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William Ramseyer

 
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  • Great Graphic - Case Study: San Jose Hiked Minimum Wage [View article]
    Arguing about minimum wage levels is about as useful as deciding whether the deck chairs on the Titanic are comfortable enough. Capitalists may be a lot of things, but they are not stupid. When wages rise capital flows to cheaper locations. This began with the industrial revolution in England in the 19th Century when money left the developed industrial areas to seek cheaper wages in the U.S., and then the same thing happened here when capital fled to Japan, and from there to China, and on and on.

    When capital leaves it takes real jobs with it, leaving fake jobs (and localized jobs such as fast food cooks and plumbers) and an artificially high (and fake) living standard maintained by every trick politicians and economists can think of: welfare, deficient financing, artificially lowered interest rates, restrictions on the flow of jobs and money, currency regulations, unemployment payments, government jobs, defense spending, governments buying their own debt…and minimum wages.

    You cannot create wealth by decree. All of the tricks in the end equate to trying to give out more wealth than has been created.

    Consider England. What was the last service or good you bought that was “made in England”? And yet, England appears to have a living standard similar to other developed countries. Magic!

    The magic tricksters continue to pull the rabbits out of the hat, and to apparently create wealth from nothing. When the debt marshmallow that is the world economy implodes all the shallow tricks will appear pathetic.

    Of course, we will blame someone else for this great disaster, rather than our own fear and greed.

    Maybe we will get lucky and instead of war we will have a global welfare state where all the goods are produced (and cooked and served) by robots and given away by governments. We can then all live on robotic welfare.

    Thank you. Bill
    Apr 15 02:12 AM | 10 Likes Like |Link to Comment
  • Hollow Men, Hollow Markets, Hollow World [View article]
    Hi Ben, I enjoyed your article. If you have not already done so, you might want to read Society of the Spectacle by Guy DeBord, which deals with similar issues.
    We all live in a world of illusion and dreams. The examples are endless. For example, do the chunks of steel and plastic that smell like a refinery and are called a “mustang” or a “jaguar” have anything to do with the biological animals of those names? Or do the wood and concrete housing tracts with names like “Running Springs” or “Green Meadows” have anything to do with those natural features? Or does a hair-washing chemical soap that smells like papayas or coconut, have anything to do with a tropical vacation? Who knows? We live in our dream fantasies and they are sold back to us.

    The greatest fantasy in the world of investing and economies is that we can collectively avoid arithmetic, and simple brutal bookkeeping facts. The amount of investment must equal the amount of savings. This is simple arithmetic. The amount of wealth that I can obtain by trading in the real world is equal to the amount of wealth that I create. This is also simple arithmetic. Of course, we are all smarter than that, and so are our governments, right?

    England has not produced much tradable wealth for a century. Much of Europe and the United States are not far behind. Yet through complex machinations of governments and central banks those countries appear to have great wealth. I will not go through the tedious effort to pull back the curtain on the great Wizard of Money Oz. Here is one of hundreds of techniques—governments lower interest rates below non-manipulated market rates to stimulate the demand for assets. As long as the value of the assets increases, wealth appears to increase. However, at some point the assets do not even produce enough income to pay back the principal, even at zero interest. For example, the rent on a building might not cover the principal payments, but the buyer is relying not on cash flow to pay the debt but is relying instead on the value of the asset going up endlessly. Once the last buyer has bought in, the asset values crash. The only issue at such time is whether the debts liquidate at a fraction of their face value, resulting in collapsing debt money supply, deflation and depression, or whether the government prints so much non-debt money (electronic or paper) that hyper inflation occurs. Either way the debt that cannot be repaid disappears and so does the “wealth” that we thought was there. Civil chaos in weaker countries may trigger the massive interruption of war, allowing economists in other countries to learn nothing from all of this, or even to claim that the problem was a lack of skill in being able to create the illusion of wealth, that with a little more skill they could have fooled everyone one more time; this is a form of delusion or even insanity, which may come from studying economics books with too many advanced math symbols.

