Abenomics Will Be A Giant Fail If Japan Doesn't Address Looming Debt

Japan’s government debt is so excessive that, one way or another, many think it will eventually default. But there’s a way Japan can begin sloughing off its debt and growing its economy: by privatizing government assets. In fact, the nature of its debt means that it can’t fix its debt problem without doing that, says Michael Pettis, a finance professor at Peking University’s Guanghua School of Management.

Pettis likens it to the US railroad boom in late the 1800s. “Most of it was very, very wasteful and the companies eventually went bankrupt. The railroads shifted to new owners who bought at a significant discount. That meant they could lower prices immediately,” he tells Quartz. “That’s painful, but it’s economically very efficient.”

That never happened in Japan. In fact, this is why Japan’s GDP appears not to have grown in so long, says Pettis—wasteful government spending in the 1980s meant GDP “was significantly overstated.”

“Let’s say you build two bridges. One bridge is useful, one’s not. Both show up immediately in same way in terms of GDP impact,” says Pettis. “What happens over time is that second bridge doesn’t contribute [to the economy], and that debt has to be paid off. So it’s written down over long period of time.”

Here’s a look at how Japan’s GDP as a percentage of global GDP has declined compared with the US and China:

That means that what looks like the collapse of Japan’s GDP since 1990 probably hasn’t been as bad as it seems. Meanwhile, much of the rest of Japan’s excessive debt comes from the government’s absorption of private-sector debt throughout the 1990s. Here’s the historical trend of public and private debt:

There’s some good news and some bad news in all this. First, the good. The government has a lot of inefficiently run assets it can “reflate”—i.e. sell to more efficient private enterprises that can wring more value out of those assets—as Naomi Fink, Japan Strategist at Bank of Tokyo-Mitsubishi UFJ argues. For instance, it owns chunks of Japan Post, which it also protects via regulation, and nearly half of Japan Tobacco. Then there are highways and other infrastructure that could be privatized, as well, the way Japan Rail once was. The government also owns unusually high levels of land and other hard assets (pdf, p.24), according to an IMF report. Here’s how Japan stacks up compared with other advanced economies:

In addition to generating proceeds from the sale that could go toward paying down its debts, the government boosts its corporate tax base, as well. True, it sacrifices whatever profits might come from those assets. But if privatizing allows those wasteful assets to start generating real growth, rising productivity would boost the economy in a sustainable way.

The bad news—at least part of it—is that privatizing is politically tricky, and will probably involve mass layoffs. Prime Minister Shinzo Abe should have championed privatization along with his other proposed structural reforms. And that’s the rest of the bad news: he didn’t. But with Abenomics teetering, finding a way to get privatization onto the table might soon be a necessity.

View the original article here

The Inflation Chart That Has To Be Worrying Bernanke

The huge event this week is the Federal Reserve's 2-day meeting, which will conclude with a policy statement, an updated economic forecast, and a Ben Bernanke press conference on Wednesday.

This is one of the most anticipated meetings in a long time, as everyone wants to know if the Fed will give any hints at all about pulling back on Quantitative Easing. The increase in interest rates hints that the market believes the Fed might.

But while the Fed may be getting antsy and eager to begin the exit process, it's not as if the economy is that good. Job creation is still meh by historical standards, as full employment remains a long way away.

And the inflation side of the dual-mandate is still missing massively... and unlike employment going in the wrong direction.

In last night's Bedtimg with BTIG note, Dan Greenhaus (@danBTIG) included this chart, which shows that every single measure of inflation is low and falling.

Despite the firming economy, prices just keep dropping, which has to be alarming for a Fed worried about fighting deflation.

Ben Bernanke has to be looking at this chart, and worrying that walking towards the door might be premature.

View the original article here

It's A Big Week For Economic Data, And We Get Two Important Numbers Today

Last week was very quiet for economic news.

This week will be much more lively.

Of course, the big show is on Wednesday, when we get the latest announcement from the Federal Reserve, but there are going to be other notable datapoints throughout the week.

Today we get two important numbers.

