3 SIGNS JAPAN’S DE-LEVERAGING CYCLE IS ENDING
Credit Suisse has published a nice note on the balance sheet recession and Japan’s de-leveraging cycle. Japan has undergone one of the most crushing de-leveraging cycles in history due to simultaneous asset bubbles in equities and real estate and an extremely misguided policy response. The result has been a 20 year malaise that has knocked the Japanese economy down to the world’s fourth largest. The good news according to Credit Suisse is that the balance sheet recession in Japan is finally ending:
“Unlike the US, UK or Eurozone, Japan’s corporate sector over the last 20 years faced a daunting prospect of having to de-leverage against the backdrop of deflation and flat nominal GDP. In our view, the Japanese corporates have performed a near “miracle” of reducing US$6 tn of debt without help from growing economy and despite the reluctance of BoJ to embrace a more aggressive monetary policy. It seems there is growing evidence that after 20 years, the Japanese corporate sector is finally “healing”. We focus on three signs: (1) the corporate sector is no longer reducing debts or increasing cash; (2) private investment is no longer declining; and (3) ROE and ROIC are gradually recovering (though from depressed levels). At the same time, Japan’s labour productivity growth rates continue to offset the poor demographics, while competitiveness, innovation and complexity indices remain strong. It seems likely that the corporate sector could surprise on the upside.”
Source: Credit Suisse
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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53 Comments
What about government debt at 250% of GDP? The debt just changed hands, it’s still there. Dosen’t look like de-leveraging to me.
Government debt is private sector savings. How many times does that have to be said on this site for it to sink in. The Japanese government can wipe out that 250% “debt” overhang with a few strokes of a keyboard while simultaneously 1) punishing savers and 2) having limited-to-no impact on inflation.
“Government debt is private sector savings.”
Without referring me to a white paper or something, would you mind just explaining that in a nutshell, if possible? How is government debt private sector savings? I’m sincerely asking, not challenging. Because I thought government debt puts a burden on tax payers. How can that be savings?
Technically government debt never has to be “repaid”, so the money government created and spent into existence ends up in someone’s wallet or bank account as savings.
John – pragcap and Cullen’s other site monetaryrealism.com deal with this issue extensively. MMR and MMT point out the difference btwn a currency issuer like the US, UK, Japan, and a currency user like you and me, businesses, and Greece (who can’t issue the Euro). A currency issuer can simply print to spend, and can print to “pay back” those who “lent” it money. Printing money can cause inflation, but it doesn’t change the fact that the debt doesn’t have to be paid back by you and me. The idea that you and I have to earn extra money to pay back a Gov with a printing press is ridiculous, but is a widely held myth.
And even if we are ahead of the Japanese curve I guess that means we have at least another ten years of this mess?? (depending on whom we try to bail out)
And how will the FED pare down its balance sheet??
What other mechanisms do we need to keep an eye on??
sorry to interupt this discussion, what is the current outlook of PRAGCAP algo?
Cullen, just a small tip for you, i know we are already bothering you a lot with such questions, why not to put somewhere on your site a PRAGCAP algo signal? just to save your time…
It’s been in cash for a few weeks. It should be triggering a buy in the next few weeks….
This article ignores the fact that Japan is turning off its nuclear reactors. Burning imported fossil fuels for power generation is neither efficient nor cheap, and the added cost with directly impact their GDP.
Unfortunately, both major political parties in Japan agree that they must raise their VAT in order to stave off the impending debt crisis. So any hopes of recovery will be gone soon. Add to that the fact that they now run a trade deficit due to energy imports that will worsen as export demand from China, the EU and US declines.
Japan’s government debt at 250% of GDP doesn’t mean anything if it is rebated. Japan’s postal bank (JPB) has large savings, so Japan loans money to itself. JPB was a post office, and it became a bank, where many middle class people store their savings. (We in the U.S. could learn from this example.) The deficit spend money becomes savings, that offsets BSR debts at private banks. Debt’s owed to yourself are an entirely different category than debts that are owed outside of your political system. We don’t have language for differentiation on this important point. If Japan wanted to, they could make a large coin, and retire much of their debt, the same as the U.S. In the U.S. the FED rebates at 90%. So, debt accrued at the vertical level is really .10 x the interest rate. It is cheap and useful money if it is spent properly.
