Japan Isn’t Bankrupt

I’ll keep this short and sweet.  I’m not a big fan of the Japanese economy at present or what the policymakers are doing to drive the economy/markets higher.  I think they’ve made a mockery of their stock market and that this “wealth effect” is a misguided approach to fixing their woes.  But I am equally critical of those who think Japan is on the brink of bankruptcy.  Japan’s got big problems – being able to meet its obligations is NOT one of them.

First of all, Japan has basically copied the US monetary design.  And anyone who understands the US monetary system knows that the USA can’t just “run out of money”.  Even the most simplistic (erroneous) thinking that the US government “prints” money should lead one to understand that a nation with a printing press can’t default on debts denominated in its own currency. I mean, if you had a printing press in your basement would you worry about your credit card bills?   This should just be obvious.  As Warren Buffett once said:

“The United States is not going to have a debt crisis as long as we keep issuing our debts in our own currency. The only thing we have to worry about is the printing press and inflation.”

Japan is in the same boat.  Their debt is denominated in a currency they can always create.  So what’s the persistent fuss from the likes of Kyle Bass and some others who keep claiming Japan is on the brink of insolvency?  Even an Austrian economist who criticizes the US government for “printing money” should understand that a nation with a printing press and debt denominated in its own currency isn’t going to go bankrupt.  So why does this myth persist?

Japan’s got big problems and I wouldn’t go near their economy or their markets with a twenty foot pole, but that doesn’t mean they’re on the brink of insolvency.  Saying something that silly might make people think you don’t even understand the most basic institutional structures of the way their monetary system is designed.  As for the USA, it’s the same story, but that doesn’t stop the mainstream media and politicians from constantly talking about how we’ve “run out of money”.  It’s absurd.  And this conversation about whether we “have the money” should just stop.  It’s time to get past the basics and move on to the real discussion – the quality and efficiency of spending, how it’s impacting living standards and is it causing inflation?

Updated with horrifying 30 year JGB interest rates surging as default approaches:




Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

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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  • Stephen

    I tell you what If I can get rid of George Osbourne would you like to come over here to the UK and take his job ?

  • http://www.orcamgroup.com Cullen Roche

    Sure, why not. I love the UK.

  • Stephen

    You’re either misinterpreting Bass’ Japan view or not presenting it clearly. Bass has repeatedly argued that once the BOJ is successful in spurring inflation, interest payments as a percentage of central government revenues (currently at 25%) will be the death knell for Japan (as the BOJ increases rates to fight inflation, interest payments on government debt will rise).

    I do not see Bass claiming that Japan is going bankrupt, not sure where you see that either.

  • Iluvatar

    2 things:



    “The BOJ will buy 7.5 trillion yen of long-term government bonds per month, roughly 70 percent of bonds sold in markets. It combined two bond-buying schemes, its asset-buying and lending program and the “rinban” market operation, to buy longer-dated government bonds, including those with duration of 40 years.

    The central bank will also increase purchases of exchange-traded funds (ETF) by 1 trillion yen per year and real-estate trust funds (REIT) by 30 billion yen per year.”

    “One of those steps was to abandon interest rates as a target and become the only major central bank to primarily target the monetary base — the amount of cash it pumps out to the economy. It adopted a similar policy in 2001-2006, but not on this scale.”

    I did not understand the utility of the last part. Especially in light of a (CORP sector) BSR and monetary velocity hovering somewhere near cipher.


    “And this conversation about whether we “have the money” should just stop. It’s time to get past the basics and move on to the real discussion – the quality and efficiency of spending, how it’s impacting living standards and is it causing inflation?”

    Ready when you are, sir. (`Bout time)

    Oh, and please remember to bring with you Article II, Section 8…

  • Johnny Evers

    “The United States is not going to have a debt crisis as long as we keep issuing our debts in our own currency. The only thing we have to worry about is the printing press and inflation.”

    Isn’t that the worry? After all, what good is a printing press if using it would create inflation? I think that’s what people mean when they talk about running out of money.
    Agree 100 percent on the quality and efficiency of spending — although I would call it the quality and efficiency of debt. Most debt issuance does not seem to be raising living standards the way it used to do.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    “And this conversation about whether we “have the money” should just stop.”

    I fully agree, but there’s a terrific headwind. David Stockman, for instance, is at it again making the rounds with his latest doom and gloom book. He had a full hour today on NPR:


    I actually agree with some of what he has to say, but overall I think he an austerian and an Austrian.

    It would have been nice if they’d invited someone such as yourself on to add a little perspective.

  • Martin

    I agree with Stephen’s comment above – you’re either misinterpreting Bass’ Japan view or not presenting it accurately. Cullen – if

    (1) the BoJ is successful in creating 2% inflation and
    (2) then JGB yields rise to 2.5% or more,

    how will Japan avoid a severe financial event, most likely one involving high inflation or hyperinflation?

  • Greedsgood

    Perhaps someone can explain to me how this Japanese magic act can continue. If the goal is 2% inflation, and the 10-yr is yielding 44bps, who (outside of the BoJ) would possibly want to own a guaranteed negative real yield of 1.56% ?

    Is the goal of the FED and BoJ to ultimately destroy and/or eliminate government bonds as an asset class, an investment for anyone outside of FR Banks of the world? I don’t get it, please enlighten me.

  • Cowpoke

    We may not be able to run out of money, but the other side of the coin “production capacity” seems to have left the printing presses at the gate.
    seems we are now getting to the point of being able to supply more goods and services than we have cash to scoop them up with.

    Perhaps we need a new sort of trickle up economic/fiscal approach that will allow the people in the lower 99% the ability to bring about pairity of the productive capacity with the monatary base.

  • http://www.orcamgroup.com Cullen Roche

    Bass says Japan has a “debt time bomb” and that its interest rates will skyrocket as a result. He’s been comparing Japan to Greece for YEARS now. He made a fundamental flaw in his thesis when the Euro crisis broke out. He misunderstands Europe relative to Japan. Pick the odd man out in Bass’s list of troubled countries from a 2011 investor letter:

    “Greece, Italy, Japan, Ireland, Iceland, Japan, Spain, Belgium, Japan, Porutgal, France, and have we mentioned Japan.”

    Iceland of course had Euro and Pound denominated so that leaves one glaring country who is an issuer of their own currency….Bass has had this wrong for years.

  • http://www.orcamgroup.com Cullen Roche

    THIS IS THE DEBATE WE SHOULD BE HAVING! It’s about efficiency of govt spending and the overall impact on living standards. It’s not about whether we have the money….

  • http://thebuttonwoodtree.wordpress.com Romeo Fayette

    What is it that you suggest Japan do? I assume that they should run a dual deficit, since demographics have incomes receding & deficits would allow them to essentially borrow to maintain GDP/consumption…?

    You obviously don’t like Japan’s outrageous monetary policy here, but per Koo, I guess you’d advise they employ fiscal means? I don’t think that would suggest any stimulus, but rather deficit spending…?

  • Martin

    I agree that JGB interest rates have not soared – that’s obvious. I don’t care if Bass has been “wrong for years” if his thesis is proven correct in the years to come.

    Given Japan’s poor fundamentals and the demographic issues, and now the significant QE implemented today, a significant rise in interest rates will happen in the coming years.

    Cullen – do you think Japan will be successful in reaching the 2% inflation target? If not, do you expect additional QE? If you do think the 2% CPI target is reached – what (approximate) yield do you think the 10 year JGB will earn given 2% CPI?

  • Jay

    It’s about taking back the trillions of dollars the rentiers have stolen from regular people for the past several decades.

  • Iluvatar
  • Johnny Evers

    So long as the BofJ can buy bonds, the interest rate can stay low forever. The BofJ can buy ALL the bonds and keep rates at zero.
    There could be rampant inflation in the rest of the economy, but the government interest rates will be zero.

  • Martin

    The “rampant inflation” to which you refer is what I was thinking about in my first post above.

    My understanding is that Kyle Bass has structured his “Japan trades” to profit from a depreciation of the JPY against the USD.