From Calculated Risk:

• At 8:30 AM, the NY Fed Empire Manufacturing Survey for June will be released. The consensus is for a reading of 0.0, up from -1.4 in May (above zero is expansion). 

• At 10:00 AM, the June NAHB homebuilder survey will be released. The consensus is for a reading of 45, up from 44 in May. This index increased sharply last year, but has moved sideways recently with some builders.

Both numbers are interesting.

A string of data have suggested that the manufacturing side of the US economy is lagging, so the Empire survey will be important on that front. And then housing is key. The entire bull case on the US economy rests on housing continuing to improve (both in terms of prices and housing starts/construction) so the latest gauge from the homebuilders will be key.

View the original article here

77 Years Of Being Wrong About Social Security Just Hasn't Been Enough

$('.icon-tooltip').tooltip();

77 years ago Barron’s magazine wrote the following about Social Security:

“Yes sir, Uncle Sam is going to collect money in the form of social-security taxes and use it to run his business and set aside a ‘reserve’ of his own promises to pay, in order to make it look as though the social-security taxpayers are getting something for their contributions.”

The purpose of the article in 1936 was to scare readers silly about the government’s ability to fund the Social Security program.  Of course, there hasn’t been a funding crisis in Social Security, but Barron’s decided to double down this weekend writing:

“From that day to this, Barron’s has tried to explain to readers that Social Security is a scheme worthy of the unlamented Charles Ponzi, who gave his name to the recurring fantasy that a growing fund of investments can pay high returns to early investors by using the deposits made by later investors.

Sooner or later the Ponzi fund runs out of new investors to be suckered. It cannot continue to pay those generous dividends and the fund manager leaves town, commits suicide or goes quietly to prison—unless the government is the fund manager.”

Describing Social Security as a “Ponzi scheme” is extremely misleading.  And it should be obvious why.  So let’s make this dead simple to understand:

1)  The US government has the potential ability to print US dollars if it needs to meet obligations.

2)  The entire US debt is denominated in the currency it has the ability to create.

3)  You can’t “run out of” something you can create out of thin air.

4)  So the US government has no real funding constraint, as in, it doesn’t have enough dollars to pay the debt.

5)  There’s no free lunch there though!  But the fact is, the US government has a different constraint.  Its true constraint is inflation.  In other words, since it can’t “run out of dollars” its real risk is actually creating so many dollars that inflation ensues.

6)  But inflation is at record low levels.  Which makes sense since 10%+ of our workforce is unemployed, capacity utilization is at record low levels this deep into a recession and the economy remains very sluggish.

Anyhow, if you do the math on all of that one thing becomes clear.  It’s illogical to compare Social Security to a “ponzi scheme”.  Ponzi schemes run out of funding at some point.  But the US government can’t run out of dollars so that’s clearly wrong.  Now, it could make the dollar worthless by creating too many of them, but that’s very different than running out of dollars.  Hyperinflation is the opposite of running out of money.  It’s creating too much money.

So, could hyperinflation happen in the USA?  You bet.  I’ve said it won’t happen for years (despite the many predictions otherwise), but it certainly could.  But we should first understand that the ability to meet our obligations on Social Security is not about whether we have the dollars or not, but whether we’re willing to use our government to allocate resources in specific ways that MIGHT contribute to higher inflation in the future.  That’s a debate about efficiency of government spending and not about having the ability to create money.

Don’t get me wrong.  I am not saying there’s a free lunch here.  Absolutely not.  But if we’re going to have an intelligent debate about all of this we should at least start by understanding what the real debate is about.  This isn’t about whether we have the ability to fund Social Security.  This is is about understanding the real constraint on our government (the inflation constraint) and how we are going to balance government spending with the side effect of inflation.  It’s a debate we should certainly be having.  And after 77 years of being wrong, I hope that more and more people are beginning to question those who constantly inject fear and misconception into the discussion while failing to put this all into the proper context.  Relying on them year after year is the very definition of insanity and will get us nowhere.