With regards to the VAT, that is the worst kind of tax. In general, you shouldn’t tax labor, because you then suppress productivity. By taxing labor, you untax financial and monopoly interests. In the U.S. the FIRE sector has been busy untaxing itself and pushing taxes on labor.
OK, suppose that I decide to save $1000 each month for retirement. So every month I lend $1000 to myself (at a 1% interest rate) and proceed to spend the money on fine clothes, expensive vacations, meals in the best restaurants, lavish gifts for my friends, etc.
Now when I decide to retire, there should be no problem since my retirement fund contains lots of money. I can just start cashing in those IOU’s that I owe to myself and have a comfortable retirement, right?
So Ben Dover – do you have a printing press in your basement, back by the most productive society in history? If so, then your retirement is safe.
Thanks for playing the “what if a Gov with a printing press does what a household without a printing press does”. Don’t forget your door prize… a trip back to Cullen’s white paper.
Hugh Hendry doesn’t agree and neither do I.
We like Japan-
Every comment is commenting on what is well known. Well documented.
We OWN japan today- While our line in the sand was crossed a while back…we have kept Japan as a long term position and will be adding to it. The position is in the red.
WE like Japan alot. More so after reading all the reasons why you shouldn’t own it.
Missing out on Europe…scares me to death. On a call Monday we discussed Europe-The question asked was- How does the SPX go down if S5XE starts to go up? The phone lines were silent. Price moves before fundamentals- Hell..Dr. Hussman had the U.S heading into a depression 1929 style and he couldn’t anticipate the lengths policy makers would go to pull us out. I can not fathom or understand what needs to happen to get S5XE to move up. But I know it will in spite of what I read. Maybe it’s a year away? But…when I used to surf..I missed out on a lot of waves thinking the a bigger wave was waiting for me behind the 3rd wave of the set which I could not see. My Dad always would say..”the devil you know is better than the one you don’t..see ya” He’d take the wave and I’d paddle over only to find myself too far outside.
Waiting for Japan and Europe to fix the problems will be too late. A bunch of weeds that will be flowers before you know it.
I see Value in Japan-
Fight the crowd-
The technicals are lining up-
Here that…that’s the Bell ringing. Read your own post and ask why you missed investing in Apple, Dell, and the QQQ until 2000.
Japan is about to pass you buy…cause your worried about demographics???
An aging population??? Ever read Harry Dent. He had a whole book on how good the U.S deompraphics are back in 2000. How’d that work out.
i am with you on japan. right now i am in the a fund but will start hunting for value companies to hold for the next 10 years or so.
MIKE- BE CAREFUL!!!!!!!!!!!!
We own a small piece of JAPAN…and we’ve received some data that looks positive. Technically- Nikkei 1970-Present New High Breakout out 12 months-12.64%
Improving Economic data-Citi surprise index(CESUPY,Daily) back above zero returns 50% 12.2%
Bullish seasonal window
Long Term Cycle Trough(3/22/12)41 month cycle
Analogs on Nikkei highest correlations 2003-1995.
And this week we got more good stuff on Japan-
BUT BUT….I can not answer how an export country like Japan…does well with the U.S,Europe and China under pressure. Further- If I was on an airplane right now with everyone and yelled what I’m seeing I’m either a hero or about to get arrested.
I would wait to scale in on Japan until the SPX can figure out if it wants to fly or crash. BE CAREFUL- I like Japan but inspite of what I have…I’m holding off on any further buys until I get clarity.
Do you Japan because e.g. Book/Value look attractive ? If so, then it seems the japanese stock analysts know a bit more than VII does.
Am I correct that you like Japan because everyone is bearish on Japan ?
OK, suppose that I decide to save $1000 each month for retirement. So every month I lend $1000 to myself (at a 1% interest rate) and proceed to spend the money on fine clothes, expensive vacations, meals in the best restaurants, lavish gifts for my friends, etc.
—————–
Money is a marker for our wealth output. It also codes for information by virtue of its interest rate and volume. The idea is to have the right amount of money in the supply, and said money needs to be low debt. When it is low debt, then it is not stealing wealth for its right to exist.
Conflating personal economics with Sovereign economics is a straw man argument. It doesn’t work to compare apples and oranges.