  • theta

    Rates will rise only if and when growth resumes, in which case the additional tax receipts will go towards the additional interest payments. Rates are not exogenous, set by some bogeyman “vigilantes”, they are set by the BoJ. They can even go the UK way of keeping them at zero even with inflation at 4%, if they need to. The real issues are the ones Cullen mentions in the last sentence, not ability to pay any JPY denominated obligations.

  • theta

    No, he’s buying CDSs.
    So he’s wrong and proud of it.

  • http://www.ipkansas.com/ Insurance Partners of Kansas

    This is a lot to think about… I don’t know much about Japan, but I don’t think its right that a nation “can’t go bankrupt” because the debt is in the denomination that their printing presses create.

  • Johnny Evers

    If he is putting $1 at risk with the chance to make $100 if the trade goes his way, he would be ‘right’ even if the trade’s true odds are 50 to 1.
    If he’s right, it could be a bigger score than what John Paulson pulled off.

  • http://azizonomics.wordpress.com Aziz

    Great article, Cullen.

  • theta

    A few possible explanations:
    1) the market is betting that the goal of 2% inflation won’t be reached.
    2) the goal will be reached but it’s already priced in with the recent decline in JPY (if they succeed in their goal, the right trade is to short the Yen, not to short the JGBs)
    3) the goal will be reached in >7 years and then rates will start rising, at which point, the total return of the trade including FX move will be positive, even for investors outside Japan.
    4) The current yield is the result of demand coming from the fact that JGBs are the only eligible collateral for a lot of JPY investments and the only JPY safe haven (see the recent drop of 2yr Bunds yield to negative territory for another such example).

  • Martin

    He may have bought CDS on Japanese debt, however, he may have other positions, such as those related to the JPY.

    For example:

    “I would buy Gold in JPY and go to sleep… Sell JPY, Buy Gold, Go to sleep, and wake up ten years later and you’ll be fine. Don’t put all yourr money in it but that is the single best investment you can make today.”

  • Geoff

    The key metric for Japan, and indeed any sovereign currency nation, is debt service cost. As long as the interest rate on the govt debt remains below GDP growth, the situation is sustainable. If the interest rate rises above GDP, then you will eventually have an inflation problem.

  • http://www.orcamgroup.com Cullen Roche

    Bass said he bought 1 year jump risk for a basis point. His portfolio is mostly fixed income at present.

  • Martin

    OK, but he’d be doing well today if he took his own advice from March and bought gold denominated in JPY.

    And the USD-equivalent principal on his JPY denominated home loan has decreased nicely today too.

  • http://www.jasondacruz.com Jason DaCruz

    Why is it necessary to spur RGDP on a country level? The fundamentals say that slow growth *should* be happening, what with the demographics you mentioned. That’s what I don’t understand about the liquidity trap argument — the savings are necessary, the elderly Japanese are depending on that money in the future, and BoJ only seems interested in erasing its value.

  • matt mcosker

    The BoJ cannot create Inflation. They have been trying since 2001, and they have measly inflation. This is another we asset swap as far as I can tell.

  • Nils

    The Japanese government wouldn’t have to pay more in interest for it’s old debt when rates rise though, and with rising inflation comes rising government revenue.

  • Nils

    Just wanted to get your link out or do you actually have a point?

  • Andy Richardson

    Ok Cullen long time readers agree with you. They can’t run out of money. Some people don’t get it but let’s just forget about them and move on to issues you haven’t discussed like What are Japan’s problems? And what if Japan decides they don’t need to pay interest on debt that the BOJ owns. Does it really matter if they do or not? Please move past the basics. We know they can print their own currency

  • Dunce Cap Aficionado

    I’d love to see a more elaborate and constructed version of the discussion Cullen and Ramanan are having on Twitter right now.

  • http://www.nowandfutures.com bart

    Cullen, did you ever cover Reinhart & Rogoff in this context?

  • Matt McOsker

    IMO the yen has been weakening since they have moved from a trade surplus to a trade deficit since the Tsunami. Not because of their debt. Sure this QE will cause some short term weakness in the YEn v $, but other fundamentals will be at play – not too much government debt.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Yeah, I know Mish has been a big Krugman critic too. I’m not a regular reader of Mish though… I wonder, does he dish it out to the MMers just as much? The MMers are always complaining about the Fed being too TIGHT with the money supply? They think the Fed needs to make money a LOT easier than it is now. Seems to me these two libertarian strains are diametrically opposed to each other (Austrians and MMers). I have a feeling Stockman would classify MMers as “Keynesians”, which would probably make the MMers howl in protest.

  • Waitingtoretire

    It always trickles up, never down. American propaganda is the best in the world at convincing people that black is white.

  • http://www.orcamgroup.com Cullen Roche

    Yes, it’s super important to delve into the inflation constraint and foreign exchange constraint because Japan’s monetary system is not the only benefit they’re experiencing here. Japan has the luxury of being a massively productive nation with enormous output. They’re not suffering from a lack of aggregate supply, but a lack of aggregate demand. So they don’t have the bad kind of inflation that results from a declining output base as we’ve seen in some countries like Greece, Cyprus, or LatAm countries. These are very different situations from Japan or the USA. It doesn’t mean we couldn’t become more like Greece in terms of output, but we’re certainly not there now.

    Still, Bass’s argument is that rates will rise because the bond markets will demand it as in Greece. This is a fundamental misunderstanding of the Japanese monetary system. It doesn’t mean rates in Japan can’t rise, but they won’t rise because investors are worried about Japan paying its obligations.

  • Rob T

    You say you want a revolution…

  • jt26

    Nothing horrible will happen in Japan … at least if they can keep making stuff to exchange for oil … even then they can always go nuclear (they have Toshiba, which is in the top 3 of nukes)
    (a) as Cullen says, in principle, the BoJ can control all interest rates
    (b) interest is just another flow in the economy; someone gets the income
    (c) the private banking sector is an extension of the government; interest rates don’t need to rise when you control them, debt can just go bad, government takes over or allows the zombie banks to hide the losses, and eventually it just devalues the currency
    (d) recent history tells us that countries that are still productive have increased interest rates only to slow the economy or have some notion of “defending their currency”, which is more political then anything (e.g. UK, Canada)
    (e) wages can adjust

  • Mr. Market

    Japan is already insolvent. The last shoe to drop is that Japan will run into a liquidity crisis, like the US.

    Seems Warren Buffett wants to promote Hyper-Inflation. But Hyper-Inflation requires Hyper-Deflation. And Hyper-Deflation is the result of a debt crisis. So, poor old Buffett still doesn’t get it.

  • http://highgreely.com John Daschbach

    As Cullen says: “THIS IS THE DEBATE WE SHOULD BE HAVING! It’s about efficiency of govt spending and the overall impact on living standards. It’s not about whether we have the money….”

    I agree. But it’s only indirectly spending, it’s really people working. It seems that many people don’t understand that a the global macro level (sort of the thermodynamic view) there are basically only two terms, human productivity and consumption of real resources. At a more detailed level, human productivity can be used in the present to produce small amounts of real resources that can be consumed in the future (e.g. Housing, durable goods, etc.). Anyone understands this realizes that what we call money is worthless at the macro (thermodynamic) level (it can’t directly provide human productivity or real resources).

    It’s possible to (imperfectly) model the economy with a (huge) set of coupled differential equations. In the end, if R is the real economy, and P is real human productivity and C is consumption of real resources you have R^dot = P^dot – C^dot. It’s convenient, but not necessary, in coupling the equations to use money, and in fact we can accommodate any functional form for money as a function of time in the system.

    But a huge number, perhaps the majority, view money as something real, because in your own life you can get money in exchange for productivity and exchange money for the productivity of others or real resources. But at the true macro level it is truly worthless. The real economy is the difference between net real productivity and real resource consumption. It seems strange that instead of focussing on the real inputs to the economy we focus on money.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Well I took at look at MMer Scott Sumner’s site to see if he had any comments on Stockman. I found this:

    “PS. Just so the post doesn’t seem like a mindless anti-Krugman rant, let me add that I do agree with Krugman’s view that the recent David Stockman column was a sort of mindless rant. And I’m an expert on rants.”