View the original article here

CANADA IS DOOMED: Three Signs That The Country Up North Is Screwed Beyond All Recognition

The Three Reasons Canada Is In Big Trouble - Business InsiderFeaturedTrendingRecent Login Remember me I forgot username or password Login with Twitter Login with Facebook Login with LinkedIn Login with Google Register EventsBI IntelligenceTechFinancePoliticsStrategyLifeEntertainmentAll Tech Enterprise Science The Social Media Advertising Ecosystem Explained The iPhone's New Back Button Has The Former Design Director Of The New... Why This Whole 'Secretly Rating Men On Facebook' Thing Won't Last How To Become Invisible To The NSA's Domestic Spying Program How McCormick Got Its Electricity Use Down To Net Zero These US Cities Can't Hire Tech Workers Fast Enough 13 Enterprise Apps That Drive People Nuts Even Though They're Free 14 Tech Execs Who Could Probably Kick Your Butt In A Fight Is This Creepy Looking Animal The Jersey Devil? Updated Flood Maps Show How Vulnerable New York City Really Is Montana Conservationist Accused Of Declaring War On Wolves These Are The 2013 Atlantic Hurricane And Tropical Storm Names Finance Markets Your Money The Trailer For Martin Scorsese's 'Wolf Of Wall Street' Looks Sick —... A Finance Worker From Connecticut Was Just Crowned Miss USA Doug Kass Leaves Twitter, Blames 'Too Many Haters' George Soros' Older Brother Made An Engineering Breakthrough That... The Worst Chart In The World Yes, At Some Point China Will Implode 11 Tapirs That Are Worried About The Taper 35 Years Of Failed Economic Forecasts In One Chart The 10 Cheapest Cities In The World Here's Where You Can Buy A House With A Pool For $100,000 Or Less Dick's Sporting Goods 'Buy One Get One Free' Coupon Includes A Major Fail A Good Dad Is Worth $23,344 Politics Military & Defense Law & Order CANADA IS DOOMED: Three Signs That The Country Up North Is Screwed... Canada Mayor Crisis Spreads: Montreal Mayor In Custody Former Romney Economic Adviser Writes New Paper In Defense Of The '1... Obama's Approval Rating Plummets, With A Stunning Drop Among Young People Syrian Rebels Unleash Unprecedented 6-Ton Car Bomb, Killing 60 Microsoft Alienates Troops With The Always-Online Xbox One Guantánamo Prisoners Singing Akon's 'Locked Up' While Being Force Fed... Lawsuit Over CIA 'War Crimes' Probe Points To The Underbelly Of Secret Ops LAWSUIT: Utah Cops Shot 21-Year-Old Woman 'Assassination Style' How Flint, Michigan Became The Most Dangerous City In America Why 3 Of America's Most Dangerous Cities Are In Wealthy Connecticut This Man Is Either The World's Biggest Patent Troll Or A Champion Of... Strategy Careers Advertising Retail Small Business 12 Of The Shrewdest Business Maneuvers Of All Time Cheesecake Factory's 174 General Managers Are Given New BMWs Every 3 Years What 6 Executives Learned From Going On 'Undercover Boss' Booth And Columbia MBA Students Get The Highest Summer Pay What New Yorkers Earn For A Living 71% Of Millennials Want Their Co-Workers To Be A 'Second Family' What's It Like Working For No Money? INSTANT MBA: There Are Challenges Unique To Leadership Roles Google's Little-Seen Ad About Gay Marriage In France Will Have You... Web Ad Business About To Suffer Stunning Defeat At Hands Of 'A Volunteer... Siri Takes Another Beating From Microsoft In Latest Anti-iPad Commercial 'Million Moms' Are Upset About Kraft's Naked Salad Dressing Man Cheesecake Factory's 174 General Managers Are Given New BMWs Every 3 Years This 4-Person Startup Is Trying To Change Online Shopping As We Know It What 6 Executives Learned From Going On 'Undercover Boss' QUIZ: Who Do These Famous Frames Belong To? Life Transportation 12 American Bars To Drink At Before You Die QUIZ: Who Do These Famous Frames Belong To? China's Plan To Build The World's Tallest Skyscraper In 90 Days Is... 6 Amazing Recreated Photos Of Kids And Their Dads The First Test Flight Of The Brand New Airbus Jetliner Went Perfectly Flight From Egypt To New York Diverted To Scotland After Threatening... Entertainment Sports Miss Utah Falls Apart While Answering An Easy Question About Women... The First Trailer For 'The Wolf Of Wall Street' Is A Giant Gatsby-Sized... Britney Spears Releases New Squeaky-Clean Single 'Ooh La La' 'Man Of Steel' Flies Past The Competition With Record June Opening —... Brazilian Phenom Neymar Scored A Volleyed Goal From 20 Yards Away... Tony Parker Explained Why The Miami Heat Keep Giving Danny Green Wide... Report: Allen Iverson Allegedly Kidnapped His Own Children And Is... LeBron James Got Shut Down By A Chubby French Role Player Last Night Sections A-ZAdvertisingCareersEnterpriseEntertainmentFinanceMarketsLaw & OrderLifeMilitary & DefensePoliticsRetailScienceSmall BusinessSportsStrategyTechTransportationYour MoneyYour NewsListsSilicon Alley 100Digital 100Silicon Valley 100Clusterstock 50The Most Important ChartsThe Life 50More »Sponsored Sections10 Things To Know In Small Business Best New Small Businesses in AtlantaComing Up NextThe Future of BusinessInspired to StriveMonday Scouting ReportSmall Business, Big IdeasVideo RevolutionToolsLatestHiveJob ListingsDocument CenterAccount PreferencesRegisterVideoMobileFull ArchivesAbout BIAboutJobs at BIMastheadContactAdvertiseContributers FAQLegal Fine PrintFollow BINewslettersAlertsRSSTwitterFacebookLinkedInGoogle+CompaniesAuthorsCategories From To You have successfully emailed the post. Politics More: Canada Housing Bubble Rob Ford Oil Boom CANADA IS DOOMED: Three Signs That The Country Up North Is Screwed Beyond All Recognition Josh Barro Jun. 17, 2013, 11:21 AM 1,401 1 Tweet!function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0];if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs");EmailShare on Tumblr