Governments are a sovereign issuers of currency, where the money power has been “shared” by the citizens consent. A knowledgable citizenry is then a watchdog over the money power. If a government spends into consumption, then that is bad as your economy becomes unbalanced, and you become a nation of rentiers and consumers, as we are in the U.S. today. Colonialism is also an unbalanced economy; for example cotton as a mono culture in the U.S. south circa civil war. This forces the colony to buy more expensive “British” finished goods.
How government spends and where the money goes is the argument we are not having as a society. It is the more important discussion. However, government spending into the modes of production (Land, Capital, Labor, Public Commons) is legitimate use of government money power. Spending properly and taxing properly are rules that should be framed in economic textbooks, but they aren’t. The rules are well known by observing economic history. But, since our economists do not speak of these things, then most of us do not have the language to frame the argument.
Nicely put, and remember billions are spent to distract us from talking about the important subjects.
A slow change is coming, thanks to the internet, and people learning for themselves.
“A slow change is coming, thanks to the internet, and people learning for themselves.”
Seriously? The Internet = Bread and Circuses.
Sure there’s loads of the trivial, and worse on the Internet, but there are also sites like this, enabling ordinary people to learn AND contribute.
We can all try to make a positive change.
Hopelessness and cynicism help nothing.
+1.
“most of us do not have the language to frame the argument” is critical; why what CR and others are doing may make a real difference.
Just bought DFJ today (ETF Japanese small cap), based on this and a recommendation from Steve Sjuggerud. Owned it previously, made a small profit. Steve’s recommendation was to keep a 10% stop loss, will hold to that religiously.
One of the rules I’m trying to follow is not to risk/lose any more than 1% of my portfolio on any single trade, which necessitates position sizing and stop losses.
Yes Japan has an aging population, but they are a remarkably healthy aging population, and overall they are a very productive people.
As far as the nuclear issue, I think it’s likely they will start firing them back up once they’ve improved the safety, and fossil fuel costs rise.
Nuclear is not the solution, is a very inefficient energy if you account for all the externalities it generates, and this one IS a burden for younger generations or ones that do not exist. Nuclear energy is also an insult to uncertainty.
Even without accounting for uncertainty, uninsurable risks and externalities it barely breaks even, both from a financial point of view (the investment necessary to build a modern plant is huge and can only be financed by states, and then is not much profitable from running operations) or physical one (the EROI barely breaks even). Reserves are limited anyway, and nuclear capacity to substitute a carbon driven society are basically impossible.
The nuclear industry is strong on propaganda though, they are similar parasites to the banks, corporate welfare etc.
P.S: Also personally I think we should be saving nuclear fuel for future space exploration, but that’s an other issue.
Interesting points.
Aren’t the nuclear plants in Japan already built? I’m no expert, but once they are built, aren’t the input costs fairly small compared to fossil fuel? Yes, you are probably right about the output costs, but capitalism doesn’t generally measure those, and I was approaching this from an investment standpoint.
If I recall right, around 25% of electricity in Japan was generated by nuclear, even if you extended the life of the current plants, you still would need additional capacity to run the nation on nuclear.
Then we have the problem of transportation, as oil become expensive and cheap oil era comes to an end we are realizing we will need alternative transport methods and logistical models, this probably means you will need extra electricity generation to substitute gas driven transports as that energy vector becomes too expensive. Take in mind most energy spent by humanity is in form of oil derivatives, specially gas.
Then you have to renew the current plants, a lot of them already very old, extending the life is not safe and can’t come at all costs. We already had two important nuclear accidents with far reaching impact in a very short history of nuclear power generation life (in geological terms is ridiculously small period, like a second for an human life). you can’t risk even more by maintaining dated plants.
Look, I’m a realist, I see the nuclear industry is very powerful and even nuclear power can be used as a base for energy generation (however, is extremely risky in case of general system failure as it has strong dependencies on external supplies no matter how the industry spins it, if a major catastrophe happened the potential disaster is awful) while we transition to a more efficient model and other production methods, but is not the way policy should be pushed to.
And this is something that is being realized both at policy making level and at energy industry level, fortunately, because of stacking too much on that basket while neglecting other alternatives may have a too high price.
These comments regarding nuclear power show a great deal of ignorance about it’s generation and dangers.
