Pendulum of Government Overreach has Peaked

The pendulum of government overreach has peaked in most liberal democratic countries around the world (for now). The major political events of 2016 have shown increasing resistance to government given the rising number of breaches in civil liberties and failure of government to identify and respond to the disenfranchised members of their societies.

Many segments of society have felt themselves becoming impoverishment. At the same time they have watched the hubris, greed and failure of politicians to deliver solutions to resolve the various politically made crises. One of the recurring questions that will emerge is the role of government in the lives of people.

By the time politicians’ hubris has completely evaporated, the nature of liberal democratic countries will have changed. We see major risk of political, economic and social upheaval occurring between now and 2028-2033 This phase may extend before social, political and economic stability becomes the norm. As always the pendulum will one day swing again towards increasing government involvement in the lives and affairs of ordinary people.

The Great Sovereign Debt Crisis Coming Soon

Starting in Europe and reaching public consciousness when Japan implodes before engulfing the USA and remaining Liberal-Democratic nations.

The Great Sovereign Debt Crisis of the 21st Century is steadily gaining momentum. The forces of deflation have been steadily building since 2000 and the stage is set over the next 6-12 months where the reality of public plundering of the means of production comes home to roost. The weight of public and private debt, government regulation and leverage, fraudulent economics and fallacious political thinking that assumes that if you keep taking and spending other people’s money you will never ever run out!

Yet this is exactly what is happening. The politicians have borrowed to deliver on promises they were never going to be around to see delivered. They’ve debased the their currency and now we have reached the problem that there is so much debt in the world that the world does not have enough income to service that debt.

Historically its happened many times before of course and yet we never seem to learn. Empires grow and prosper, politicians make promises, governments and people borrow and everyone takes for granted the wealth that has been achieved until finally, it all collapses. History records the rise and fall of civilizations on exactly this premise. It’s always government and the self-seeking of leaders that cause civilizations to self-destruct.

While we observe the rise and fall of empires due to reasons of currency debasement or war, we can also observe that these are merely the mechanisms that cause the problems. Behind them lies the cyclic nature of humanity. Deep in the limbic system of the human brain reside deep impulses that play out at individual and aggregate levels.

We might look back at the Tulip Mania Bubble of the Dutch Golden Age (1634-1637) and wonder how people might have been so crazy as to invest in tulips. The Tulip Mania occurred on the back of a Europe-wide debasement of coins (1619-1622) used to finance war. Yet they did and future historians will look back at early 21st century share, commodity, real estate prices and wonder “how could they have been so blind?”TulipPricesDebasement of the currency has occurred this time by closing the link between gold and paper money and the massive printing of money that subsequently occurred. Each era brings the usual excuse “this time its different”. But the same debasing of money, the same political hubris, the same grasp for political power create the same drivers that cause the boom and the bust.

We watch at the moment the European debt drama playing out in Greece. Other nations sit on the edge of potential debt crises including Spain, Portugal, Italy, Puerto Rica and various cities of the US. This is just the beginning. Soon we shall see the debt crisis spreading to northern Europe, Japan, China and the US. Its about sovereign debt of course, the debt accumulated by generations of politicians spending other people’s money.SouthSeaIn Japan they experienced this in the early 1930’s when massive money printing operations inflated their economy. It resulted in the assassination of the Finance Minister and Prime Minister, the establishment of the military as the power brokers of Japanese politics and the beginnings of the build up for for WWII. That didn’t end well for the Japanese people.

Between 1740 and 1783, the French experienced it with the massive indebtedness of the monarchy, high taxes, high levels of regulation and cronyism led to the French Revolution, Napoleon and a final defeat in 1815.

Pax Romana followed a similar path where eventually the debasement of the currency and accumulated debt caused the empire to implode. To look at Pax Americana is to see an identical script unfolding. Massively unsustainable debt levels, vast militarization, endless monetary debasement, constitutional decay and subjugation of citizens by taxation, regulation and blatant spying signal, as it has in many previous civilizations, the demise of this short lived empire.

Using financial markets as a barometer we observe markets in major topping patterns, working out of main trends. The next 3-6 months will prove critical in determining if the Great Sovereign Debt Crisis has truly arrived or if there is still enough gas in the tank for one last sprint before the weight of debt, regulation and political hubris bring down the liberal – democratic nations of the world. dow-jones-100-year-historical-chart-2015-08-07Once again the cyclic nature of human egress and regress is playing out at individual and aggregate levels and from where we stand, major and minor cycles of human endeavor are changing direction. Crisis bring danger and opportunity for those so prepared.