    So I guess the MMers do, at least, dish it out to the Austrians once in a while. Here’s the link:


    Be interesting to see if the feeling is mutual! Poor Krugman though catches it from all sides!…

    Just read the Mish piece. I guess I’m surprised by some of his assertions. I know he’s an Austrian, but still…

  • PeterP

    Mish is a total fraud. He got exposed by Peter Schiff of all people.


  • http://brown-blog-5.blogspot.com/ Tom Brown

    Mish seems to have some goods on Schiff too:


    I guess it’s an inter-Austrian feud!

    At this point I don’t trust either of them.

  • http://brown-blog-5.blogspot.com/ Tom Brown
  • Nils

    Gold denominated in JPY? That sounds rather odd. Unless you borrow the yen to buy the gold all you are left with after exchanging JPY for Gold is.. Gold.

  • Geoff

    Expanding the “monetary base” will do dick.

  • Anon

    nice link!

    But why do these guys stop there? Why not just go all the way and have the BOJ buy ALL outstanding government bonds by the end of May?

    Imagine the aggregate demand and economic activity that would stimulate?

  • http://JackSooner Jack Adkins

    I’m a long time bond trader and frequent visitor to this site and others. I try to have an open mind because much of what is happening in the world with regard to monetary policy is a grand experiment in my view. I don’t have an ideological bent; I’m not Keynesian, Austrian-Austerian, MMR or MMT; I’m agnostic, my only goal is to be on the right side of the trade. There are a lot of points that I agree with Cullen and others here on, and some that I don’t.

    That being said, I think Cullen and others here are being somewhat short-sighted with regard to the Bass trade. I’m citing Bass math here, but I have little reason to doubt its accuracy; he’s been enormously opaque with his data and no one that I’m aware of has cited a problem with it. Anyway, a 67 bp rise in a Japanese 2yr rate would cause 25% of Japan’s 2011 tax revenues to be directed toward interest expense. A 2.5% 10-yr JGB would cause all of 2011 tax revenues to be devoted to interest expense. You can play around with tax rate scenarios but revenues are remarkably consistent in developed economies as far as I can tell.

    Mind you that the goal is 2.0% inflation so this large of a rise in interest rates is quite reasonable over time. With a rapidly graying population it would take a minimum 4.5% GDP growth in perpetuity to cause a revenue stalemate. If this math is accurate then Japan will have to make some tough choices in the not-too-distant future unless growth surges. How much retirement and health benefits to pay its seniors of force bondholders to take a significant haircut. From my perspective the current QE on steroids is an attempt to delay that choice. The government clearly intends to devalue its currency (a haircut for any international bondholders, which are currently non-existent) in hopes that export growth will take up the growth slack. I’m aware that the government could simply print enough yen to cover redemptions, but this is a steep haircut in purchasing power as well. Further, as a bond trader, if I have to seriously ponder those possibilities, I’ll be out of my position long before the government gives that answer. And it will take a significant yield premium to get me interested again. The real danger is when the debt has to be rolled over (the same problem will likely impact the Fed at some point in the next four years).

    I understand that a real default isn’t an issue and I don’t think that is what Bass is playing for. If he’s long 5 yr jump risk at 1 bp, he makes a killing if CDS only rises to 50 bp, much less the +600 bp level that is typically associated with the start of an actual default risk scenario. My suspicion is that JGB holders are willing to wait and see just how much BOJ bond purchases can push the yield curve lower/flatter.

    I suspect the BOJ will be able to generate some inflation but will find it difficult to achieve and sustain 2.0% inflation. I am quite confident that Japan will be very disappointed how little growth this experiment actually generates.

    If so, then some restructuring of the debt load will eventually take place and the market will anticipate that, causing a bearish steepener trade to push to new all-time wides. I’m still unclear of the timing of such a trade but I’ll wager that a yield floor is established by Q3 of 2013. How quickly yields rise, however, will depend on inflation stats and growth stats in Q4 and going forward, and if the BOJ has enough of a mandate to double down on QE once again at that time. My view is that a confidence crisis in policy could occur in a nation that prints its own currency. Not a default crisis, mind you but confidence crisis nonetheless.

    If this happens in Japan, then they will probably not be alone. Liquidity in sovereign debt has been taken off-line by the low interest policy of the Fed. I have a friend who is retired but was once the high-yield chief at PIMCO. He wants to come out of retirement and start a new fund that will be capable of shorting the long end of the curve relative to the belly in various grades of fixed-income yet can’t draw sufficient interest from capital allocators to fund it. Anything fixed income is currently a pariah to attracting spec capital at this time.

    After all of this, here is my major difference of opinion with Cullen and many others here. The MMR tenet that primary dealers are obligated to fund the Treasury through auctions is, in my opinion, vastly over-exaggerated here. Cullen is a young guy (maybe many others are as well) and has never experienced a real bear market in fixed income. The last one was 1994 but others in the 1980s were worse.

    In a genuine bear market environment customer bids for Tsys becomes very sparse, credit lines quickly get bloated with inventory and hedge techniques aren’t foolproof. That was when rates were 6.00% and traveled to 7.25%. How one-sided can we expect the market to be with 10 yr rates when they turn up in earnest from 1%-1.5% toward 3.00%? or likely higher. Mind you that the market’s capacity to absorb significant volume isn’t what it used to be. There is a smaller number of players, a smaller chorus of large players who will likely think in unison, much fewer than the max-allowable 32 primary dealers. If we can’t 32 dealers to be profitable in a major bull market, how many will survive a genuine bear market? I pretty tough to bottom pick when there is a 3-4 bp tail on each issue in an auction tranche and the bid-to-cover is lean day after day.

    Anyway I think you all see my point, you may disagree but I haven’t seen enough evidence yet to suggest that this pillar of MMR will hold up under duress; it is very flimsy in my professional opinion as a 30 year veteran of bond trading. I think Japan’s success/failure at QE will likely have major repercussions for US fixed income. We’ll see. I expect some pretty severe differences of opinion but color me skeptical from experience.

  • http://www.fanbrowser.com/ Cowpoke

    Interesting how these discussions seem to always come back around to aid and support for the common folks.
    Just like the discussions 3-4 years ago where folks pointed out that people should be paid first, THEN Banks get paid by them (common folks) for mtg pmts.

    That was the way to go. Credit the private sector individuals with capital and then create a path (vehicle) for the funds to travel through the banking system thus balancing the books of both the banks and the masses (HOUSEHOLDS). BUT NO.. Let’s circumvent the masses and only clean up the banks balance sheet.
    OH!! wait, they threw the masses a 2% Bone for a year or so.. BIG DAMN DEAL, Hell I was proposing a FREEZE on all mtg pmts for a year or so back then THAT WOULD BE SHOCK AND AWE..
    This was mis-guided and WRONG and now here we are again with healthy banks asking them to now make BAD LOANS!!!!
    “Team Obama to Banks: Issue Home Loans to Riskier Borrowers”

  • http://www.fanbrowser.com/ Cowpoke

    Japan IS Bankrupt. So Is The US.
    They are Both Bankrupt in the upper political echelon of any fresh new Ideological fiscal thinking of how their monetary systems function which blinds them to how they can be healed.

  • Anonymous

    You really eat this stuff up. As smart as Cullen is, he has a limited idea of how the world monetary system works. It’s not about vigilantes; it’s about the absolute level of debt that if rates move a percent, it’s an expense more than the budget. Being able to print money is more flexibility than the inability to, but it leads to the same destination over time. With no respect given, get a clue, think for yourself, and know what you don’t know; all of which is a serious problem on this site. If such “knowledge” was so valuable, it wouldn’t be given away free.

  • http://www.fanbrowser.com/ Cowpoke

    Hughh? what you talkin bout Willis?
    The FED CONTROLS the Interest rate. and NO ONE ELSE.

  • Anonymous

    That was a recent bet, and a small one at that. Ill take a 10,000 to 1 anyday.

  • Anonymous

    I disagree Maynard. The problem is not a all of demand, but an over overabundance of supply due to unproductive lending.

