Japan: "from an economic Godzilla to an afterthought"

Japan, Once Dynamic, Is Disheartened by Decline

Excerpt:

Few nations in recent history have seen such a striking reversal of economic fortune as Japan. The original Asian success story, Japan rode one of the great speculative stock and property bubbles of all time in the 1980s to become the first Asian country to challenge the long dominance of the West.

But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed. For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.

Now, as the United States and other Western nations struggle to recover from a debt and property bubble of their own, a growing number of economists are pointing to Japan as a dark vision of the future. Even as the Federal Reserve chairman, Ben S. Bernanke, prepares a fresh round of unconventional measures to stimulate the economy, there are growing fears that the United States and many European economies could face a prolonged period of slow growth or even, in the worst case, deflation, something not seen on a sustained basis outside Japan since the Great Depression.

Comment: Is Japan's present our future?

Is Deflation already here?

Is a Crash Coming? Ten Reasons to Be Cautious

Excerpt:

Deflation is already here. Consumer prices have fallen for three months in a row. And, most ominously, it's affecting wages too. The Bureau of Labor Statistics reports that, last quarter, workers earned 0.7% less in real terms per hour than they did a year ago. No wonder the Fed is worried. In deflation, wages, company revenues, and the value of your home and your investments may shrink in dollar terms. But your debts stay the same size. That makes deflation a vicious trap, especially if people owe way too much money.

What Deflation Means for Your Money

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In deflation, cash wouldn't be king. Income would be king.

Investors would be struggling to find safe, dependable sources of income.

So top-quality bonds, which provide that income, would boom. Bond prices would rise, and the yield, or interest rate, falls. (In Japan, at one point, long-term government bonds yielded nearly nothing).

That would be good for Treasurys, especially longer-term bonds, as well as for better quality municipals and corporates.

Cash would still be prince, though. If a savings account earns you zero percent interest, but prices fall 2%, you've still made 2% in real terms. And it's tax free. (Contrast that with earning 4% interest in an era of 2% inflation).

...

If income would be king and cash would be prince, in an era of deflation, debt would be the devil.

Your credit card bill. Your car and student loans. Your mortgage. As incomes and prices fall, the bills stay the same, which means they grow in real terms. It gets harder and harder to pay them off. "You're paying down debts but your income is falling," says SG strategist Albert Edwards. "So you have to pay down your debt even more quickly. You get into a vicious cycle."

Comment: Is Deflation already here? No sure. But two good articles about the dangers of. I've long considered "debt to be the devil" (not speaking theologically!)

"The Great Stall" and "the deflationistas"

Economists React: ‘The Great Stall’ Takes Hold

Excerpt:

The “Great Recession” has officially morphed into the “Great Stall”. There are no signs in this morning’s report on July employment of building momentum for the second half of this year. If anything, there are more signs of a deteriorating labor situation .

2 Top Economists Differ Sharply on Risk of Deflation

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According to the deflationistas, as they are nicknamed, a new round of stimulus spending by Washington is urgently required to stave off a Depression-like cycle of falling prices and wages that is difficult to reverse once it is set in motion.

Inflationistas, by contrast, worry more about the effect that additional government borrowing could have on the recovery. With the budget deficit expected to hover around $1 trillion a year for the next decade, they say, interest rates could eventually surge, making borrowing — and goods — more expensive. A double dip, they say, is highly unlikely.

Comment: The problem is the Fed cannot further reduce interest rates, stimuli hasn't seemed to do much, and the government is $ 13 Trillion in debt (and basically can't afford more stimulus!)

Time to print money?

RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve

Excerpt:

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.

Comment: The speech from November 21, 2002

Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C.: Deflation: Making Sure "It" Doesn't Happen Here


Excerpt:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.