Japan Shocked To Find Abenomics Is Destroying Its Middle Class

Zerohedge reports:

In central planner “mission accomplished” news, the wealth divide in Japan is growing under Abenomics and middle class citizens are at risk of falling into poverty, The Japan Times says. Despite nightly sound bites from Kuroda, Aso, and Abe himself designed to assuage fears that the country’s gargantuan monetary experiment may yet fail to pull Japan out the deflationary doldrums, some people are getting impatient as the number of households on welfare continues to rise as does the number of nonregular workers. This comes on the heels of the rather amusing news that the country’s Labor Ministry had fabricated a year’s worth of data on wage growth (it turns out there was none) and after countless warnings from us that the PM’s policies would end in spactacularly bad fashion (see here, here, and here for instance). Here’s more:

According to Akio Doteuchi, a senior researcher at the NLI Research Institute, what is threatening people here is that, under the current social structure, virtually anyone in the middle class is at risk of falling into poverty.

“It’s like walking in a mine field. Many risks lie ahead of you,” Doteuchi said. “Even if you are in the middle class, if something unexpected happens, you could slip into poverty.”

Such risks could include contracting diseases such as cancer and being unable to work, the failure to land a job soon after graduation, or an ill parent who needs looking after.

The big problem in Japan is that there are few social safety nets for such situations. In the past, workers had been shielded by the guarantee of lifetime employment at companies. When they retired, they were supported by family members, Doteuchi noted.

But now, there is an increasing number of nonregular workers, particularly younger ones, whose financial situations are unstable. More and more single-person households are vulnerable to serious health problems.

Data back this up. According to labor ministry figures announced April 1, the number of households living on welfare hit a record 1,618,817 in January. This figure has been on the rise for the last two decades.

The country’s relative poverty rate has also edged up over the last 30 years, especially with single mothers and fathers raising children, although the latest data are for 2012.

Meanwhile, the rich are getting richer (as they are prone to do anyway but especially so under monetary policy regimes explicitly designed to inflate financial assets).

On the other hand, data also show that the rich became even wealthier under Abe’s tenure.

Their numbers and the amount of their assets surged in 2013 and are still rising mostly due to sharp gains in stocks triggered by the Bank of Japan’s aggressive monetary easing, which started in April 2013, experts said.

According to the Nomura Research Institute, the number of wealthy households jumped 24.3 percent, with the amount of their total financial assets rising 28.2 percent in 2013, compared with 2011 figures…

Households on average are believed to have a majority of their assets either in bank accounts or in cash. But the wealthy hold risk assets such as real estate, stocks and bonds — assets more likely to grow in value faster than mere savings accounts, Miyamoto said.

Of course the real punchline when it comes to the Japanese QE experience is that the so-called “wealth effect” — which certainly makes the wealthy wealthier but exactly how far down the benefit ultimately trickles is up for debate  — is on steroids because not only is the central bank helping to push up the prices of the financial assets held by the rich, the BoJ actually won’t let them fall, as we recently discovered when it was revealed that the bank intervenes in morning trading when sentiment seems less than euphoric. In other words, they are more than “supportive”, they have openly rigged the system, and we don’t mean in a kind of “behind the scenes the market is rigged by HFT firms that never have losing trading days” type of way — we mean in a blatant “we’ll print money and buy every single ETF that trades if we have to in order to ensure that stocks don’t fall” type of way. But we guess the fact that this is increasing the disparity between the haves and the have-nots is just further evidence that, much like poor people in the US, Japan’s poor similarly don’t understand Janet Yellen’s extolling of the virtues of having assets.

Here’s The Japan Times again to sum things up:

“Abenomics has boasted economic strength, telling people that higher economic growth will shrink the gap between the haves and have-nots via the trickledown effect,” Doteuchi said. “But is that really true? I think not. Solving inequality is the way to improve the economy.”

Indeed.

As a reminder:

Source: http://www.zerohedge.com/news/2015-04-08/japan-shocked-find-abenomics-destroying-its-middle-class

The Satori Generation

Roland Kelts writing for Adbusters:
A new breed of young people have outdone the tricksters of advertising.

ONO KEI

This article appeared in issue #113, now available in our Blueprint for a New World Series Box Set.

They don’t want cars or brand name handbags or luxury boots. To many of them, travel beyond the known and local is expensive and potentially dangerous. They work part-time jobs—because that is what they’ve been offered—and live at home long after they graduate. They’re not getting married or having kids. They’re not even sure if they want to be in romantic relationships. Why? Too much hassle. Oh, and too expensive.

In Japan, they’ve come to be known as satori sedai—the “enlightened generation.” In Buddhist terms: free from material desires, focused on self-awareness, finding essential truths. But another translation is grimmer: “generation resignation,” or those without ideals, ambition or hope.

They were born in the late 1980s on up, when their nation’s economic juggernaut, with its promises of lifetime employment and conspicuous celebrations of consumption, was already a spent historical force.  They don’t believe the future will get better—so they make do with what they have.  In one respect, they’re arch-realists. And they’re freaking their elders out.