  • Anonymous

    …and unsustainable demand due to unproductive lending. “Sustainable” is many levels of GDP below the level that is attempted to be maintained.

  • Anonymous

    But…but the US has it’s debts denominated in its own currency and the fed can buy bonds and keep rates down indefinitely. The only constraint is inflation. Don’t you understand the facts of the monetary system man?

  • http://www.orcamgroup.com Cullen Roche

    Run the numbers. You’re just regurgitating some standard fear mongering point backed by zero factual evidence. The US govt pays a few hundred billion in interest payments today. It could run a 5% interest rate and pay 800B in interest expense without any other budget expenses. It could run a 2% average rate with 320B in expenses. You clearly haven’t run the figures here. You act like this is some sort of onerous burden and at the same time you probably complain that grandma is earning too little on her savings. Did you ever consider that that 320B goes to grandma? Which is it? Is the debt a burden or does grandma not want her interest payments? This is how Americans are. They all want the govt to reduce its debt, but none of them want to reduce the payments they’re getting. The interest on the national debt is a benefit to the private sector! It’s the interest on your savings. If you don’t want it then the govt can just say they won’t pay it and you’ll get the equivalent of a checking account as opposed to a savings account. No big deal. No more interest expense, no addition to the deficit. So what.

    You haven’t understood the very basics of what I’ve explained here. Please give it another effort. Ask questions if you must. I am here to help. Not to jam some ideology down your throat….

  • Andrew P

    In his video today, Bass said to short Yen and borrow in Yen to buy foreign productive assets.

  • Andrew P

    Watch Bass’s video that is posted today.
    He did NOT recommend any trade based on JPY interest rates rising, even if he thinks such a thing will happen in the far future. He recommends shorting the Yen, and borrowing in Yen (presumably with a long term note) to buy foreign productive assets (carry trade). Neither of those trades are fighting the BOJ.

  • Johnny Evers

    What are some examples in history of a nation that paid its debts in its own currency and either cranked up the printing press or borrowed from its central bank in order to finance its spending?
    I have this suspicion that having a printing press is like having a nuclear arsenal. You can use it to scare people, but ultimately the consequences of using either one are negative.

  • But What Do I Know?

    Exactly. Interest payments on federal debt are subsidies to savers. There is no intrinsic reason why the government need pay interest on its deficit; it’s just a darn good idea and one of the reasons why ZIRP/QE lead to deflation in a demographic era which sees less borrowing.

  • But What Do I Know?

    Less borrowing by the general public, that is.

  • KB


    Again and again you are being caught in the sophistry of all these money-schmoney stuff. Just try to use simple and basic view using amount of goods and services produced. Produced amount is obviously finite and restricted. A part of it, which is promised through debt and social programs, is mathematically beyond the levels that can be possibly delivered. That’s why Japan is bankrupt.

    It is as simple as in the story with Karlsson, his little friend Lillebror and buns. Karlsson says “Lillebror, we got ten buns, eight for each of us” “But how, exclaims Lillebror, it is not possible…” “Possible or not, I have already took and ate mine”, says Karlsson. Here, you can substitute these characters with the main economic actors, be it Japan or US….

  • Geoff

    KB, nice vocabulary with the “sophistry” thing. Are you saying that Japan and the US, two of the most productive countries in the world, will not have the real resources to deliver the social programs etc. that have been promised?

  • KB

    God almighty! What relation does production level, be it high or low, have to this thesis? Whatever high the level of a country production is, if the promised amount is higher, the country still goes bankrupt.

    Per my example, instead of ten and eight buns, you can use ten trillion and eight trillion buns, to reflect the high level of production.

  • KB

    And also thank you for the compliment and sorry for excessive rants.

  • Johnny Evers

    We’ve promised benefits to retirees — mostly health care benefits — that will require the time and energy of surgeons, doctors, drug makers, wheelchair manufacturers, the lady to turn you over in the night, etc. And since the people accepting these benefits don’t have the resources to pay for it, then money must either be diverted from other purposes (which would require higher taxes and demand that other Americans then enjoy fewer of their own benefits), or, and I admit this is a fascinating idea, we can just create the money through borrowing or printing.
    I don’t think it would work, but my gosh it would solve a lot of problems if it did.

  • Geoff

    When you say that the country will go “bankrupt”, that is about financial resources, not real ones.

  • Sam A

    Japan will not succeed in generating inflation. The problem is not monetary but demographic. The BOJ could buy up all the debt stock and the country will still be mired in deflation. Aggregate demand in excess of productive capacity is the only thing that will push up inflation. Japan has excess productive capacity and falling aggregate demand, so the situation will only persist. Any rise in import costs from currency depreciation will be offset by rising exports, effectively neutralizing the inflationary impact.

    What is this nonsense about debt servicing cost? The BOJ can buy up the entire debt stock wiping out all debt servicing cost. Japan is not Zimbabwe. The debt is essentially meaningless to the economy other than providing a place for savers to park their cash. I find it ironic that Japan is the only developed economy with positive real interest rates. If investors in the US and EU are willing to accept negative real rates, what leads one to believe that Japanese investors would reject such a notion if confronted with the dilemma? Where would they move their savings?

  • http://www.fanbrowser.com/ Cowpoke

    KB, can you please elaborate on this?
    “A part of it, which is promised through debt and social programs, is mathematically beyond the levels that can be possibly delivered. That’s why Japan is bankrupt.”

  • KB

    If you mean an event when a toady appears on some podium and proclaims “Hereby, Japan is announced bankrupt”, then no, this will not happen. (unless the toadies would decide it has some “constructive” political meaning).

    All I mean is that any little brother in Japan or, actually, in the US, who expects to get five buns down the road, will only get two.

  • KB

    Let’s say a Japanese pensioner holds X JPY in retirement account. All, of cause, is invested in Japanese bonds. Plus some sort of Japanese “Medicare”. A poor chump expects to get nice tuna sushi every day during his retirement, and some titanium knee joint when need be. These are “five buns”. Instead, he would get “two buns” – a nice pile of rice every day, and a good wooden stick when need be.

    From the “financial” point of view the transition from five to two buns can happen in two ways. Either the chump’s holding will be “cut”/”adjusted”/”bailed-in” to X-N JPY, buying “two buns” under current prices, or the “two buns” will cost X JPY in the future, instead of X-N JPY now.

  • http://www.fanbrowser.com/ Cowpoke

    KB, have you factored the “Quality” of the Buns?
    2 Fresh buns that improve a brothers quality of life are far more valuable than 5 or 10 stale old buns.

  • http://www.fanbrowser.com/ Cowpoke

    well, with regards to Japanese Pensioners OR US entitlements, the whole point is that the way our monetary system are designed, there will always be ample buns to pay because the Govt (given the political will and understanding of how the system actually works) just moves the buns around the system.
    In the end the Buns always end up back in the bread basket of the banks anyways so it’s no biggie.
    As long as there are enough bakery staff and supplies to make all the buns needed. And since we as a society are in hyper drive efficiency mode with MFG it doesn’t look like we have a productive capacity constraint in the the near future.

  • KB

    You are not getting what I said. I did not mention, nor did I discuss “the buns to pay”. These are not buns, these are “money”. I discussed “the buns to eat”.

    Again, a simple example. Every Japanese pensioner expects tuna sushi every day during their retirement, because, that’s what they can buy now with their X JPY. Yet the reality is, produced tuna sushi is only enough for half of them. So, either they will have to pay twice the current amount for tuna sushi, or they will get X/2 in savings after “tax”, “levy” or “bail-in”, but still, they will not get tuna sushi every day!!!

    Now I expect to hear from you about demand elasticity, substitutions, utility curve, and such.

