basing).
I guess your stance will be given in the next post! See you then.
What are the sovereign debt servicing costs as a percentage of GDP for Japan USA EU etc ? I have heard that for Japan it is 4% GDP but I do not know where I can check this for accuracy. Another great post by AP.
A great post but you've left way too much hanging in the air for someone (like me) who doesn't understand how CBDCs change the money creation and private balance sheet dynamics. Can't wait for the 2nd installment!
Dumb question but what did the government do in the 1980 to 1993 period to get the private sector to increase debt so much and why can't they do that now?
Excellent ideias... however Alfonso, I'd like to ask your opinion on the following differences beween USA versus EU/JAPAN:
- NIIP is 67% negative for USA... and positive for EU and highly positive for Japan
- population is way younger in USA then in EU/Japan
- Current Account is very negative for USA and positive for EU/Japan
These are basically BIG differences... which would imply a bigger ''equilibrium'' inflation rate if the USA start an ONGOING NON-STOP ''FISCAL+QE MARRIAGE''....LOL
What are your thoghts on that??
Cheers! Fan of your work man...
@Joeem05
additional information re Japanese monetary policy can be found here
https://twitter.com/LynAldenContact/status/1479186825373704196
Hello Alfonso,
Thanks for the great article!
According to the inflation camp, the difference between Japan and the US is that the former increased their base money supply but the increase in the broad money supply was insignificant unlike the US. How would you comment on that?
Also, what would stop the government from engaging in other socialist policies like the stimulus checks funded by debt?
Hi Alfonso. I've been living in Japan since the early 90th and until 2 years ago, and though I didn't even touch the stock market at the time, I experienced what it was like to be "on the ground".
There was one big mistake that Japan did (repeatedly), but I see that most analysts don't mention it: several consumer tax hikes. The keyword here is "consumer" - as you know, that's a tax that hits the necessities most of all.
I wasn't there for the first consumption tax (3% in 1989), but subsequent ones - to 5% in 1997, 8% in 2014, and the latest one - to 10% in 2019, hit the middle class (and even more so low-income families), rebalancing their spending towards groceries, utilities, and transportation, away from everything else. It also scared people into trying to save instead of spending. I've been raising small children and working, and I can confirm the same feelings among young mothers, housewives, unmarried coworkers, elderly people - with each tax hike, we have been cutting our expenses. It's worth mentioning that salaries did not grow in tune with these taxes - when the monthly payment would increase, the bonus would decline, or overtime pay would be cut off so that in the end it was the same or less per year. It was not just in my sector (I've been working mainly in tourism), but everywhere. Tourism is like a canary in a coal mine: when people stop spending, it gets hit. That was very evident during my time in Japan: travel companies started to rebalance from outbound tourism (taking Japanese tourists abroad) to inbound (working with foreign visitors). Japanese tourists have been spending less and less on travel.
I don't have statistics to prove what I'm saying, it's just my notes from what I have seen.
As long as the US won't hit its middle class in favor of the wealthy 5% again, we have a chance for a better outcome.
Hi Alfonso. Thanks for the great article. I do wonder if QE will be more effective if/when they start directly injecting money in our bank accounts?
I'm also curious why they don't change the law for banks to something like "if you get QE funds, you are mandated to lend at least 50% of them".
If we assume the U.S. will play out exactly like Japan, which assets should one be in? Even if we get a deflationary crash in the next ~5 years, long term if nothing else QE will prop up the market and real estate right?
I'm a trader and like to use Hypothesis to plan my 2 year , 5 year and 10 year outlook. Japan is hindsight but there are lessons learned. How does this History help me prepare my trading plan? What signals would help me alter my plan and pivot? This is a big asset bubble Japan is 4% of GDP can the bubble grow 25 times more? My current hypothesis since 2009 is that technology will dominate this asset bubble makes me think the game ends some day but I sleep well because I am Hedged. The negative carry is hard to take but I don't think their is anything else you can do unless someone tells me the exact date all this ends. Any thoughts on portfolio construction as the bubble grows larger and larger?