“Don’t you want to get a nice German car one day?”—asked one flustered 50-something guest of his 20-something counterpart on a nationally broadcasted talk show.  The show aired on the eve of Coming of Age Day, a national holiday in Japan that celebrates the latest crop of youth turning 20, the threshold of adulthood.  An animated graphic of a smiling man wearing sunglasses driving a blonde around in a convertible flashed across the screen, the man’s scarf fluttering in the wind.  “Don’t you want a pretty young woman to take on a Sunday drive?”

There was some polite giggling from the guests.  After a pause, the younger man said, “I’m really not interested, no.”

Critics of the satori youths level the kinds of intergenerational accusations time-honored worldwide: they’re lazy, lacking in willpower, potency and drive.

Having lectured to a number of them at several universities in Tokyo, I was able to query students directly.  “We’re risk-averse,” was the most common response.  We were raised in relative comfort.  We’re just trying to keep it that way.

Is this enlightened, or resigned? Or both?

Novelist Genichiro Takahashi, 63, addressed the matter in an essay 10 years ago.  He called the new wave of youth a “generation of loss,” but he defined them as “the world’s most advanced phenomenon”—in his view, a generation whose only desires are those that are actually achievable.

The satori generation are known for keeping things small, preferring an evening at home with a small gathering of friends, for example, to an upscale restaurant.  They create ensemble outfits from so-called “fast fashion” discount stores like Uniqlo or H&M, instead of purchasing top-shelf at Louis Vuitton or Prada.  They don’t even booze.

“They drink much less alcohol than the kids of my generation, for sure,” says social critic and researcher Mariko Fujiwara of Hakuhodo. “And even when they go to places where they are free to drink, drinking too much was never ‘cool’ for them the way it was for us.”

Fujiwara’s research leads her to define a global trend—youth who have the technological tools to avoid being duped by phony needs.  There is a new breed of young people, she says, who have outdone the tricksters of advertising.

“They are prudent and careful about what they buy. They have been informed about the expensive top brands of all sorts of consumer goods but were never so impressed by them like those from the bubble generation. We have identified them as those who are far more levelheaded than the generations preceding them as a result of the new reality they came to face.”

The new reality is affecting a new generation around the world.  Young Americans and Europeans are increasingly living at home, saving money, and living prudently.  Technology, as it did in Japan, abets their shrinking circles.  If you have internet access, you can accomplish a lot in a little room.  And revolution in the 21st century, as most young people know, is not about consumption—it’s about sustainability.

Waseda University professor, Norihiro Kato, points to broader global phenomena that have radically transformed younger generations’ sense of possibility, calling it a shift from “the infinite to the finite.” Kato cites the Chernobyl meltdown and the fall of communism in the late 1980s and early 90s; the September 11 terrorist attacks in the early 2000s; and closer to home, the triple earthquake, tsunami and ongoing nuclear disasters in Japan. These events reshaped our sense of wisdom and self-worth. The satori generation, he says, marks the emergence of a new “‘qualified power,’ the power to do and the power to undo, and the ability to enjoy doing and not doing equally.  Imagine a robot with the sophistication and strength to clutch an egg without crushing it.  The key concept is outgrowing growth toward degrowth.  That’s the wisdom of this new generation.”

In America and Europe, the new generation is teaching us how to live with less—but also how to live with one another. Mainstream media decry the number of young people living at home—a record 26.1 million in the US, according to recent statistics—yet living at home and caring for one’s elders has long been a mainstay of Japanese culture.

In the context of shrinking resources and global crises, satori “enlightenment” might mean what the young everywhere are telling us: shrink your goals to the realistic, help your family and community and resign yourself to peace.

What Takahashi called “the world’s most advanced phenomenon” may well be coming our way from Japan. But this time it’s not automotive or robotic or electronic. It’s human enlightenment.

Roland Kelts is a half-Japanese writer based in Tokyo and New York. He is the author of the bestselling JAPANAMERICA: How Japanese Pop Culture Has Invaded the US, and a contributor to enlightened media worldwide.

Japan

In line with our forecast, the Bank of Japan has once again announced a further round of Quantitative Easing (QE).

Our comment from 02/03/2014:

More QE for Japan

Japan’s central bank will make another quantitative easing, most probably late in the second half of 2014.

MarketWatch reports: “The central bank expanded the size of its Japanese Government Bond purchases to the equivalent of “about 80 trillion yen” ($727 billion) a year, an increase of ¥30 trillion from the previous pace. It said it would also buy longer-dated JGBs, seeking an average remaining maturity of 7-10 years.

The central bank also said it would triple its purchases of exchange-traded funds and real-estate investment trusts.

Concerns about dwindling inflation appeared to drive the move, with the Bank of Japan saying that “on the price front, somewhat weak developments in demand following the [April 1] consumption-tax hike and a substantial decline in crude-oil prices have been exerting downward pressure recently.” ”

As the reality of QE unfolds we do not expect further QE to occur in Japan at this time. If our bullish scenario in the US occurs, this should be enough to continue to pull the Japanese economy along. In the long term however, demographics, debt and lack of deregulation will kill the Japanese economy.