  • LeoZ

    Dont be so cocky Cullen Roche. Kyle Bass is hunting for profit outside your vision. What is the most profitable trade look like? it looks impossible. That is only way to make money from everyone else. There are dozens of articles online, attacking foundation of Kyle Bass’s Japan trade, from BAC 8 hours office sitter, you to Joe Weisenthal, who makes a living on using “disaster” “dead wrong” kind of words to attract attention. You guys are saying KB is either an idiot or political wing nuts. But that is exactly why KB made a billion dollars and you guys just know how to put your money in index fund every month. Remember, you may have right arguments, theoretically. But Kyle Bass could still make insane profits for being wrong. It only takes a spike in yields for him to do so. He is not betting on price.He is betting on volatility. And this is what Soros has to say


    What happens if there will be capital outflow? They can still apply capital control and currency peg to suppress the interest rate. But wait a minute, did I just say currency peg?

  • http://www.orcamgroup.com Cullen Roche

    I didn’t say buying CDS for 1 basis point is a bad risk/reward. I am sure he’s implemented the trades brilliantly. Bass is a genius trader. But that doesn’t mean his thesis is right. It just means he’s hedged his trade well by implementing it in a clever way.

    And I don’t think I am being “cocky”. From my view, if you understand the money system Japan won’t experience a Greek like interest rate surge because the default risk is virtually non-existent. But Bass doesn’t differentiate Greece from Japan because he doesn’t differentiate the design of their money systems.

  • http://www.fanbrowser.com/ Cowpoke

    If they want sushi in Japan or meals on wheels in Florida, they will get it until it’s gone because in democratic societies people vote for what they want.

  • http://www.orcamgroup.com Cullen Roche

    “Caught in the sopistry”? KB, your comments have zero factual basis. You do little more than regurgitate the same vague talking points that have been wrong for 20 years. If Japan is so “bankrupt” then why don’t you do us all a favor and tell us that you’re short JGBs and long sov CDS? Gary_UK and a few others have been just as wrong as you about all of this for years, but at least they’re willing to put their money where their mouth is. You consistently come here and insult my writing and then write your own vague political talking posts to satisify whatever anti-govt agenda it is you’re pushing.

    Rather than just repeat these vague comments, why don’t you offer your own thesis and provide us with a way to benefit from it? In other words, try to add some real value to the comments rather than this repetitive politically charged nonsense.

  • http://www.orcamgroup.com Cullen Roche

    No, it’s even more basic than that and you still don’t understand it. If the buns are better quality and it takes less labor hours to produce them then Japan’s sons/daughters have experience a rise in their living standards. A USD buys 1/10th of what it did in 1913 and it takes us 1/100th of the time to produce those same goods and services. Do you really call that a decline in living standards just because there’s been a rise in prices? Because if you do you’re wrong.

  • AWF

    CR”Japans got big problems and I wouldn’t go near their economy or their markets with a twenty foot pole”

    Of course the US Economy and Markets are nothing but lush

  • LVG

    Bass isn’t a “genius”. His Japan Macro Opportunities Fund has been crushed. This guy is a clown and his fund has been destroyed by his own misunderstanding of the system. If he’d read Pragcap 2 years ago he would have never started this fund and quickly imploded his reputation.


  • El Viejo

    Exactly. And when the savers retire the payments will shift to Soc Security. It’s paid out over a long period of time. It’s like the govt borrowing to get through a rough patch and paying it back at a very attractive rate. And the govt has all kinds of alternatives that private individuals and States don’t have so where are the numbers that say we should panic?? Is it the balance sheet at the FED ?? Bernanke says he can pare it down. Can he? I’d like to know how he plans on doing that.

  • Happy Dog

    Please don’t waste your precious time responding to borderline trolls/the clueless who haven’t read any of your stuff.

  • http://highgreely.com John Daschbach

    Exactly. If you look at the essentials, food, shelter, and clothing the BLS calculates that the share of household income spent on food has gone from 39% in 1919, to 24% in 1960, to 13% in 2002, housing since 1934 has been very close to 31%, and clothing has gone from 17% to 4%. Expenses categorized as other have gone from 22% to 50%. The idea that we have promised more than we can produce is ludicrous. On the other side of the coin, the fact that it now takes so few people to supply basic needs and a much smaller fraction of the economy is devoted to basic needs makes inherent stability of the economy far lower.

  • KB

    Cullen, please, pay attention to what I said. I actually stated that official declaration of Japan bankruptcy is extremely unlikely, if not impossible.

    Talking about my Japan-related trades, I cannot do CDSs, I was short JPY, covered it some time ago, maybe too prematurely. I am also long 30Y US treasuries as of now, and do not plan to short JGBs. I will probably re-short JPY on a pull-back. If I could, I would speculate in CDSs the way Bass suggested. That’s regarding my thesis of how to benefit.

    Talking about “being wrong for 20 years” – this argument is incorrect. Even if we assume it is an outright Ponzi, it can run for more than 20 years, and would not break. Just imagine if somebody called Madoff Ponzi early and “shorted” him. The whistleblower would have gone completely broke quite soon, and then Madoff would run his circus for much more time and only after that he would got exposed. And here we are considering Japan – it obviously has much more capacity to run ponzies comparing to Madoff.

    And I never intended this to be anti-government. They do what they can, and I, most likely, would do the same.

  • LeoZ

    1. It is ridiculous to say Bass, Einhorn never heard of or deliberately ignore your arguments. Just like some articles in this blog at earlier age, such as “Obama doesn’t understand our system” “Bernanke doesn’t understand our system”. I know it is a tactic to attract traffic, but it is just ridiculous. What part of this system is difficult to understand? is it rocket science? that you have to take 4 years college class and 5 years PHD program to understand it? on the other hand, how much edge do you have against market if you “understand” it? No, the real question is, how much edge do you THINK you have if you THINK you understand it?

    2.If I am in trade with profit target of 500-1000 percent, am I gonna lose sleep if I stuck 60%? People made judgement for this trade because it is up/down 60% probably never have been in such a trade.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Well said Iluvatar! It’s true I’m more sympathetic to Mish than Schiff, but I too have scratched my head over his FRB take.

  • KB

    As neither I nor you are providing any hard numbers, the subject remains purely philosophical. Thus, I would not use strong statements, such as “ludicrous”. It is pretty simple – whatever amount you can produce, you still can promise more. Production is inherently limited, even if it is growing very fast. Promises are unlimited.

    You simply believe that the current promises, reflected in the levels of debt and in social programs, are adequate to the current production and its growth. I do not believe so. Both of us are unable to prove it with numbers. That would be the end of argument.

    Apparently, our beliefs should affect our investment strategies. As Cullen rightfully noticed, blabbing and ranting is redundant, and, rather, investment strategies should be discussed. Mine is to be tactically short JPY. What is yours?

  • KB

    Interesting point of view, quite the opposite to mine. Are you counting iphone production? Or BS from Harvard? Or healthcare coverage? Or two houses per family?

  • Nils

    If you say there’s 0 risk of Japan defaulting, it doesn’t matter what you paid, it’s still money down the drain.

  • Nils

    Healthiest horse in the glue factory ;)

  • cc

    put all the words and definition aside,
    let’s not care who is bankrupt or what does bankrupt mean.
    not even talk about the fancy charts and statistics whether it is in Japan, US or Europe.
    There is just one question that matters:
    “Do the 99% feel better or worse?”

  • http://www.fanbrowser.com/ Cowpoke

    What part is opposite?
    KB it’s rather simple. People are better off today than they were 50, 100, 200 years ago and that’s undeniable.

    If in the next few years we are all dying before 50 starving and disease ridden wiping ourselves with leaves and eating grass and tree bark.
    Then I will admit your point of view was correct.
    However, History is on M.Rs side.

    Of course a man made Or natural Disaster can alter things but that has little to do with national monetary operations.

  • KB

    Yes, people are better off today than they were previously. I would agree to that, despite some research stating that real household income declined during last 30 years. But this point has absolutely no relationship to what you stated (as the other statement about “high production”).

    You stated that “seems we are now getting to the point of being able to supply more goods and services than we have cash to scoop them up with”.

    I assume you understand what debt is. It is money. It is also delayed consumption. What is the world’s debt outstanding? What is the world’s total production capacity? There is, quite obviously, much more money than the goods the world can supply. What would happen when people stop delaying the consumption and began to accelerate it? Would it be enough goods supplied? And how all this is related to the fact that “people now are better off..”?