    In any event, the illusion of wealth disappears and people end up trading their actual time and objects to survive. Neither of which may be worth much. This is the harsh arithmetic of economics. So start saving in a diversified way, so that you can take care of yourself. The clock is ticking. Thanks. Bill
    Apr 3 02:37 AM | 2 Likes Like |Link to Comment
  • Welcome To Phase 3 Of The Global Financial Crisis [View article]
    “understand that interest rates are the central price signal off which all assets are priced”
    I found this simple statement in the article to be profound. Interest rates are used to increase wealth; low interest rates are designed to increase asset values and hopefully lead to more economic activity. The present problem is that the assets cannot generate a return sufficient to repay even low interest rates. This leads to loan defaults, that is. a decline in the (debt) money supply, and falling asset prices. Thus, we get the many collapsing asset bubble crises that we have seen so often.

    The falling asset prices and evaporating debt money make cash more valuable. This is deflation, the collapse of debt money supply. Hyper-inflation involves printing more cash. This would destroy the private banking system, as the banks are net lenders. Thus, hyper-inflation would be opposed by banks, and could only happen if the politicians took direct control of the money supply. This may happen in Japan. Hyper-inflation in Japan would probably take down the world financial system as so many institutions would end up bankrupted.

    But who knows?

    We could have deflation, hyper-inflation, stagflation—we cannot predict the acts of politicians (or anyone else) in reaction to a world that does not yet exist. In the end, one or more major countries will probably have to default on their bond debt, issue new currency and start over—but more likely war will intervene before we get that far. Thank you.
    Jan 29 10:50 PM | 1 Like Like |Link to Comment
  • The Ticking Time Bomb Under The World Economy [View article]
    Thank you. I enjoyed the article, and found it informative.

    For me, looking at the problems of Italy, or other countries, is a bit like trying to predict where the volcano will erupt next. The behavior of governments going back at least to the 1980s and probably all the way back to the 1940s is to avert depression and political chaos by making debt cheaper and easier to get. The problem is global since lower interest rates in one country (for example, Japan) lead to investors borrowing in the low rate currency and investing in some other country. When one country or region suffers the inevitable debt overload and asset bubble, the response is—more of the same, more cheap debt. The “wack-a-mole” set of economic crises and “solutions” reflect the giant smoldering volcano underneath the world economy.

    As a result of the debt-based economies, Europe and the United States have sovereign debt loads that will not and cannot be repaid.

    But, they are the A and B students in the “slow group” central banking class. Japan will never recover from its debt load. I don’t see how they can keep interest rates low, reduce debt and maintain a cheap currency for exports. More likely, they will pile on more sovereign debt until they default.

    But Japan is only a C or D student.

    The student most likely to fail the class is China.

    Remember how Bernanke early on said the sub-prime crisis was contained? China’s debt and real estate disaster is “contained” in the same way. Many banks in China are insolvent. Once again, people mistake liquidity problems for insolvency problems. Governments can easily solve liquidity problems, but the Chinese economy is running off an insolvent banking system. The extent of the problem is X multiplied by F, where X is the publicly disclosed bubble/debt problems, multiplied by F, the accounting fraud that happens in a one-party economy. When the government finally steps in to bail out the local, and maybe larger, banks most economic activity in China will grind to a halt. The army and police will be called in to quell the inevitable unrest and the usual suspects, Japan and the US will get the blame.

    My heart goes out to the many people who will suffer. Thank you. Bill
    Jan 26 11:33 PM | 1 Like Like |Link to Comment
  • Dogs Of The Buffett [View article]
    John, that's a very interesting comment regarding who invests in what, and gives me hope for what happens after the Oracle is gone. Thanks.
    Dec 20 01:27 AM | Likes Like |Link to Comment
  • Dogs Of The Buffett [View article]
    Zenstone, thank you for your correction.
    Dec 20 01:25 AM | Likes Like |Link to Comment
  • The Austrians Are Right - Inflation Is Coming [View article]
    Ben, great article. I especially appreciated the explanation for foreign demand for US dollars and how that reduces inflation in dollars. Great comments and I especially liked those of Doug regarding the importance of debt (although I felt this was somewhat covered in Ben’s article).