Brett Gundlock, Reuters

You might be under the impression that everything is going pretty well in Canada, which had no banking collapse and only a mild recession in 2008-9.

You would be wrong.

The country is beset by political corruption scandals of the sort that people focus on when the economy is good. But it also has a massive ongoing housing bubble, and its economy is being propped up by a global commodities boom that now shows signs of slowing.

Let's break down the three ominous signs.

First, the scandals:Montreal Mayor Michael Applebaum got arrested this morning, charged with 14 counts including fraud and conspiracy. Applebaum was appointed to replace Gérald Tremblay, who resigned last year after getting caught up in a separate corruption scandal involving kickbacks from construction firms with alleged mafia links.Toronto Mayor Rob Ford may or may not be on video smoking crack; last week, Toronto and Ontario police raided an apartment complex linked to the alleged video and arrested 43 people, including the two pictured on either side of Ford in this photo.The mounties are investigating whether Prime Minister Stephen Harper's former chief of staff, Nigel Wright, committed a crime when he gave a Conservative senator over $90,000 to pay back expenses that he had improperly claimed.London, Ontario Mayor Joe Fontana is under indictment for allegedly using public money to pay for his son's wedding reception. London is the 11th largest city in Canada. Fontana is seeking re-election.Laval, Quebec mayor Alexandre Duplessis asked that his city, Canada's 13th largest, be placed in receivership after "he and almost every sitting municipal politician in the city was linked to illegal political financing by a corruption-inquiry witness," according to the National Post. His predecessor as mayor has been charged with two counts of "gangsterism."Missassauga, Ontario Mayor Hazel McCallion was acquitted last week of conflict of interest. In 2007, she voted to reduce fees owed by a development company in which her son is a principal by $11 million. One of the defenses offered by McCallion, age 92, was that she did not read one of the relevant documents because she didn't have her reading glasses. Missassauga, a suburb of Toronto, is the sixth largest city in Canada.Not all of the scandals are so serious. Winnipeg Mayor Sam Katz was recently acquitted of conflict of interest for his decision to host a city council Christmas party at a restaurant he owned. The judge said he showed "bad political judgment" but didn't break the law. He also apologized in May after the Winnipeg Free Press called him out for littering.