  • Joe

    Every sovereign which has the debt denominater in his currency, and has a printing press, cannot defalt. Fair enough.
    But isn’t hyperinflation somehow a stealth default?

    The funny thing is that in october 2011 i was speaking at a small simposium, and when i said that Greece was insolvent due to an unsustainable debt burden, a well known strategist asked me aggressively “so why japan hasnt defaulted yet?!”

  • KB

    Absolutely! What they call it these days – “quality substitute”? Just as I said – an excellent premium wooden stick instead of stupid an dangerous titanium knee joint.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Cullen points out that inflation is certainly a constraint, but Japan hasn’t been in danger of hyperinflation. Until recently they’ve been experiencing mild deflation.

  • Arc

    Now this is something I really think needs an answer. During past bond bears, has the MR description of the fail safe gov funding procedure really held up? Cullen?

  • Indignado

    Great post. I appreciate your insight as a seasoned bond trader; very informative.

  • Yoyur Nore
  • http://www.fanbrowser.com/ Cowpoke

    Damn, that was 6 minutes of my life I won’t get back.
    Why can’t smart talented people who can make these videos actually do a bit more leg work and get it right.
    That guy would be a great MR spokesman if he was willing to educate himself.

  • troll

    I haven’t commented on your blog for some time now because I realize the ignorance I have of economics.
    That being said, I read the same things over and over: the US can’t run out of money (that’s a gimme); we cannot keep spending and spending (because that would cause inflation – but there presently is no sign of this occuring). So why is it that I keep getting this feeling that something is fundemantally wrong with our present situation? Could it be that somethng is worth what people THINK it’s worth, not WHAT it’s worth. If our economy – or dollar – loses the faith (what people THINK it’s worth) of the vast majority of the people because they start realizing WHAT it’s worth (because we just keep on printing and spending) then it will be realized to be worth damn little.
    The continuation of huge deficits, while not directly impacting WHAT it’s worth, will eventually cause a lack of faith on part of the people. Large economical facilities can only control the peoples’ minds for so long. This worries me greatly. Continued cheap money worries me greatly. I feel like I’m at the end of a whip and have no control over the snap, only the dreaded knowledge that eventually it’s going to happen.

    Thanks for your blog.

  • http://www.fanbrowser.com/ Cowpoke

    Troll, I think you are falling into the “Micro Trap” when it comes to “Macro Monetary” concepts.
    People are bantering on about the US or JAPAN, however, people are NOT rushing to hide their money in China or Russia.

    Think of Money more in terms of TRUST IN NATION or BELIEF IN IDEOLOGY

    That is really what makes money a store of value, The VALUE of the society.. NOT just ones and zeros.

  • Joe T

    Agreed. Our American ideology founded on the NDAA, Patriot Act, Monsonto Protection shall certainly give the public full faith in the privately owned unconstitutional debt based reserve note.

  • http://www.fanbrowser.com/ Cowpoke

    Joe T, it is what it is my brother.
    Think about it. At least with the Monsanto Corn, You could “possibly” live another day. However. If you just had to rely on another Oprah OR Ellen Degenerate TV show for your substanance you would not be doing so well.

    If I may put Words In A Profit of Gods mouth…
    “Man does Not Live BY The Words Of Cheesy Actors Alone.”

  • ed

    You would think the founder of a financial services firm would be more astute than the article implies, but i guess its all about sales after all.

  • http://www.orcamgroup.com Cullen Roche

    Ed, rather than an insult, why don’t you have explain why I’m wrong? Thanks.

  • http://www.orcamgroup.com Cullen Roche

    Understanding the future price of govt bonds has to do with understanding inflation, not solvency in the USA or Japan. That’s the whole point of the article. If Japan begins to suffer high inflation it will be because their economy has improved and the BOJ will be forced to raise rates. It doesn’t mean bond traders can’t get hurt, but understanding that is very different from what hurt Greek bond traders for instance.

  • Jack Adkins

    I agree that inflation has always been the basis of bond pricing and realize that central banks/treasury departments that issue their own currency can print the currency necessary to cover redemptions but…these are very unique times we live in. Until the Volcker-era Fed, virtually every economist on the planet would have said that an inflationary recession (i.e. stagflation) was impossible; you could have one but not both. Prior to 2001-2003, the US equity markets had never closed lower more than two years in a row, when maybe it did so just to spite me! During my long career the market has taught me repeatedly to not rule out the unthinkable because it theoretically can’t happen.

    In just the last five years there were failed auctions in Germany (at the time it didn’t issue its own currency but I think you’d have to admit that the Euro has been managed with “German” bent) and in the UK (which does issue their own currency). The bond market quickly shook off these events and rallied because it recognized the deflationary aspects of the financial crisis. Both occurred with ECB and BOE balance sheets at “normal” levels. The BOE also suffered failed auctions in 1995 as it exited the ERM. Many emerging market countries have also experienced failed auctions in their native currency. I suspect that the rebuttal by most will be that it can’t happen in deep financial markets such as Japan or the USA because of the printing press guaranty. I’m not so sure.

    During times of extreme financial distress, however, I suspect (but can’t prove obviously) that there IS an upper bound from the market’s perspective that a CB can expand its balance sheet, kind a Reinhart/Rogoff level, that says these numbers are too large to ignore and demand a substantial risk premium even if growth remains weak and reported inflation stays low/negative. We may have crossed that line already but don’t know it yet. The true litmus test, if there is going to be one, is when the maturing debt on CB balance sheets must be rolled. I suspect that another ratcheting up in auction supply to cover redemptions will choke the placement infrastructure and that you COULD have failed auctions in the “deepest” financial markets. My bet is that country will be Japan. Under this scenario Bass’ CDS trade would surge, even though the BOJ could print its ass off. Essentially, the CB could lose “control” over the long end of the yield curve even in the absence of rising inflation. If growth in the US or Japan improves substantially, then this scenario will come off the table and we’ll trade inflation fundamentals instead.

    Obviously, this line of thought is probably heresy here (and in a lot of other places as well) and many would accuse me of not understanding the financial system, that I’m old and close-minded. Maybe, but the market has a funny way of making old guys play devil’s advocate quite often; those who don’t aren’t likely to become old guys in the market, they end up doing something else.

  • KB

    oh, people do not hide money in the US, they hide it in various offshore outlets. Do they really “TRUST IN NATION” when they hide money in Cayman Islands?

    And regarding China – people hide huge sums of money in HK and Singapore. What do you think would happen to this trend after Cyprus “levy”?

  • Jack Adkins

    I forget to add that the current forward dynamics of the derivatives curve is similar to what gold or crude oil experienced in the late 90s. Producers in these commodities sold forward contracts that had a positive carry. When some type of short-covering rally was ignited, prices would move substantially higher than expected because those producer short positions began to get “uncomfortable”, sometimes producing counter-trend rallies as large as 50%-70% despite weak supply/demand fundamentals.

    Interest rates have a huge derivatives market component. Should some shock generate a rapid rise in 10 yr yields of say +100 bp, it could start a derivatives domino effect that could amplify the move to +250 bp. The economic carnage of such an event would likely become damaging than the sub-prime blowout. Obviously, this is just a tail risk POSSIBILITY at this point, but the policies being pursued in the developed world don’t make me feel like this risk is diminishing, just the opposite.

  • Bert Lynd

    Banana Republic Econ 101

  • http://www.orcamgroup.com Cullen Roche


    I appreciate these comments. Unfortunately, this post isn’t detailed enough to cover all the potential tail risks that bond markets could encounter. I kept it “short and sweet” in order to hit a general point that many people fail to understand. Are there potential tail risks? Of course. Are tail risks hard to hedge out of a portfolio? Of course. I don’t deny ant of that. But the point is that a lot of people have been scared out of bonds for years by these mythical risks like a JGB default and they’ve missed huge market moves because of it. That doesn’t mean there’s no downside risk, but let’s at least get the big picture facts straight when considering the quality of these sovereign bonds as an option.

  • Jack Adkins

    Thanks Cullen for your response, I think you’re a very brilliant thinker and you’re biases (at least the ones communicated here, have largely been spot on. That’s why I peruse your site at least once a week. I hope you don’t feel I’m being combative, I’m not trying to be. I’ve thoroughly read your work, and they often are in-sync with my own.