 

 

 

Guess which empire came to an end today?

 Spanish Hapsburgs

In the early 16th century, a priest by the name of Fray Francisco de Ugalde remarked to his king that Spain was “el imperio en el que nunca se pone el sol”.

In other words, the sun never set on the Spanish Empire.

And by the 1500s with its vast lands across the Americas, Africa, Europe, Asia, and even the South Pacific, Spain (technically the House of Habsburg) had become the first truly global superpower.

The Empire’s status was so great that its silver coin (the real de ocho or piece of 8) was used around the world as a global reserve standard… including in the US colonies.

It didn’t last.

Like so many great empires that came before, Spain was beset by unsustainable spending, constant warfare, debilitating debt, and an inflated money supply.

By the mid 1500s, the Spanish government was spending 2/3 of its total tax revenue just to pay interest. Spain defaulted on its debt six times in the next century.

It finally came to an end on today’s date in 1643, exactly 371 years ago.

Historians can literally circle the date on a calendar that Spain ceased being Europe’s dominant superpower; it was the day that Spain lost the Battle of Rocroi, and effectively the Thirty Years War against France.

Just days before, a four-year old Louis XIV had ascended to the throne to become the King of France after the death of his father.

And during his whopping 72-year reign, France replaced Spain as the global superpower.

(To put this reign in context, the longest serving monarch alive today is King Bhumibol of Thailand, who at age 86 has served for 67 years. At age 88, Queen Elizabeth has served for 62 years.)

For more than a century, commerce, art, and technology flourished in France. And some of the greatest intellectual minds in history published their works during this period.

I remember being told as a West Point cadet that in the early days of the Academy in the 1800s, the only two classes were French and Mathematics, primarily because all of the great textbooks were written by French mathematicians.

France had public healthcare and free hospitals. Great monuments to their grandeur. Colonies around the world. An awe-inspiring military.

And their influence was so great that foreign governments from Russia to Prussia spoke French internally.

Needless to say, this didn’t last either.

And like the Spanish before them, France overspent, overexpanded, and overregulated. They waged excessive warfare, and they managed their affairs as if the good times would last forever.

By the 1780s, the French debt had grown so much that they were rapidly devaluing the currency and borrowing money just to pay interest on what they had already borrowed.

Sound familiar?

The US is in a similar position right now, along with most of the West (including… France and Spain again!)

Like an aging prize fighter, there is no nation that can permanently maintain its status as the dominant superpower. And certainly no nation that can defy universal economic truths.

Powerful nations believe they can borrow indefinitely and dilute their currencies without consequence.

This simply isn’t true. Wealth and power shift. The world’s reserve currency changes. It’s been happening for centuries, and this time is no different.

We are all witnessing this change unfold again. And this isn’t some wild assertion.

Objective data from the Bank for International Settlements and the International Monetary Fund all show a clear decline in the dollar’s share of global reserves.

chart2 1 Guess which empire came to an end today?The US government’s own data shows a net worth of minus $16.9 trillion, over 100% of GDP in the red.

And even in their most optimistic projections, the government tells us that growth in debt will outpace growth in tax revenue.

Day to day, it’s easy to ignore these trends. But from a big picture perspective, it couldn’t be more obvious.

Just like the Battle of Rocroi in 1643, or the storming of the Bastille in 1789, there will come a time when future historians circle a date on a calendar and say, “That was the day the United States ceased being the dominant superpower.”

Perhaps it’s happened already. Or perhaps it will occur in a war yet to be fought.

But if history, common sense, and truth are any guides, that reckoning is quickly approaching.

Source: http://www.sovereignman.com/expat/guess-which-empire-came-to-an-end-today-14439/

Eating Our Seed Corn: How Much of our “Growth” Is From One-Time Cashouts?

Charles Hugh Smith of http://www.oftwominds.com/blog.html writes:

We as a nation are consuming our seed corn in great gulps, and there will be precious little left in a decade to pass down to the next generation.

Anecdotally, it seems a significant percentage of our recent economic “growth” is being funded by one-time cashouts of IRAs, 401Ks, sales of parents’ homes, etc. This is the equivalent of eating our seed corn. Once these pools of savings/equity/capital are gone, they aren’t coming back.

I personally know a number of people who have cashed out their retirement account 401Ks (and paid the taxes) to pay for their kids’ college expenses–in effect, cashing out their retirement to lower but not eliminate the debt burden of their offspring who bought the “going away to college” experience.

The cashed-out 401K delighted the government, which reaped huge penalties and income taxes, as the cashout pushed the annual income of the recipient into a high tax bracket. (“Hardship” withdrawals for medical care and education waive the penalties, but the income tax takes a big chunk of the withdrawal.)