    Here’s my take: Money is a thing (including debt “things”) like any other thing and therefore subject to supply and demand. It is a thing that can be used more than once (unless it is debt money and the borrower has defaulted) and so the velocity is also a factor. The US is increasing supply (whether or not the money is yet beginning to move into circulation) and so the value of US money will decline and we will have inflation. However, demand for US dollars increases with economic crisis (because of safe haven status and the need to pay US dollar debts). In addition, the failure to pay debts in full extinguishes those debts and the money supply falls, decreasing supply. Thus, we have both an increase in supply of USD by the Fed, an increase in demand because of crisis, and a decrease in supply because of bankruptcies and defaults. In fact, the Fed is trying to offset the latter two deflationary pressures through its actions.

    In a perfect world, inflationary and deflationary pressures could be exactly offset and we would have no depression and no inflation. In my opinion, the chances are very slim and that is because the population will not accept the level of unemployment and business failures that would be required to bring us back to a “real” economy where investment came from savings and increased productivity rather than artificially low interest rates and government deficits.

    As a practical matter, I believe that the next debt crisis may come in either China or Japan. This could make the US dollar move up. So, I like precious metal stock (for inflation and crisis) and short term US debt (for deflation and crisis). Of course, we all know Mr. Future is coming to visit, but none of us have ever met him or can say for sure what he looks like. Thanks. Bill
    Nov 28 05:25 AM | 1 Like Like |Link to Comment
  • The Austrians Are Right - Inflation Is Coming [View article]
    Ben, great article. I especially appreciated the explanation for foreign demand for US dollars and how that reduces inflation in dollars. Great comments and I especially liked those of Doug regarding the importance of debt (although I felt this was somewhat covered in Ben’s article).

    Here’s my take: Money is a thing (including debt “things”) like any other thing and therefore subject to supply and demand. It is a thing that can be used more than once (unless it is debt money and the borrower has defaulted) and so the velocity is also a factor. The US is increasing supply (whether or not the money is yet beginning to move into circulation) and so the value of US money will decline and we will have inflation. However, demand for US dollars increases with economic crisis (because of safe haven status and the need to pay US dollar debts). In addition, the failure to pay debts in full extinguishes those debts and the money supply falls, decreasing supply. Thus, we have both an increase in supply of USD by the Fed, an increase in demand because of crisis, and a decrease in supply because of bankruptcies and defaults. In fact, the Fed is trying to offset the latter two deflationary pressures through its actions.

    In a perfect world, inflationary and deflationary pressures could be exactly offset and we would have no depression and no inflation. In my opinion, the chances are very slim and that is because the population will not accept the level of unemployment and business failures that would be required to bring us back to a “real” economy where investment came from savings and increased productivity rather than artificially low interest rates and government deficits.

    As a practical matter, I believe that the next debt crisis may come in either China or Japan. This could make the US dollar move up. So, I like precious metal stock (for inflation and crisis) and short term US debt (for deflation and crisis). Of course, we all know Mr. Future is coming to visit, but none of us have ever met him. Thanks. Bill
    Nov 28 05:23 AM | 1 Like Like |Link to Comment
  • Don't Fall For The Taper Talk Again: Buy Gold On This Related Decline [View article]
    Good article. I have some questions for the author and those making comments. Working with the numbers in the article it appears that almost no QE money (roughly 3% or less) has shown up in the economy as new loans. I therefore would ask these questions, and in particular about the mechanics of the flow of money:
    1) Does QE cause an increase in stock or real estate prices, and if so, how? If QE money is parked at the banks then who is loaning money for stock or real estate purchases? And who are the borrowers? Or are all these purchases coming from savings, here or abroad? Do buyers of stock and real estate believe that values will go up in the future because interest rates will stay low, or that the economy will recover leading to increased profits and rents, or that inflation will push asset values up? Do they even think about any of this, or just ride the bull?
    2) We often hear about the “carry trade”--borrowing in currencies that have low interest rates, such as the yen or US dollar. But who loans this money and who borrows it? Are there any studies on this? If we knew who was borrowing and lending in the carry trade (if it even exists) and how it actually works mechanically then we might be able to predict the effect of rising US or Japanese on economies around the world.