The reality is that nuclear power is one of the most environmentally friendly and safest energy sources available today for mass electricity production. The biggest issue is that when accidents happen they are spectacular, which allow the uneducated detractors to scare people and comment on how dangerous it is. The reality that the alternatives we have today are far more harmful.
Environmental concerns: In the U.S. coal fired power releases as much radioactive material every year directly into the air, water and soil as the nuclear power industry generates (but keeps safely away from the rest of the population). Nuclear waste generated at nuclear plants is very compact simple to contain, while coal energy releases it at almost every stage of it’s cycle in quantities so distributed as to be almost impossible to remove. Plus there are all kinds of other toxins released by coal power.
Oil is running out in easily available locations and the alternatives are massively damaging to the environment. When oil spills happen they damage areas much greater than either Fukushima or Chernobyl did.
Nuclear accidents: Accidents are serious to be sure, but not nearly as serious people would have you believe. We’ve had 3 major accidents (reactor meltdowns) in the nuclear power industry:
3 Mile Island – no deaths, possibly 1 or 2 deaths from environmental radiation
Chernobyl – dozens of direct deaths, and probably hundreds of indirect deaths from radiation exposure. While Chernobyl made a large amount of land unusable for humans, it has become a de facto nature preserve, where wild animals live free from danger of harm by humans. A study by Jim Smith had this to say: “…wildlife populations in the exclusion zone around Chernobyl have recovered and are actually doing well and even better than before because the human population has been removed.”
Fukushima – no direct deaths, likely somewhere between 0 and 100 deaths of environmental radiation exposure in the next couple decades
Compare that to the coal industry which in the U.S. alone has between 50 to 100 annual deaths, just amongst workers.
So nuclear power has less than 1 death per year on average amongst workers, and a couple a year on average for the general population due to waste, vs. coal which has probably hundreds of worker deaths a year globally, and untold numbers of deaths from exposure to toxic materials released directly into the environment.
Nuclear fuel supply: Known reserves number around 5.5 million tons, while global supply consumes about 50,000 tonnes annually, meaning we currently know of enough to supply the world at current levels for over 100 years. New large mines are found every few years, adding to the reserves faster than they are being depleted, so we are quite far from peak uranium. The oceans contain enough uranium to supply the entire world, if all electricity was produced by nuclear power, and everybody lived at American standards, for a billion years. Thorium is also a useable nuclear fuel, and is three times as abundant in the earth as uranium.
Reactor safety: One of the issues with nuclear reactors is that they’ve been opposed for so long that there has been little effort put into building new reactors, but the majority of reactor trouble is due to old reactors. A meltdown happens because old technology reactors require active cooling, as the reaction gets faster as the temperature goes up. There are newer technologies that require no active cooling, as when they get hotter, nuclear reactions slow down. So older reactors meltdown when they lose power, while newer reactors (if built) will shutdown when power is lost. Understand that Fukushima only became a problem because the backup generators were insufficient to keep the reactors cooled long enough to get a new power line due to all the debris from the tsunami. If it had been a modern design reactor there would have been no meltdown.
Nuclear weapons: Many people assume that nuclear reactors can always be used to create nuclear weapons material, but that is not true. Thorium cycle reactors cannot create materials for use in nuclear weapons, and can be used to destroy the materials in existing nuclear weapons. Nuclear power is NOT the same as nuclear weapons. Thorium is also a technology that can be built to have no possibility of causing reactor meltdowns.
Modern nuclear power is safe, clean, and inexpensive. The people who are opposing it are responsible for more deaths and environment damage than they are trying to prevent.
What a bunch of arrogant comments:
1) Nuclear power generates less than 15% of the electricity worldwide, you would need at least 10 times the current number of plants to just generate enough electricity. There goes your known reserves.
If you include oil increase that amount by 4-to-5 to substitute the energy generated by burning gas.
2) The statistical models used for risk measurement are IRRELEVANT (I’ve seen them), they are based on irrelevant data samples and made up parameters. We are talking about an energy which generates waste that will last thousands of years, we don’t know right know what to make of waste! There have been already problems in waste deposit sites and we haven’t been using this even a century. As I said nuclear energy is laughing at uncertainty, that does not tend to end well.