The middle-aged person who cashed out their retirement will not work long enough to save an equivalent nestegg. Not only is time against such an accumulation of retirement savings, so is the stagnant economy: companies are slashing 401K contributions to offset rising healthcare (a.k.a. sickcare) expenses, and many workers young and old alike are finding jobs that pay them as self-employed contractors or part-time jobs with no benefits.

Another set of middle-aged people are withdrawing from IRAs (and paying the penalties) just to fill the gap between expenses and income. For a variety of reasons, many people are loathe to cut expenses or are unable to do so without drastic changes in their lifestyle. So they withdraw from the IRA (individual retirement account) to cover expenses that are left after income has been spent.

This “solution” is appealing to those whose incomes have declined in what they perceive as “temporary” hard times.

Another pool of equity that is being drained is the home equity in aging parents’ homes. The government will only pay for one set of medical expenses (long-term care, for example) if the elderly person has assets of less than $2,000 (as I recall). Given this cap, it makes sense for elderly homeowners to transfer ownership of their home to their offspring well before they need long-term care (which can cost $12,000 to $15,000 a month).

A variety of other medical expenses can arise that cause the home to be sold to raise cash–either expenses for the elderly parents or for their late-middle-age offspring who develop costly health issues. Family disagreements over sharing the equity can arise, leading to the sale of the house and the division of the equity among the offspring.

This cash is immediately hit with a variety of demands: a grandkid needs a car, somebody needs money to go back to graduate school (pursuing the fantasy that another degree will provide financial security), and so on–not to mention “we deserve a nice vacation, a new car, etc.“, the temptations in a consumerist culture that we all “deserve.

Once the family home is sold, the furnishings and other valuables are also sold off to raise cash. In many cases, the expense of transporting the items across the country to relatives exceeds the value of the furnishings.

One common thread in all these demands for liquidation of equity is the short-term need is pressing. A consumerist culture offers few incentives for long-term savings other than life insurance, IRAs and 401Ks, and all of these can be tapped once a pressing need arises.

Though people may want to hang on to their nestegg, they are faced with short-term needs: how else can I pay tuition, or this medical bill?

As incomes have stagnated and costs for big-ticket expenses such as college and healthcare have soared, the gap between income and expenditures has widened every year for the bottom 90%.

 

Even those in the top 10% are not protected from draw-downs in retirement funds and family equity in homes and other assets.

Retirement funds, home equity, family assets–these are the financial equivalent of seed corn. Once they’re cashed out and spent, they cannot be replaced.

In more prudent and prosperous times, these nesteggs of capital were conserved to be passed on to the next generation not for consumption but as a nestegg to be conserved for the following generation. That chain of capital preservation and inheritance is being broken by the ravenous need for cash to spend, not later but right now.

So how much of the recent “growth” in GDP results from our consumption of seed corn? It is difficult to find any data on this, something which is unsurprising as the data would reveal the entire “recovery” story as a grandiose illusion: we as a nation are consuming our seed corn in great gulps, and there will be precious little left in a decade to pass down to the next generation.

We face not just an impoverishment in consumption but in expectations and generational assets.

Source: http://www.oftwominds.com/blogfeb14/one-time-cashout2-14.html

 

 

US$Yen Prediction

The US$ has rallied strongly since early October from 96.55 and recently achieved a high of 105.39. Fueled by Japanese central bank QE competition with the US Federal Reserve and demand for Yen denominated loans for investment and speculative purposes it appears the run on the US$ may be over or nearly so. Notwithstanding one more surge to 106.50, expect the Yen to regain some of its lost ground to the dollar. In fact we at Emerging Event are looking for a return below the 96.55 level in fairly short order.

The QE Experiment is Failing… Will Stocks Crash?

Graham Summers from GainsPainsCapital writes:

We’ve long maintained that Japan is ground zero for the “QE works vs QE doesn’t work” debate.

The Fed’s economic models, and 99% of the economic models employed by Central Banks in general, believe that monetary easing can bring about an economic recovery. The primary argument for this crowd if QE has thus far failed to produce a recovery is that the QE efforts have not been big enough.

And then there’s Japan. In a nation with GDP of $5.96 trillion, the Bank of Japan has launched a $1.4 trillion QE effort: a monetary move equal to 23% of Japan’s GDP.

To put this into perspective, this would be akin to the US’s Federal Reserve announcing a QE effort of over $3 trillion.

Suffice to say, Japan’s QE most certainly should be considered “enough” by even the most pro-QE supporter. But the very problem is that it does not appear to be having the intended effects.

The following is an article from the Wall Street Journal. I’ve highlighted a few choice items for your review:

At Koeido Co., a 156-year-old sweets maker based in this city in southwest Japan, chairman Shuichi Takeda says he feels the country may finally be coming out of a 20-year funk.