Petty corruption undermines public confidence in government, though it's also the sort of thing people focus on when the economy is healthy and they need something else to talk about. Are Canada's municipal scandals a sign of underlying economic health?

Second, Canada has a big, brewing debt problem...

Paul Krugman argued over the weekend that Canada may not be as economically secure as it looks. Canada's relatively easy time with the global economic crisis is often credited to its highly-regulated banking system. But Krugman argues that the big problem in the U.S. was not the banking crisis but the bursting of the real estate bubble and the huge overhang of household debt that it caused.

The Economist

Home prices in Canada are now double what they were in the 1970s in real terms. Historically, over the very long term, real home prices tend to be flat.

Krugman argues:

So if the new, non-bank-centered view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks. Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too.

And third, one of the big factors that has allowed Canada's house prices to stay inflated may be coming to an end. As an oil exporter, Canada has been one of the big beneficiaries of the global commodity boom. 

Business Insider, data from Industry Canada

In 2012, Canada exported mineral oil, fuel and wax products and bituminous substances worth nearly $100 billion (USD), up from $20 billion in 1990 on an inflation-adjusted basis. Petrodollars have been raising Canadian incomes and allowing the country's residents to bid up home prices.

But as worldwide demand slows and the commodity boom wanes, Canada may be in for a home price bust — and bigger problems than municipal corruption.

To embed this post, copy the code below and paste into your website or blog.600px wide (preview)400px wide (preview) 300px wide (preview) Alerts Newsletter URL Recommended For You These Are The Biggest Changes Coming To Your iPhone   These Are The Biggest Changes Coming To Your iPhone   More: Canada Housing Bubble Rob Ford Oil Boom Get Alerts for these topics »

Josh Barro $('.icon-tooltip').tooltip(); HOT: 11 Charts That Show Why Detroit Is Falling Apart And Heading For Bankruptcy Advertisement:Join The Discussion OR Login With Facebook Login With Twitter Login With Google Submit the comment for Insider Status Comments Apply To Be An "Insider" » Insiders0All Comments1 Loading CANADA IS DOOMED: Three Signs That The Country Up North Is Screwed Beyond All Recognition CANADA IS DOOMED: Three Signs That The Country Up North Is Screwed Beyond All Recognition

Corruption, housing bubble, and the end of the commodity boom.

