Floating to Japan on a sea of bad debt
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Bill Bonner Guest blogger
Hold onto your hats. Grab your wallet. All over the world, central planners are getting together. They鈥檙e watching the whole developed world tilt towards Tokyo. And they鈥檙e determined to 鈥渄o something鈥� to stop it.
What鈥檚 wrong with Tokyo, we want to know鈥� On the other hand, what鈥檚 not wrong with it?
But never mind that鈥�
The Dow fell again yesterday, down 17 points. Not a big deal. But hardly a day goes by without a loss. And look at the yield on a 10-year T-note. Barely above 1.5%.
This market and this economy seem to want to go down. Like Japan. Which is fine with us. They probably have some business to attend to down there 鈥� such as cleaning up the mess that comes after a long credit expansion built on phony money and EZ credit. There鈥檚 trash that needs to be swept up and hauled away.
But the fixers want to stop Mr. Market from doing his job.
And you can see why they might want to do something. They鈥檝e got elections to win鈥obs to keep鈥eputations to doctor up and r茅sum茅s to forge.
The world鈥檚 advanced economies are almost all in a dreadful funk. And some people say the fixers caused the problem themselves.
So, they鈥檝e got their work cut out for them. They鈥檝e got to mislead the voters鈥nd flim flam the markets鈥� Not easy!
Last Friday, for example, analysts turned on their Bloomberg terminals to find out how many jobs had been added last month. Remember, it takes about 100,000 new jobs in order to keep the unemployment level about even. So what number came up on the terminals? Twenty-six thousand!
Whoa, nowhere near enough.
But wait. That wasn鈥檛 the number of new jobs created. That was the number of old jobs lost. Net. For men, there were actually 26,000 fewer jobs at the end of the month than there were at the beginning.
What kind of a recovery is this?
We鈥檝e asked that question 鈥� rhetorically 鈥� many times. We know the answer. It鈥檚 not a recovery at all. Instead, it鈥檚 the deadest dead cat bounce in US economic history. Never before has a 鈥榬ecovery鈥� been so weak. Felix Salmon:
This is about as bad as the jobs report could possibly be: just 69,000 jobs created, split between 95,000 new jobs for women and 26,000 fewer jobs for men.
To spell this out: high corporate profits and low levels of job growth are two sides of the same coin. If things were working properly right now, companies would take their excess revenues and use them to hire more people. Instead, they鈥檙e basically just letting those excess revenues sit on their balance sheets as cash because they鈥檙e scared to invest in themselves.
But Mr. Salmon has a plan. He wants the US to follow Japan:
The government can borrow at 1.45%: it should do so, in vast quantities, and invest that money back into the economy itself. Take a few hundred billion dollars and use it to fix our broken infrastructure, to re-hire all those laid-off teachers and firefighters, to provide some kind of safety net for the millions of Americans who have been out of work for more than a year. Even if the real long-term return on any stimulus package was zero, the nominal long-term return would be well over 1.45%, making the investment worthwhile.
And here鈥檚 Paul Krugman. He鈥檚 got a solution. The same solution! More borrowing鈥ore spending鈥ore trash in the basement!
鈥淥pen ended financing and macroeconomic expansion鈥︹�� is his formula for both Europe and America.
As to Japan, he is full of admiration.
鈥淲hen people ask: might we become Japan? I say: 鈥業 wish we could become Japan.鈥欌��
From our vantage point here at The Daily Reckoning, it looks like Mr. Krugman will get his wish. The world鈥檚 tectonic plates are loose. Every day, both Europe and America drift closer to Tokyo.
We鈥檝e got nothing against Japan. But what puzzles us is why anybody would want to be like Japan. The Japanese economy has gone essentially nowhere in the last 22 years. Now, it has the largest pile of debt in the entire world 鈥� rivaled only by Britain. How did it get all that debt? Following Paul Krugman鈥檚 advice!
So let鈥檚 see鈥ou run up debt equal to 4.5 times your GDP鈥ou don鈥檛 increase the number of jobs. Your assets get cut in half鈥nd then cut in half again.
With debt equal to 450% of GDP, you are forced to use a big part of next year鈥檚 output just to pay for things you already put out last year鈥nd consumed! At 5% interest rate, the equivalent of one day a week must be spent merely supporting your debt. That doesn鈥檛 leave you much to spend on things you want to consume today鈥r tomorrow.
And if interest rates were to go to 10%, nearly half your GDP would be required for debt service.
You would be like a galley slave鈥hained to your oar鈥orced to row in order to keep up with your debt. And pray the ship doesn鈥檛 sink!
What kind of success is that?
We don鈥檛 know, but we tend to agree with Mr. Krugman, in a few years we may be happy to take a place beside Japan on the galley slave bench. At least the SS Japan is still afloat.
Bill Bonner
听蹿辞谤 The Daily Reckoning