    Thanks. Bill
    Nov 23 03:09 AM | 1 Like Like |Link to Comment
  • Extended Unemployment Benefits Explain High Unemployment Rates [View article]
    Economics have often wondered why wages are “sticky” during recessions; that is, wages do not fall very much even when economic activity declines. I find their wonder surprising. The reason wages do not fall significantly during recessions, as partially covered in the article and comments, is that government benefits and laws interfere with the labor market. These benefits and laws include unemployment benefits, as well as cheap student loans, broadened disability benefits, government created “work”, minimum wage laws, and numerous other programs designed to keep incomes higher than the market would otherwise dictate. Increased taxes cannot cover these programs, especially in a weakened economy, so they are paid for by government borrowing. The excess high wages drives capital to other countries, where the process is repeated. Thus, today, we have countries from England to the US and Japan, all sustaining artificially high wages through borrowing. Increased productivity has bought us some time, but the long term prognosis for this process is not good. I sometimes wonder whether the educated financial and political elite are aware of where we are headed and thus are cynical about our chances, or whether they are so ignorant of history and arithmetic as to be insane. Is it really possible that the many Nobel prize winning economists and their followers believe that we can maintain living standards through borrowing without dire consequences? I don’t know. It does appear that both Greenspan (regarding the housing bubble) and McNamara (regarding winning the Vietnam War) acted with some cynicism regarding what they told the public versus what they believed. On the other hand, the process seems to have worked more or less so far so maybe it is more a lack of imagination than anything. Thank you.
    Oct 25 05:28 AM | 1 Like Like |Link to Comment
  • Understand The 2 Kinds Of Money, Or Cry 2 Kinds Of Tears [View article]
    DMC and Ronster9, thank you for your comments. Ronster9, in response to your question about DGI--war and social unrest are often the result of economic crisis, and thus companies who are in the defense sector are well-positioned for the future. As to whether DGI is well-managed or not, or what valuation it should have, I have no knowledge or opinion. I have also liked the cyber security space as war and unrest (and the usual hackers and criminals) will provide work there--again, there is always the question of management and valuation. A badly managed firm in a great sector can end up in bankruptcy just like any other badly managed firm. Personally, my main focus is tryng to preserve wealth in both a stagflation and deflation/depression environment. For various reasons I like US money market or short term treasury funds (which should work ok for both inflation and deflation), precious metal stocks, positive cash flow real estate with low or no debt, and some foreign assets (this is basically a hedge investment on the US dollar). I believe that the most likely future crisis will push the USD up--but no one can know the future. As to participating in the musical chairs game of investing in the global bubbles forming from so much easy money--I will prefer to sit it out with what stocks I already have. There is plenty of money to be made there for those lucky enough to get out before the music stops--but I don't trust luck in these things. I hope to buy cheap assets if a crisis comes, and if it never comes, I will have some savings and can enjoy a world much better than I had expected! Thanks. Bill
    Oct 25 12:47 AM | Likes Like |Link to Comment
  • A Bubble Continues To Form In The Stock Market [View article]
    Thank you James. I always enjoy your articles. I believe that bubbles usually involve debt-asset feedback loops where investors borrow to buy assets pushing up asset values. The increased asset values attract even more purchasers who use debt which is now easier to obtain as lenders and investors feel confident that rising asset prices will protect and benefit them. George Soros described some of these bubble mechanisms in his book, “The Alchemy of Finance”. Some features I look for in bubbles: 1) increasing and easier borrowing; 2) rapidly rising prices; 3) assets no longer producing income (rent or profit) sufficient to pay the interest on the debt (investors relying instead on new buyers to drive up values); and 4) lots of talk about how “it’s different this time”. I especially am wary of the third element. If you borrow at 4% to buy a piece of real property that produces 3% net rental (ignoring tax issues) then you will go bankrupt unless you can use rising asset prices to borrow more money or sell the property to a greater fool. Corporate profits serve the same function in this analysis as rents, although the analysis is more complex. So to me, I would look for signs that investors, especially retail investors, have started to use debt to buy stock.

