I read a number of economic based blogs, usually the less familiar ones. The main stream blogs have an agenda, many tend to follow the candy unicorn line of all is well, growth ever increases and just keep buying the dip. Others are a little more on the doom and gloom, we’re all going to go broke and die while civilization crashes and burns. Both groups have little that would recomend their wisdom, collective or otherwise. The likes of Bloomberg, MSNBC, CNN, and many more are too eager to follow Washington, New York, and Wall Street while preaching that all is well and keep fully invested. There are thousands of experienced economists, individuals with PhDs and all the collective years of getting it wrong that are willing to tell you where to put your money but aren’t willing to guarantee their advice. Then there are those who are very bearish and find fault with every action in government and the markets, as if they could really tell the future. The fact is, when you are talking about economics or political economy, which was the original term as derived from moral philosophy, you are talking about the actions of individuals in both a singular and collective sense. Moral philosophy centers on the actions of individuals in connection with society.
On the one hand the sky is falling in Japan because the government debt to GDP is 240%. Right now, for 2014,the GDP of Japan was 4.95 trillion dollars, not yen. You can convert back and forth by using 120 yen to the dollar. The total debt issued by the Japanese government is about 10.5 trillion dollars and some change. Now GDP is not the tax flow into the Japanese Treasury. GDP is the value of all that the country produces and consumes and included government spending plus or minus the difference between imports and exports. Imports reduces GDP, imports expand GDP, and when added together give a net results. We also add in investment or savings, the two are more or less the same. Government spending was about .814 trillion dollars, a substantial amount or about 16 percent of total GDP. This debt is Japanese government bonds issued by the Central Bank of Japan and the average interest rate amounts to about 0.63 percent, less than one percent. Well, that is a lot of debt and the interest rate is extremely low, so it would not seem to be a real problem just yet. So what is the debt service each year, 660 billion, maybe more? So economists point out that some of that debt is intergovernmental borrowing so that it doesn’t count. Oh, you mean like in the US where Congress allocates and authorizes money for each department to spend for its budget requirements (Congress may authorized the spending of money in the budget but it must allocate said funds or the money can’t be spent). So what do you do if you have a shortfall in allocated funds in your department? You could borrow from another government agency or department and spend that money while you wait for your allocation to be filled. Or Congress may do that for you so it can balance the budget and show that the debt ceiling was not breached. But if I allocate your department funds, say like Social Security pensions, and then borrow those tax dollars that are meant to be paid into the Social Security fund but are really paid into the general fund, then everything is ok. Why? Because social security has been given special Treasury bills of credit that only it can spend at the Federal Reserve for the money that will be paid by check to all Social Security benefit holders every month. Did I just miss something? Congress just borrowed funds that normally would have gone to the Social Security fund but always go into the general fund and are now being borrowed to be spent elsewhere by another government agency but Social Security uses special Treasury t-bills to pay its pension recipients. I’m sorry, how did that reduce the total debt and keep it below the debt ceiling? If you or I did this with other people’s money we would find ourselves doing ten to twenty at Leavenworth.
Yes, a debt is a debt, is a debt. One agency’s assets are not another agency’s liabilities. If I loan you money to repay your creditor I am not buying an asset, I am buying a liability. Ok, so you discharged your liability or loan to another person, buy you still owe me the money. I can’t take my loan to you to the bank and sell it as an asset. Assistant economic such as Noah Smith, who try to pull this little accounting trick are deceptive at best. On the other hand, why hasn’t Japan collapsed from its government debt load? Ah, good question. For one, as societies go, it is a fairly closed one and its citizens exhibit a great deal of loyalty to their country. Most of this government debt is kept within the country. The various pension funds, including the Japanese Government Pension system all hold government bonds and other government debt. Secondly, the vast majority of Japanese corporations hold government debt as do the commercial banks. At one point, less that eight percent of the japanese government bonds were held by foreign ownership. That figure has increased to eleven percent and threatens to go higher. Second, there has been very little capital outflow from Japan until this year when we are now seeing individuals, corporations, and even a couple of Japanese government agencies actually sending money out of the country and into foreign banks, some of which are located in Singapore. Because the government’s demand for funds could be satiated within the country there was no demand for higher interest rates on government securities. But as money flows out of the country the demand for a higher interest rate and rate of return will cause a great deal of harm to the government. One other crucial factor is the aging of Japan, the increasing number of its citizens who are reaching retirement age and the smaller base of younger working population able to to provide tax money for the government needs. If interest rates rise a half point, the current loan service will almost double. Should it rise a full one percent more, well, let’s just say the the cherry blossoms might be a bit late in Spring.
The rule that applies to Japan is that government borrowing crowds out the market in capital demand for corporate and private individuals. And by reducing the rate of interest to an artificially low state for an excessive period of time, it deters savings that form investment. Savers must earn sufficient return if they are to be induced to save and thus form the basis of investment. When savers can’t save but need to risk their capital on higher risk investments, their capital tends to go into assets and not capital formation. This is one of the great problems in the United States today, lack of sufficient return on savings that normally turns into capital. Individuals and corporations chase higher returns that have higher risk which tends to inflate assets such as commodities, real estate, and other like investments.
On the other hand we have Mario Draghi blowing his trumpet that the Euro is saved and all is well in the EU. He says that this years GDP growth will be wonderful, the following year will be really good, and the year after that the miracle will occur and all or Europe will be favored with wealth beyond its imagination. If you believe that, then I have some bridges located around the world that you may be interested in buying. The Quantitative Easing will not work in Europe. It didn’t work in the United States, consumers found that the CPI was inflated but not their wages and certainly not the job market. Banks felt inflation in assets as they went on a buying spree searching for the mythical unicorn of high rates of return and low risks. They may have found higher rates of return but the safety was no better than trying to catch a number of falling knives with bare hands. Sub prime mortgages have returned with a vengeance in both housing, commercial real estate, and automobile loans. Do you know how to catch a monkey? Get a coconut and drill a hold just barely large enough for his hand to fit through. Then place some rice in the coconut and make sure it is tied o a tree. Now wait and a monkey will come along and stick his hand it the hole and grab the rice. In doing so he makes a fist and can’t pull his hand out. As you walk up to him, he will not let go of the rice. One can do this trick with the same monkey several times more before he starts to catch on to the trick. Now just how many monkeys are there in the jungle? A man could get rick catching monkeys if the market was right.
If you are the central bank and you want to stimulate demand then give money directly to the populace and let them spend it. After all, if their credit is all tapped out they can’t buy much more. But give them government cash and watch sales go through the roof for a short period of time. But give the money to a bank and it will find a way to eventually lose that money on bad investments looking for high returns off high risk ventures. As for the ELA agreement, so what? Now the Greek banks get some liquidity money so they won’t run out the next time there is a run on the bank. It is temporary at best. Do the Greeks really get much else? No, what ever money might be agreed upon with simply flow to the various public and private European banks. Europe will be bankrupt soon enough. And while a great deal of the lending of funds is done within the EU, it is done by bankrupt countries who trade promises. That ESFS loaned only a very small portion of funds to Greece. Countries like Spain put very little money up front, they only agreed to be responsible if Greece received any more money from the ESFS. Well, monkeys are very easy to catch.