Sales of Koeido’s sweet millet dumplings are holding up. The company is spending around 80 million yen ($800,000) to renovate two shops—a sign of how Japan’s economy is showing signs of life, lifted in part by a flood of easy money from the central bank that has boosted stocks and helped spur growth.

But with future demand unclear, and costs for imported sugar rising, Koeido still isn’t bullish enough to take out bigger loans to replace equipment or expand its business—even though banks are begging it to borrow more.

The economy doesn’t necessarily get better just because of monetary easing,” says Mr. Takeda. “And you don’t borrow just because rates are low.”…

It is an attempt to literally crowd banks and other investors out of the market and force them to put their money to work in other ways—through loans or investments in real estate, for example—to help stimulate the economy…

“The idea that the Bank of Japan will buy bonds, and then the extra money will start flooding into corporate or retail loans—that’s just a theoretical exercise,’‘ says Chugoku’s Mr. Miyanaga. “Most important is [for the government] to hurry up and produce a concrete growth strategy, which will spur private economic activity.

http://online.wsj.com/news/articles/SB10001424052702304470504579163094082999108

I want to point out that the individuals who are expressing basic common sense views about monetary policy and the economy are businesspeople who run actual businesses, NOT academics.

This is what happens when academic monetary theory meets reality: theory proves to be just that theory.

There are some perceived benefits (the markets rally) from the easy money high. But the inevitable hangover is usually intense (see 2000-2001 and 2007-2008).

So stocks rally for now. But eventually this will end. In fact it may come sooner rather than later.

Remember 2008? Everyone said everything was just fine… right up until the Crash hit.

We’re seeing the same warnings in the markets now.

Source: http://gainspainscapital.com/2013/11/20/the-qe-experiment-is-failing-will-stocks-crash/

Why Japan’s new home run king forebodes the biggest default in history

Homerun

Suicide has long played a bizarre role in Japanese culture.

In feudal Japan, for example, dishonored samurai would often commit seppuku, a suicide ritual that involved ceremonial disembowelment. It was torturous pain lasting for hours.

In World War II, the Japanese military churned out suicide attackers known as the kamikaze that routinely antagonized allied warships in the Pacific.

And of course, citizens in Hiroshima and Nagasaki simply went back into their homes and waited to become burnt toast despite ample warnings from the US military.

Even after the Fukishima disaster, TEPCO employees went rushing back into deadly levels of radiation exposure in what could only be characterized as a suicide mission.

Despite the obvious prospect of certain death, the Japanese collective still did what was expected of them by the state. Even if it meant roasting alive under a mushroom cloud.

This fierce commitment to the nation has often been abused by the Japanese government which disposed of its people like kindling. It’s the same today.

Looking purely at the numbers, Japan’s medium-term fundamentals are among the bleakest in the world.

Total government debt amounts to over 200% of the country’s entire GDP– a figure so large that the Japanese government spends 51.5% of the 43 trillion yen ($430 billion) they collect in tax revenue just to pay interest!

Perhaps even more astounding is that ‘primary balance expenses,’ i.e. normal government expenditures, totaled 70.3 trillion yen, or 163% of tax revenue.

The only way they’ve managed to stay afloat is by issuing more debt, which makes the problem even worse. In fact, 46% of the 2013 budget is being financed by debt.

These guys are running out of rope. And fast.

The government is trying to ‘fix’ this by appealing to Japanese people’s sense of national pride to get them to buy more government bonds.

Needless to say, this is like a modern-day economic kamikaze– letting the people commit financial suicide for the good of the state.

And perhaps decades ago, this tactic may have worked. But not today. Times are changing, and people aren’t willing to lay down like they used to. Here’s an interesting example–

Japan is a baseball obsessed nation. They love the game. And their equivalent of Babe Ruth is a player named Sadaharu Oh who retired in 1980.

Oh is a national hero for hitting 55 home runs in a single season, a record which stood for decades.

This season, a foreign player named Wladimir Balentien started challenging Oh’s record. And as he got close, many Japanese pitchers in the Nippon league refused to even throw to him in an effort to preserve Oh’s record and mystique.

But then something changed. There was a shift in mentality, and suddenly all the players started giving Balentien a fair shot at the record. They quit putting national pride first, and just played the game.

Balentien broke the record yesterday and is now, officially, the Home Run King of Japan.

This may seem like a minor footnote. But in Japan, it’s a major shift… suggesting that Japanese people are no longer willing to lay down for the sake of the national pride, let alone the government.

You can see this shift in the bond market; individuals and pension funds alike are reducing their purchases of Japanese government bonds… which begs the question:

If the government is financing 46% of its budget with debt, but fewer and fewer people are willing to buy this debt, then how will they be able to keep the party going?

They won’t. It’s simple arithmetic. The only ways out for them are default and a currency crisis– the biggest in history. This would affect financial markets, banks, and the entire global financial system in a profound way.