Get Politics Emails & AlertsLearn More »IndustryAccountingAirlines/AviationAlternative Dispute ResolutionAlternative MedicineAnimationApparel & FashionArchitecture & PlanningArts and CraftsAutomotiveAviation & AerospaceBankingBiotechnologyBroadcast MediaBuilding MaterialsBusiness Supplies and EquipmentCapital MarketsChemicalsCivic & Social OrganizationCivil EngineeringCommercial Real EstateComputer & Network SecurityComputer GamesComputer HardwareComputer NetworkingComputer SoftwareConstructionConsumer ElectronicsConsumer GoodsConsumer ServicesCosmeticsDairyDefense & SpaceDesignEducation ManagementE-LearningElectrical/Electronic ManufacturingEntertainmentEnvironmental ServicesEvents ServicesExecutive OfficeFacilities ServicesFarmingFinancial ServicesFine ArtFisheryFood & BeveragesFood ProductionFund-RaisingFurnitureGambling & CasinosGlass, Ceramics & ConcreteGovernment AdministrationGovernment RelationsGraphic DesignHealth, Wellness and FitnessHigher EducationHospital & Health CareHospitalityHuman ResourcesImport and ExportIndividual & Family ServicesIndustrial AutomationInformation ServicesInformation Technology and ServicesInsuranceInternational AffairsInternational Trade and DevelopmentInternetInvestment BankingInvestment ManagementJudiciaryLaw EnforcementLaw PracticeLegal ServicesLegislative OfficeLeisure, Travel & TourismLibrariesLogistics and Supply ChainLuxury Goods & JewelryMachineryManagement ConsultingMaritimeMarketing and AdvertisingMarket ResearchMechanical or Industrial EngineeringMedia ProductionMedical DevicesMedical PracticeMental Health CareMilitaryMining & MetalsMotion Pictures and FilmMuseums and InstitutionsMusicNanotechnologyNewspapersNonprofit Organization ManagementOil & EnergyOnline MediaOutsourcing/OffshoringPackage/Freight DeliveryPackaging and ContainersPaper & Forest ProductsPerforming ArtsPharmaceuticalsPhilanthropyPhotographyPlasticsPolitical OrganizationPrimary/Secondary EducationPrintingProfessional Training & CoachingProgram DevelopmentPublic PolicyPublic Relations and CommunicationsPublic SafetyPublishingRailroad ManufactureRanchingReal EstateRecreational Facilities and ServicesReligious InstitutionsRenewables & EnvironmentResearchRestaurantsRetailSecurity and InvestigationsSemiconductorsShipbuildingSporting GoodsSportsStaffing and RecruitingSupermarketsTelecommunicationsTextilesThink TanksTobaccoTranslation and LocalizationTransportation/Trucking/RailroadUtilitiesVenture Capital & Private EquityVeterinaryWarehousingWholesaleWine and SpiritsWirelessWriting and EditingPolitics SelectMoreFeaturedBusiness Insider SelectTechnologySAI SelectMobile InsightsScience SelectAdvertising SelectAdvertising: The BriefSocial Media InsightsFinanceFinancial Advisor InsightsClusterstock SelectMoney Game SelectYour Money SelectSmart InvestorMonday Scouting ReportLifestyleThe Wire SelectThe Life SelectSports Page SelectGetting There SelectManagementRetail SelectBreaking NewsWar Room SelectEnterprise SelectCareers SelectInstant MBAMarketing MondaysPolitics and MilitaryPolitics SelectMilitary SelectLaw & Order SelectTop 10 Things & ListsLists Select10 Things In Tech You Need To Know10 Things Before the Opening BellClosing BellCharts of the DaySAI Chart Of The DayMoney Game Chart Of The DaySports Page Chart Of The DayAdvertisementYour Money NASDAQ Composite 3,468 +44.52 (+1.3%) S&P 500 1,645 +18.15 (+1.116%) NYSE Composite 9,373 +109.28 (+1.18%) LinkedIn Login Hot: LinkedIn In your network

The Social Media Advertising Ecosystem Explained

Apple's New iPhone Software: Redesigned, With A Lot Of Features Copied From Android

Why Local-Mobile Marketing Is Exploding

Login with LinkedIn to see what your friends are reading on Business Insider.
Login with LinkedIn

No articles have recently been shared in your network.

More »

Welcome, !You are logged into FacebookSocial: Your Activity|These articles have been shared on your timeline. You can remove them here:OptionsNotify me when a story is shared.YesNo Welcome, ! You are logged in with Google Social: Your Activity| These articles have been added to your Google activity log. You can remove them here: Options Notify me when a story is shared. Yes No The Future Of Mobile

Why Mobile Payments Are Poised For TakeoffHere Are The Major Players In Mobile AdvertisingWhy Local-Mobile Marketing Is ExplodingTrendingAdvertisementIn partnership with Find A JobTech JobsMedia JobsFinance JobsC-Level JobsDesign JobsSales JobsSee All JobsThanks to our partners * Copyright © 2013 Business Insider, Inc. All rights reserved. Registration on or use of this site constitutes acceptance of our Terms of Service and Privacy Policy. Disclaimer Commerce Policy Powered by MongoDB Stock quotes by YCharts Ad Serving by 24/7 Open AdStream Made in NYC

View the original article here