    I have been a bond bull most of my professional career, because I recognized the inflation dynamics correctly. But with 10yr paper in JPN trading as low as it did this past week, there isn’t much reward in an upside bias. I’d argue that the same can be said as we near 1.0-1.25% on US 10s, not just from a yield basis but from a cap gain perspective. I began accumulating a long bond position in late Feb and think we’ll retest the Draghi low yields, maybe lower this summer.

    That being said, I see a significant bear market thereafter, could rise to 3.0%-4.0% in 24 months after Aug. I am pessimistic that growth anywhere outside of China will be north of 2.0% in the next 3 yrs, and will likely be negative in a lot of places. Under such a scenario inflation will not rise. So…I am expanding my universe of possibilities. A) I can be wrong, there’s no bear market in bonds. B) The economy catches fire and inflation rises; doubtful or C) Think outside the box; a bearish steepener despite no inflation/growth; the only way I can rationalize that is to expect the market to lose confidence in the long end of the curve. This seems to me to be the one worth exploring. What would be the mechanics of such a scenario, etc.

  • http://oneconomist.com Hans

    Cowpoke, the music and presentation was so poor, I click the ad to the left (Hot Russian girls with high debt and QEs in their eyes)

  • http://oneconomist.com Hans

    Government provides little or no efficiency and its impact only reduces GNP and or living standards…

  • http://www.orcamgroup.com Cullen Roche

    Hi Jack,

    Thanks for the kind comment. I don’t find your comment combative at all. It’s well reasoned and very pertinent to what’s being discussed here. I am just referring to a more macro situation in Japan and how their monetary situation works whereas you’re making a more specific micro observation. The way I view this is that a big bear market in bonds will most likely coincide with a big bull market in the Japanese economy. I don’t see high risk of a 1970’s style environment mainly because I don’t see the wage pressures that were a very necessary precursor to that unusual environment. If anything, I think deflation and/or low inflation will continue to persist in Japan and in the USA. I think we’re beginning to see some wage inflation in the USA, but that’s a good thing in many ways so from my view it just means you have to piece your portfolio together more tactically going forward and fixed income is just one piece of that puzzle. I can imagine though, if you’re a primarily FI trader (as you are) that you might be more concerned about that specific asset class as it pertains to your portfolio going forward.

    Thanks for the thoughtful comments and your honest assessment of where you think the markets are headed. It’s great to hear from the real seasoned veterans on the more specific matters at heart here. I know I am rather vague at times so this sort of commentary is a great addition to what I wrote.



  • http://oneconomist.com Hans

    Nippon, has the largest governmental debt burden in the world…

    Its export arm is growing weak, the nations’ greatest resource…

    It is sitting in the shadows of Red China, with an aging population and a dysfunctional political system…Surely, the Yen shall follow the nation declining demographics..

  • http://www.winteractionables.com Russ Winter

    We will see in due course how this monetary experiment works out. Indeed the very night that the BoJ launched its new money printing program, the JGB 10 year spiked to a 35 bps yield than reversed down to 65 bps, reversed again to recover to 45, and ended up around 55. That is a lot of daily volatility for a vehicle that yields around 50 bps per year. I think a new and very different risk-reward Keynesian end game regime is at hand. Fiscally Japan already spends a third of its tax revenues on interest payments, so I will ask you what happens should this spike even moderately, say to one percent?

    This is bound to attract the interests of speculative pools, who I think will facilitate an attack on the both the currency, but especially the JGB. Japanese institutions and individuals can then do the absurd exercise of determining if their exposure loaning at near zero rates is really worth the risk. I am betting with Kyle Bass that an asymmetric trade will work here.

  • ed

    i checked on finra and now i understand…i guess i am amazed at how a guy with 1.5 years experience at Merrill passes himself off as an financial expert. i guess this is the power of social media nowadays. japan’s issues are well documented. good luck with your website.

  • bh

    If money is considered as social way how to bridge time difference in production vs. Consumption of something of value and a mean to foster value exchange interactions across different forms (goods & svcs and yes taxes) then the question is what current monetary policies impact on value production and consumption will be? How various actors – consumers in u.s., japan, emgmkts world vs. Producers vs. Countries vs ccy blocs etc.will behave and what perceptions will influence their value metrics. There is much more here than rather mechanistics explanations of FED motives. I would really appreciate some insight in this area.

  • Nkaknes

    Troll, your intuition is correct. The current argument goes that while we are printing money, the price of goods (CPI) has not increased, so there has been no inflation. The problem is that CPI doesn’t account for inflation if the savings rate changes. So if you print $85 billion a month, and banks and individuals simply save it because they realize they have no savings for retirement, your inflation will still be low until they start to unwind this position and live off of their savings. Once the population starts to liquidate its savings to live off of, inflation with rise as the cheap money finally hits the market. This is the issue facing baby boom countries like Japan, the USA, and China although they are in a better financial position in terms of savings. As the Japanese population ages and hits retirement, they will start to liquidate their savings, and inflation will rise. That is true to both the Yen, and savings Japan has in US Dollars (several trillion in T-bills). As those assets get liquidated inflation will spread to the dollar, which could be managed if the US wasn’t also facing a similar crisis of a retiring baby boom generation that has virtually no savings. Now the US baby boomers liquidate their savings to live off of in retirement, and all those $85 billion a month comes poring back into the market. I’m not sure how this gets avoided, even if the next generation were willing to take responsibility for the debt, there simply isn’t enough working age people to support the aging population anywhere near the current standard of living.

  • Stephen

    I am not in the business of defending,but listen anyway. In half a century in the business trenches I’ve met allsorts of people. Some have been in thir business of choice for 30 maybe 40 years,called expert and paid accordingly, and yet frankly they appear to have stopped learning anything much after perhaps the first few years.They are where they are because of the system they are in and perhaps the people they know,not indeed their expertise. Others appear relatively inexperienced and yet when you get down to the face to face stuff they appear to be on a different level to their wouldbe experience and indeed most of their peers.
    Now in my own way I am trying to tell you that time in the job isn’t really worth that much as a generic method of ascertaining expertise unless you’re just impressed by that stuff. I’m old enough not to be and to keep the mind open to proof. CR has offered more than enough of the latter for me to forget age etc and just concentrate on the quality of the arguments.
    Talking about arguments it is relevant that yours was extremely weak. Perhaps you have more to offer,but if you have not then in your own interests go away and learn until you have.

  • Stephen

    Whether the Japanese succeed will depend up on execution. They need to find the structural handoff between generations. If they don’t and simply make a one pronged attack on their currency then when the sentiment momentum fades so will the bang for the buck they get from this monetary policy. Personally I prefer fiscal approaches to support monetary policy and I’m waiting to see what they have to offer.

  • http://www.orcamgroup.com Cullen Roche

    I have no idea what being a Merrill Lynch employee almost 10 years ago has to do with anything. I think people should judge me based on the reasoning and accuracy of my arguments and not the firms I’ve worked for in the past.

    But that’s up to you.

    PS – Thanks for following your insult up with another insult. :-)

  • SS

    Ignore the trolls. Your body of work speaks for itself.

  • Tom Brown

    Ellen “Degenerate?” Ha! was that a slam or a mistake?

  • LVG

    I’ve been reading Cullen for 3 or 4 years now and I can honestly say that I can’t think of anyone with a macro focus who has been more accurate, instructive and informative about the state of the global economy. It’s not even the fact that he’s been right about so much that keeps me coming back. It’s the fact that he’s incredibly humble about understanding very complex things and has an obvious desire to help others understand. I think it’s a real shame when people come here and attack him.

  • Tom Brown

    Read Cullen’s piece on hyperinflation and what characterizes it. It might help put your mind at ease, especially with regard to “loss of faith.” I think that’s a very unlikely scenario for us given where we are now.