Given the magnitude of this impact, and as close as they are to the end, this is simply not a trend that anyone can afford to ignore.

 

Source: http://www.sovereignman.com/finance/why-japans-new-home-run-king-forebodes-the-biggest-default-in-history-12721/

 

Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

What Do the Bank of Japan, China’s Government and the Fed Have in Common?

Graham Summers writing for GainsPainsCapital:

As we’ve noted in recent articles, the US Federal Reserve has blown another bubble in stocks and facilitating the exact same risk-taking behavior that brought about the 2008.

The Fed realizing that it’s done this, which is why it’s now trying to manage down expectations of future stimulus (see the multiple suggestions from Fed officials that the Fed might reduce QE before hitting its unemployment target).

The Fed is not the only Central Bank to have shifted tone.

Chinese authorities took a step to ease potential inflationary pressures Tuesday by using a key mechanism for the first time in eight months.

The move by the central bank to withdraw cash from the banking system is a reversal after months of pumping cash in. That cash flood was meant to reduce borrowing costs for businesses as the economy slowed last year—but recent data has shown growth picking up, along with the main determinants of inflation: housing and food prices.

The People’s Bank of China used a liquidity-draining tool in the interbank market that enables the central bank to borrow money from commercial lenders. It withdrew 30 billion yuan ($4.81 billion) by offering 28-day repurchase agreements, alternatively known as repos. The PBOC hadn’t offered repos since June.

The central bank is trying to send a message that it will not tolerate too-easy liquidity conditions,” Dariusz Kowalczyk, a senior economist at Crédit Agricole, ACA.FR +0.99% wrote in a research note.

http://online.wsj.com/article/SB10001424127887323495104578313541983212134.html

Investors are ignoring this story for the most part. This doesn’t bode well for the economy as China was the alleged growth story that pulled the world out of recession in 2009. China did this via a massive stimulus program equal to nearly 20% of GDP (not to mention a massive expansion of its banking system).

So if China is curbing its stimulus, the rest of the world will soon feel the impact.

Another Central Bank that has failed to engage in more monetary stimulus is the Central Bank of Japan. Despite, recently re-elected Prime Minister Shinzo Abe has been talking down the Yen and urging the Bank of Japan to act aggressively to raise the stock market and Japanese economy, the Bank of Japan didn’t announce any new QE or stimulus in its latest meeting.

The significance of this is tremendous. Besides the Fed, the Bank of Japan is one of the most profligate money printers in the globe. For the Bank of Japan to NOT announce any new QE despite extreme pressure from Japan’s prime minister is yet another warning that something major has changed in the financial system.

This will end very badly. The Fed and other Central banks have set the stage for another Crash. And this time around its hands will be tied as it has used up all of its tools just creating this bubble.

THIS is the reason Central Banks are beginning to shift their tones. They realize they’ve blown another bubble and that we’re likely headed for another Crash. And this time around the Fed will be totally out of ammo to stop it. Unlike 2008 which was just a warm-up, this will be the REAL CRISIS featuring full-scale systemic failure.

So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We’re literally at most a few months, and very likely just a few weeks from the economy taking a massive downturn, potentially taking down the financial system with them. Think I’m joking? The Fed is pumping hundreds of BILLIONS of dollars into financial system right now trying to stop this from happening.

Source: http://gainspainscapital.com/2013/03/01/what-do-the-bank-of-japan-chinas-government-and-the-fed-have-in-common/

Japan’s Demographic Disaster

Submitted by John W. Traphagan via The Diplomat  to Zerohedge:

Japan is faced with an unprecedented population challenge that will have social, economic, and political consequences for years to come.

Last August, I wrote an article for The Diplomat  that discussed some of the issues Japan is facing in relation to population decline.  As I noted, the population has dropped for three years in a row.  Recently, the Japanese government announced that the population decrease for 2012 is expected to be 212,000—a new record—while the number of births is expected to have fallen by 18,000 to 1,033,000—also a record low.  Projections by the Japanese government indicate that if the current trend continues, the population of Japan will decline from its current 127.5 million to 116.6 million in 2030, and 97 million in 2050. This is truly astonishing and puts Japan at the forefront of uncharted demographic territory; but it is territory that many other industrial countries also are beginning to enter as well.

Predicting the consequences of Japan’s demographic shift is difficult.   And it is important to remember that these are projections; it seems to me unlikely that this trend will continue for the next century without some sort of intervening political, cultural, or economic factors that generate increased immigration or more robust fertility rates.  Indeed, there have been modest—very modest—increases in the number of foreign residents in Japan over the past twenty years, with a little over twice the number today (2,134,151) as compared to 1990 (1,075,317). Many towns have developed international centers where opportunities are developed and supported, creating contexts for interactions between local residents and foreigners such as a monthly English dinner hosted in the town where I have done fieldwork for several years.