3) This is not even about death ratios (which are dangerous to quantify, because some reports say that indirect deaths could go up to a million; you suddenly see increases in cancer rates but this has nothing to do with nuclear disaster off course… not to talk about things like genetic damage that are impossible to quantify or environment impact which is neglected, because having thousands of squared km idle and not being able to be used, and displacing people, is not a cost…), is about potential unquantifiable risks by the pathetic models.
4) Last by not least: Nuclear is only profitable because corporate welfare: externalization of risks and costs to states and the population. Even that way it needs majors fluxes of public financing and help. It’s not a market competitive industry, period, they need more help even than renewables, which are becoming more competitive each year.
Hey guys, so much in common with finance, you could hook up and let them finance you, because without public capital you are not getting anything done anyway, and that’s why it’s share of electricity generated is declining and trending down. Typical rabble from nuclear industry.
I’m not clear on how stating facts is arrogant. These are all verifiable statements. Feel free to prove me wrong.
1)As I said previously, over 100 years at current nuclear energy production levels. But if you want to get into a conversation of converting all energy over then one needs to understand that first, there’s not much need for uranium exploration right now as the current reserves are more than adequate, but as I mentioned they are still finding reserves faster than they are depleted, and as I mentioned already, there’s enough uranium in the oceans to supply the entire world at American consumption levels for over a billion years. Research is already underway on how to economically extract uranium from seawater. But even if that is not viable, thorium is. Thorium is 3 times as abundant in the earth’s crust, the U.S. has enough known reserves to power us for about 1,000 years, and unlike uranium 100% of thorium is usable a fuel, whereas uranium is about 0.7% usable. So even though thorium is 3 times more abundant physically, it’s about 400 times more abundant from a fuel perspective. There’s no concern about running out of fuel.
2) I don’t know what this is referring to as I didn’t say anything about statistical models. Just compared real world examples. All commercial grade energy sources generate waste, and pretty much all of them generate toxic waste. I’ll say it again, coal power releases as much radioactive waste directly into the environment as nuclear power generates (but stores safely). And that’s JUST radioactive material, there are much more toxic and dangerous waste materials than the radioactive materials coal burning releases.
At least radioactive materials break down… heavy metals are always toxic, forever! And while radioactive materials can be hazardous for thousands of years, the inputs were already radioactive, so the real issue is how long are they more radioactive than they already were. The reality is that after about 600 to 1000 years the waste is no more radioactive than the original fuel. But it’s stored in a manner than is much easier to contain than it was when it was in the ground. Far more people have been harmed by naturally occurring radioactive materials, such as radon, than have been by nuclear power waste products.
3) If there were millions of deaths related to nuclear energy it would be quite obvious, but even with Chernobyl the real debate is whether it caused hundreds, or thousands of deaths. Nobody with any credible background is claiming millions of deaths. What studies suggest that there are millions of deaths? I’ve seen none, but I’ve seen many that find no discernible increase in cancer rates around nuclear power plants.
4) No, If you applied the same rules to nuclear as were applied to other industries in accordance with the amount of harm and pollution it causes it would be much less expensive than it is today. It is overly scrutinized today because of the fears that while they were valid 50 years ago, are no longer true. As I’ve shown, the risks of nuclear power are actually lower than other comparable power sources, yet the requirements for safety are much higher, and yet nuclear power is STILL competitive cost wise.
I’m not sure what your comments about finance was about, but I’m not affiliated with the nuclear industry in any way. About 5 years ago I shared your opinion about nuclear energy until I got into a debate with my friend and he stated much of what I’ve said above. I couldn’t believe it so I did the research and found out he was right. After that I changed my opinion as the facts don’t lie.
http://www.thorium.tv/en/thorium_reactor/thorium_reactor_1.php
This perhaps resolves the nuclear energy issues. I believe China is moving in this direction.
I see the demographic decline as something positive: 1) it will help with the problem of employment in the future (that there are less jobs each day is natural and the end-game of progress) b) it means more resources per capita and the biosphere capacity to support humanity it’s aligned with the population. Economists are retarded.