    For a little perspective: What are there, about $65 trillion out there now? The public debt is about $16 or $17T, and about 10% to 12% of that is owned by the Fed? Only that part (of the public debt) which is owned by the Fed can be said to be backing “government debt created money.” The rest of the public debt is in bank created money. By far the vast majority of money that’s in play in the economy was created by private banks through private debts (bank loans). Only a small fraction was created by government debt (~2.5%).

  • Tom Brown

    You write “individuals simply save it because they realize they have no savings for retirement, your inflation will still be low until they start to unwind this position and live off of their savings. ”

    But which is it? Individuals “have no savings” or they have such a tremendous amount of savings that they’re going to cause inflation once they retire and start to live off of it? I don’t see how you have it both ways.

    One thing you’re not taking into account is that the Fed has a tremendous ability to suck money back out of the economy by selling the assets its been buying. Part of its charter is to control inflation, so if inflation starts becoming a problem, I think you might start to see some asset sales. Taxes can also be used to help control inflation.

  • http://www.orcamgroup.com Cullen Roche

    That’s far too kind. I think what I do here is rather simple. I have a real desire to understand our money system in its entirety. And I enjoy disseminating my ideas about the system because it provides feedback from an incredibly intelligent group of readers and gives me the ability to provide some real value in what I believe is a world full of monetary mythology. I certainly don’t know everything and I don’t pretend to have all the answers, but I try my best to provide honest, objective and unbiased opinions about what is happening. That’s about it. If people don’t like the message they should contribute to why it might be wrong rather than just lashing out with petty personal insults. That doesn’t help anybody.

  • Tom Brown

    Cowpoke, I watched it once. I too liked the way it was put together. I’m naturally suspicious since it appears on the “Bear Porn” site zerohedge. I need to watch it again to see the logic of the magic 4% they talk about.

    Just off hand, where, specifically, in your opinion does that video go off the rails? I’d be hard pressed to answer that myself after one viewing, but I think perhaps the magic 4% they talk about might be the crux. I’ll watch it again and see if I have a problem w/ their logic there.

    BTW, for anybody who’s ever made an unsuccessful attempt to fully decipher one of those dense Tyler Durden ZH articles, packed to the gills with mysterious sounding arguments, I found this made me feel a lot better:


    Better men than I have tried to fight their way through the logic of some of those articles apparently! Reading pragcap is a breath of clear and de-mystifying fresh air in comparison!

  • http://www.fanbrowser.com/ Cowpoke

    “Ignore the trolls” You Mean Talking Horses? hehehe

  • http://www.fanbrowser.com/ Cowpoke

    I spose a slam, It just “rubs my fur” wrong when the Hollyweird folks and other people in the public eye use their platform for their own personal agendas.
    Next Up, The Rainbow football players.

    This is why I have really enjoyed the pragcap over the years. The facts are out there for all to dissect and debate.
    This is SO refreshing. However, with all the gay this and that in the lame stream media, you would think that every other person is homosexual. However the facts are very different.
    Same for Gun Homicides, Chances of being Kid napped ect OR My OTHER favorite Stadiums For Billionaires owners and wealthy athletes. WOW what a scam that one has been.
    It’s nice to have a place on the web where monetary policy can be openly discussed and debated all in the name of truth in fact instead of agenda driven.
    I wish more politicians would swing by and learn something.

  • http://www.fanbrowser.com/ Cowpoke

    “Just off hand, where, specifically, in your opinion does that video go off the rails?”
    Tom My Monetary brother..LMAO… The first 2 seconds.

    “Japan’s Debt Problem” I’m ad libbing (music)dum dum dummmmm (Lady Screaming) Eeeeekkk (puts hands to face)

    Wait, I thought Japan issued it’s own currency?

    Oh they must borrow from China like we do.. har har har.. What’s the modern computer symbol for harpo honking his horn?

  • http://www.fanbrowser.com/ Cowpoke

    “Bear Porn” for ZH? Damn Funny Thomas that right there was..
    I do like them for their snarky political comments though. They do have some great headline leaders.

  • S Roche

    Cullen, all well and good that governments issuing debt in their own currency can never “run out of money”…but, please don’t stop there. Please explain how you see any natural limits to this issuance being applied.

    Zero interest rates haven’t stopped it, unlimited central bank buying of government bonds hasn’t stopped it, in fact, both encourage more of it.

    So, after the buyer of last resort buys all issuance, (which it seems to me is where we are heading), what then?

  • Mikael

    Cullen, most of the time you make enlightening remarks or explain otherwise convoluted things in a simple way. However, when it comes to Japan, and its problems, you may have taken a short cut.

    Certainly needless to say Japan has a printing press so it has no insolvency issue. It is running higher and higher deficits and accumulating higher and higher debts. Yen is toast for sure. People holding Yen-denominated assets should consider and will consider selling off their assets – JGB included – for safer ones, for example, US government bonds. Inflation in Japan, once started, can run its course uncontrollably. Yields have to move higher, feeding more violent Japanese assets sell-off. Japan’s fiscal mess is ensured, though it theoretically can still pay its bills in its own currency. But few people will trust its currency by then. However, it(money printing) has to STOP/slow down dramatically some time in the future. What could happen then? Running monetary policy is never purely academical or numerical. It is subject to fiscal policy, and more broadly, national politics, and national strategy. Also the big fact or difference with Japan is, it is a country oriented towards exporting, which is not like USA. So, it is over simplistic for you to say that people like Kyle Bass is wrong. On the contrary, he has a very good point.

    Anyway, Japanese problem is too huge to be clarified in a few words.

  • InvestorX

    What is it that the two of you do not understand or disagree about Mish’s position on FRB? Why do you think he does not understand how they work?

    And I do not think there is a big discrepancy regarding FRB b/w Mish and Cullen, except that Cullen says this is what we have and Mish wants it banned. If I am wrong on this, please correct me.

  • Paddy

    Kyle Bass was “wrong” on subprime for 2-3 years, and then he was right. Similarly he was “wrong” on Greece for a couple of years, and then he was right. Unfortunately being early is his curse, but it means he was buying CDS on both for less than 100bps.

    Cullen provides excellent arguments why Japan hasn’t had a problem YET, but japan’s debt is increasing way faster than productive assets, so a crisis is inevitable at some point. Maybe they will print yen to service their debts but that will just kill the currency, so is a default in real-terms.

    Either way, short yen is a great trade right now. And with 10yr JGBs at 0.7% i think that is a great short, provided you have the patience to be “wrong” for a couple of years.

  • http://www.orcamgroup.com Cullen Roche

    And what Bass is doing is pretty slick. He’s buying CDS at bottom barrel costs. He’s basically buying super inexpensive options on a tail risk event. It costs him nothing, but the potential reward is huge.

    I haven’t seen his Japan Macro Fund holdings so I can’t speak to the validity of what’s going on there (though reports are that it’s been a nightmare), but I know his primary fund has performed fairly well despite the Japan thesis, but maybe he’s obviously not implementing the same trades in that portfolio.

  • LVG

    Cullen, his macro fund has been decimated. How come no one calls him out for this? The fund has basically been imploded. I wonder how much he’s actually lost in there. It might not be his “primary fund”, but who cares? How many times does a Wall Street fund manager get to blow up funds before he loses all credibility?

  • http://www.orcamgroup.com Cullen Roche

    Well, I don’t have data on his Japan Macro Fund so I can’t really talk about it. All I’ve seen is an old 2012 report and some speculation since then.

  • LVG

    Another guy everyone is slurping is Jeff Gundlach. It seems like everyone forgets that he was calling for a recession in the USA and has been bearish stocks for most of the rally since 2009.



  • Paddy

    Kyle bass’ macro fund hasn’t been decimated, in fact it’s made excellent returns as he’s been long subprime for the last couple of years. His Japan fund (which is tiny relative to the macro fund) is down heavily, but of course it would be as he has to pay the theta on his JGB puts.

    Similarly his bets on subprime and Greece only showed losses for 2 yrs before those crises broke. These are trades where you have to be early in order to pickup the cheap out of the money options, as Cullen mentioned.

    Fact is that Bass can stay solvent a lot longer than Japan can, so lets wait and see. This trade isn’t over yet, he himself says it could take another 2yrs to payoff.