Government officials have often explained to me that one of the goals of these initiatives is to create contexts in which Japanese people can interact, and thus become more comfortable with, foreigners.  The widespread presence of foreign English teachers supported through the JET program and other English language programs has also meant that, unlike forty for fifty years ago, most younger Japanese have grown up regularly interacting with individuals from other countries.   At the same time, there has been some immigration of women from other Asian countries, such as the Philippines, into rural parts of Japan for the purpose of marrying men who otherwise would have had difficulties finding a wife among the native population.  These developments may allow for increased openness to immigration in the future, although for the most part, the Japanese government has remained lukewarm, at best, when it comes to allowing any significant increase in the number of permanent residents or immigrants. Naturalized Japanese citizenship remains difficult to obtain.

While predicting the future of these demographic trends is difficult, the causes are at least somewhat decipherable.  The proximate cause of population decline in Japan are fairly clear: a low fertility combined with increased life expectancy has led to a population structure that is increasingly weighted towards older members of society.  Currently there are significantly fewer people under 30 than there are between the ages of 30 and 60.  As the population of middle-aged individuals grows older and dies, there will be far fewer people remaining behind.  In other words, the current middle-aged generation of Japanese has failed to replace itself.  The question, of course, is why?

Various studies of demographic change in Japan have linked declining fertility to other changing social factors such as increased education, delayed marriage age, more economic opportunities for women, and the expense of raising children in modern, urban societies.  All of these have played a role in reducing fertility over the past few decades.  In addition, beyond delayed marriage many Japanese have chosen not to marry and, as a result, not have children.  According to the 2010 census, 30% of all households in Japan were single, representing the largest category of household composition in the country.  A significant portion of these households were widows over the age of 65. At the same time, a not insignificant portion were women and men in both early adulthood and middle-age who have simply chosen to not get married.  In a society like Japan where child-birth out of wedlock is stigmatized, the decision not to marry also normally means that one has chosen not to have children.

Indeed, there are many women in Japan today in their forties and fifties who have opted for a career over marriage and child-rearing.  In Japan, social pressures make it difficult for women to manage a career while also raising a family.  Furthermore, recent trends suggest that both men and women are increasingly uncertain about the value of marriage and having a family.  A government survey of people between the ages of 18 and 34 in 2011 showed that over 61% of unmarried men among those surveyed lacked a girlfriend and 49.5% unmarried women had no boyfriend, the latter being a new record. Forty percent of respondents indicated that there was no need to marry and 45% of men showed no interest in “dating the opposite sex.” These results, which represented significant increases over the same type of survey conducted in previous years, have raised concerns that the population problem Japan is facing will not change in the foreseeable future.

The consequences of changing attitudes about marriage and gender roles and associated low fertility are considerable.  One problem that has arisen is that many single women are living on very low incomes and have joined the ranks of the poor .  Recent research has shown that 1 in 3 single women of working age in Japan qualify as poor and that the number of poor women in Japan is likely to increase; by 2030 it is projected that 1 in 5 women in Japan will be single. Many of these women may well be living in some level of poverty.

Another problem Japan faces is that the general low fertility rate means there are not enough younger people paying into the national pension program, and this will cause increasing strain on government coffers as the proportion of elderly (currently about 23% of the population is over 65) continues to grow.

Finally, the decline of the population over the next few decades, and the shortage of young people in particular, will have a significant impact on the Japanese labor force.  Questions related to how to maintain economic growth—an issue that has been at the forefront of thinking about the country for the past twenty years, due to a generally sluggish economy—with a decreasing population are both complex and on the minds of policymakers.  One obvious solution to this would be for Japan to relax immigration policies and allow for more workers, particularly healthcare workers, to enter the country.  As noted above, to date this has not been a particularly palatable solution, but this may well change as younger Japanese, with regular experience and interactions with foreigners, move into positions of power and guide policy.

An alternative to this social-centered solution of increased immigration has been raised in recent years.  Rather than relaxing immigration laws, some have proposed increasing investment in robotics as a means of addressing the conflict of a shortfall of labor with the need for workers.  This idea has been raised particularly in relation to elder care, where demand for workers has increased rapidly with the promulgation of the longer term care insurance program in 2001 and the continued growth of the elderly population.  It may well be that a technological solution to Japan’s population problem will be seen as preferable to other possible solutions.

Obviously, only time will tell.  But Japan is faced with an unprecedented population challenge that will have social, economic, and political consequences over the next century—consequences that will not only affect Japan, but also influence Japan’s trading partners as well as its political and military allies.

There is, perhaps, no single variable in the complex web of East Asian politics more uncertain in terms of how it may influence future relations throughout the region than the fate of Japan’s population, because the manner in which that population changes over the next several decades is both difficult to predict and likely to have a profound influence in shaping the regional role Japan is able to play as a political, cultural, and economic power.

Source: http://www.zerohedge.com/news/2013-02-01/japan%E2%80%99s-demographic-disaster