Also I laugh at the so called ‘Japanese malaise’, seriously!? A nation without unemployment and the wealth and real capital per capita that is the first of the world if you exclude small nations like Switzerland or Luxembourg (the tax heavens/banking centres), or the City of London / Wall St. Have you seen how stable is the Japanese society? And how healthy it is? Do you know any fat Japanese!? I’m bearish on the USA becoming a ghetto full of fat people compared to nations like Japan.
Sure they have their problems, both social, cultural (or maybe in reality they are strengths) and economic. Amongst others pointed here is the conversion to an energy system which does not have nuclear as their backbone (was never going to work anyway for various reasons) and increasing dependency of oil, it also has the problem of export dependency for jobs. But if they can (and probably they will) solve that, that little island is going to flourish as one of the first nations that gets closer to the singularity point each day.
From a boring mundane financial perspective, corporate balance sheets are very strong and households too, CB’s can print money (BoJ should be printing more to finance projects for energy efficiency and production) so I don’t see the problem with public debt. The economy is so productive that they have to import jobs, so an ageing population is not a problem if they know how to manage the finances of it (which is not a problem being monetary sovereign).
To the anglo-saxons if it’s not an asset bubble and constant inflation is not progress. Terrible.
@ leverage
Did u just write…”the USA will become a ghetto full of fat people”
That is hilarious. ( just typed that with one hand on my iPhone and the other on a shake weight)
“I’m bearish on the USA becoming a ghetto full of fat people compared to nations like Japan.”
Becoming? Look around – it’s already happened!
I live in Tokyo. There are some fat Japanese,to be sure, but the percentage is rather low. And the percentage of obese Japanese, while not zero, is extremely low. When I return to the States for a periodic visit, I feel viscerally intimidated by fat. (I’m 5’10″ and 152 lbs (178 cm, 69 kg)). Everywhere I go, escalators seem to literally groan under their porcine burdens. It’s embarrassing to bring my Japanese friends over.
Again, interesting comment. Being of half-Japanese descent (though with little direct exposure to the culture), I have wondered if Japan might end up showing the way to the future.
It seems as though what had been a strength – their strong orientation to community – became a liability in the era of rapid globalization – perhaps the deepest underlying reason for their ‘decline’.(And, as with everything, this orientation can take a negative turn toward stifling conformity and scapegoating of difference. A resident anthropologist friend reports significant discrimination against refugees from the NE.)
I’d be interested to hear more of what you mean by the ‘point of singularity’ but I assume you mean when limited resources, etc. force that ‘paradigm shift’ – at which point what had been liabilities may become strengths (again).
Actually I meant the contrary: the point where technology advances make collision with the current socio-economic system unavoidable (ie. it’s impossible to maintain the status quo) -it is used as term to name the point in time of emergence of super-intelligences which are capable to auto-evolve they self, so I borrow it from that literature-.
But in case that did not happen soon, and we struggle for decades through this century with resource constraints, and a sort of de-globalization, what you say probably makes sense too.
Japan is a strange nation where tradition and high technological progress mess up in some weird way, so in both cases I think it could benefit from being forced by circumstances.
I think we agree that ‘singularity’ means a significant change in the status quo. I can see this going various ways: major advances in technology, but also changes in lifestyles, addressing resource constraints, climate change, etc; ‘deglobalization’; or some combination of these.
I am enough of a Weberian to think that either way, the deepest change will be social/cultural (ie not just material/technological changes, although these may be the drivers/catalysts).
Maybe because of my personal connection, I also find Japan a strange country; I wish I understood it better.
What Japan does with so little natural resources is amazing! What do they have there? An abundance of salt water, decent rainfall, relatively mild weather, then what?
It’s almost all human capital.
Human capital that has avoidance of shame at all costs near the apex of its value system. I’ve been living here 20 years. If the country had a motto, it would be “Don’t screw up and embarrass us.” The “us” could refer to your own local in-group, which might just be your family and neighbors, or your company, or some combination of groups. You know, I’ve never, ever, seen a big mechanical street sweeper in this country. Everybody takes care of the patch in front of their own place. If they don’t, they risk embarrassment. Simple, effective, but sometimes admittedly harsh and constraining.