Hello Alfonso. Good Article about Japan. Thanks for that.
I have some recommendations for you when it goes to Japan. Have you ever heard from Richard Werner? He lived in Japan and worked there and he talked with lots of BOJ staff and bank staff. Additionally he wrote a book about Japan around1950 to 2000 . I highly recommend this book to you "Princes of the Yen" (if you haven´t read it yet). In this book he shows empirically why asset prices and land prices increases that much. He find out that it was "window guidance". A form of credit control from the BOJ through the supervision of the MOF. Until the 70s the MOF had power of the BOJ, this also was the reason of the asian miracle and the reason why asian countries grew bigger, faster and more equal then UK and US (there is a paper from the world bank which describe this very good), until the BOJ begann to confound the MOF and the public that interest rates are the most important monetary tool for monetary policy. (It isn´t - Werner also found empircal tests that interest rate follows ecnonomic growth and the causation goes form growth to interest rates). The BOJ instead instructed the banks to keep increase their loans until they didn´t find any "sustainable" borrowers which take them to this point where they lend to speculators and unsustainable borrowers. Which then led to the crazy time where even firms like toyota speculate on the real estate market and made enormous returns. In the early 90s the BOJ instructed the banks to decrease the loan growth enormous which bursted the bubble. In addition, the BOJ would have been able to avoid the coming recession with a simple trick like they did after WW2. Buy the non performing assets from the banks with newly created purchasing power. The banks in japan would be healthy in a short time.
Also the problem with QE. Richard Werner was the "inventor" of it. But advised a different QE in 1992. He wanted to solve a banking crises fast and wanted to make banks healthy quickly without burden the taxpayer. (1) Buy the non-performing assets from the banks with newly created purchasing power and (2) instruct them to create credit for productive GDP-Transactions and forbid loans for speculators and minimise loans for consumers. But what do CB´s today. An assets swap *LOL*.
I really recommend Richard Werner and his book to you. Also his paper on the "Quantity theory of disaggregated credit". Maybe you get some new incentives to your enormous framework. I would appreciate to hear your opinion to all this. I am at the beginning on the never ending road to understand the global economy so I would appreciate to hear from you. Maybe I overlooked something. I am also on the path to find out if the ECB is on the same path the BOJ was so maybe you have also some ideas to that. Would help me a lot with my bachelor work. Thanks in advance.
Greets from Austria
buona giornata e cordiali saluti
Patric
Hi Alfonso,
Thank you for this great post. How can CBDC avoid the increase in defaults that comes when the private sector is overleveraged and real yields don’t decline anymore?
Best regards
Javier
I don't think we will have such a long and gentle deleveraging of the private sector in the US - maybe in the EU? Probably quicker, more brutal and a proper reset in US if it happens.
First great post. I want to comment on the lack of borrowing by companies in Japan. During this time we saw the rise of China. I deal with some Japanese companies and they have sent all their low priced manufacturing to China. So you don’t have to borrow to build manufacturing since you are outsourcing it. Also Japanese companies keep a huge amount of cash on their balance sheet ( think Apple )So less borrowing. Finally the last point is that a huge amount of capex has moved to software borrowing. I am not sure how this is reflected on balance sheets in Japan. I have had huge arguments with top Wall Street economists about this. In house software writing is the new smokestack. I don’t know much about Europe but it’s tough to compare Japan to the US. We let in 800,000 legal immigrants a year and only the Lord knows how many through our Southern border. In other words I don’t think we will have the same demographic issues. As far as your other points I totally agree. I am still trying to get my head around how the US funds it’s non Fed held debt if rates go up substantially. I guess they never go up much.
i need a second part for the end!!
Excellent analysis and not an example to follow in terms of monetary policy for other developed economies. What I would like to see at the end is a summary and commentary on what you think the next few decades will bring for Japan. Can they continue at this or is the rise in rates with high private debt going to cause it to end ?