The only thing I wonder about Cullen is how much can this tell us about US? I remember you having a fine article in the last year where you described how Japans BSR is different from ours. Japans debt problem was in the corporate sector whereas ours was in the household sector (Those who only look at total private sector debt miss this) My question is how different is the corporate sector in its deleveraging form the household sector.? Seems to me that the corporate sector has tools at its disposal that the households dont. Corporations write down debt with each other on a fairly regular basis yet banks must be pressed hard to give consumers a break. In addition banks are part of the corporate sector
I think we should be careful extrapolating Japans timeline to ours. Ours could potentially be longer if our policy makers dont wake up
I think most US household deleveraging is involuntary…foreclosure. This is probably why Cullen says we’re Japan on fast forward. From what I have read, most Japanese corporations paid debt down over many years…15 so far. They weren’t forced to write down much because government spending allowed them to tread water while paying down debt. US foreclosures appear to be on the downslope, so the majority of our forced deleveraging should be over. Maybe year or two left of elevated foreclosures if employment doesn’t decline.
Thanks Texan
Problem is, this type of consumer deleveraging doesnt leave the consumer better off. Yes the debt is lower but the income is lower still. Its not simply a matter of getting the debt levels down fo rthe consumers, they must go down without a commensurate decrease in income levels. One good thing about companies being in debt but consumers not is that companies can still sell their products and service debt. The converse is not true.
I think the majority of those foreclosed on still have jobs and income, but the high mortgage payments, after adjusting upward, eventually were too much to handle. Foreclosure would seem to me to free up more cash for consumption, but future increased spending from loans will be limited due to the foreclosure on the credit report. There is a growing industry of “no credit check required”, so the problem of poor credit is somewhat mitigated.
Not sure how large this group is, but another group of people that will keep a lid on consumer spending are those with elevated debt levels that are still capable of meeting their obligations. This group is similar to the Japanese corporations in that they won’t default and will pay down debt over many years. They survive but don’t contribute to economic growth.
“I think the majority of those foreclosed on still have jobs and income, but the high mortgage payments, after adjusting upward, eventually were too much to handle.”
True for some but losing your home destroys a lot of the wealth you thought you had AND banks getting houses worth less than they are owed is not good for their balance sheets either. This is why I think consumer credit crises are worse than business credit crises. A capitalist economy, based on monetary exchange, needs consumers with money to run. Putting consumers further in debt wont help which is why this:
” There is a growing industry of “no credit check required”, so the problem of poor credit is somewhat mitigated.”
Is NOT a good thing but a symptom of something gone terribly wrong.
” but another group of people that will keep a lid on consumer spending are those with elevated debt levels that are still capable of meeting their obligations. This group is similar to the Japanese corporations in that they won’t default and will pay down debt over many years. They survive but don’t contribute to economic growth.”
This is also why I think the “American way” which saddled consumers with debt is worse than the “Japanese way” which resulted in corporations in debt. Corporations arent people (regardless of what Citizens United says) and can simply be restructured and numbers jiggled, people lose livelihoods in all this.
This is a very good read about different countries attempts at deleveraging….
http://www.mckinsey.com/Insights/MGI/Research/Financial_Markets/Uneven_progress_on_the_path_to_growth
“This is why I think consumer credit crises are worse than business credit crises. A capitalist economy, based on monetary exchange, needs consumers with money to run. Putting consumers further in debt wont help”
In regard to the macro level. If the consumer is forced to delever over say 7 years, which frees up income to spend vs Japanese corporations that take 15 years to delever, then the former returns it’s economy to faster growth sooner. I agree with some of your thoughts about the social consequences of the different systems, but I am speaking economically.
I was at a very well attended investment conference yesterday, and the views on Japan were not exactly uplifting …
Excellent opportunity to bet against the crowd.
“”Companies are no longer reducing debt or raising cash”". Perhaps companies aren’t able to raise more cash and reduce their debtload any more. No, I wouldn’t touch Japan with a hundred feet pole.
You would need a much longer pole anyways.
All I know is what is “right now”. Right now, the Yen has been in a major up trend against the US $ for well over 4 years. It has increased in value from a little above .80000 to above 1.26000 and is still in a bullish trend. I’m long, once again, from 1.1950 and currently have a stop at 1.24150. Having a profit in this trade doesn’t really mean anything in the big picture, it’s just another trade! All this talk is cheap, all I want to know is what is happening “right now” and can I make a trade that has a historically proven “risk reward”, and that is ALL I care about, period.