    And now for something completely different. I believe that the world has engaged in an endless carry trade for many decades. In this trade investors borrow at very low interest rates and buy assets around the world. In classic feedback loops this debt drives up values, leading to more borrowing. When a crash occurs, the governments step in to save the economies—by encouraging even more borrowing, and the carry trade starts up again. To cut to the chase, both Japan and China have huge investments inside their countries often involving interactions with the local governments and that do not produce a return to justify the debt (national debt in the Japanese case, and local debt in the Chinese case) used to finance them. Massive portions of both China and Japan are in bubble stage and a blow-out in either of those countries will take down all world stock markets, although it would be very positive for the dollar. That time, if it comes, will offer tremendous opportunities for investors and very great risks for the world. Thank you. Bill
    Aug 3 01:01 AM | 3 Likes Like |Link to Comment
  • Why Inflation Never Came [View article]
    To me inflation in prices is caused by 3 things: lower supply, increased demand or increased money. Let’s ignore changes in supply and demand as they tend to change slowly. However, the amount of money can change very fast. Money exists in at least two forms. Exchange money and debt money. Exchange money includes paper dollars and metal coins. Exchange money lasts as long as people accept it; it does not depend on any further actions of anyone. It can last for a long time. Debt money however requires continuous acts by some person or entity—they must make payments over time or the debt money disappears. Poof. Gone completely. The interest that must be paid eventually requires the borrower to make a profit, sell some asset or find some new debt to replace the old one.

    Governments can create inflation with exchange money any time they want to (at least when money is not a rare physical commodity like gold or silver)—they simply make more of it. But how do they get it in the economy? Simple, they give it to people, through lower taxes, government programs, or even just mail it to people to as a “tax refund” even for those who pay no taxes. Such exchange money would be spent and the prices of goods and services would rise as much as the government wants.

    So, if it is so simple to create inflation, then why don’t governments do it if that’s what they want? Because they do not want inflation; they want increased economic activity through new borrowing.

    To understand this, we need to step back into the history of capitalism. In a nutshell, free market capitalism created winners who became massive monopolies with large political influence. Some estimates of Andrew Carnegie’s wealth in today’s dollars based on his ownership of mainly steel interests are around $300 billion, making him perhaps 5 or 6 times as wealthy as the richest person today. However, the monopolies eventually lost their power to the last great monopoly—the financial sector. This coincides with the rise of debt as the main economic engine. The relationship between the financial sector and modern governments is well-known. Central banks are both the collective will of the financial sector and governments’ main tool to effect financial decisions. We are a democracy, but power mainly exists in the financial sector. If you do not believe that then ask yourself--why was it so easy for the financial sector to obtain massive short term bailouts here and abroad? That is real power, and far beyond what the other capitalist sectors, such as the auto industry, obtained.

    Back to my point. The rise of the financial sector is crucial to modern capitalism, as it is the means by which governments seek to prevent recessions and depressions that would lead to: 1) lost elections in democracies; 2) social unrest; and 3) loss of wealth of powerful people. While real economic activity still exists in most capitalist countries it has become a smaller and smaller percentage of economic activity while financial activity has become a larger and larger percentage. Through the use of lower interest rates and many other financial tools, governments, central banks and the financial sector seek to maintain a happy functioning society, and prevent such things as depressions and world wars.

    However, the financial sector does not actually produce any wealth. In a nutshell, real wealth which comes from increased productivity and the investment of savings, is dwarfed by the apparent and short term wealth that comes from borrowing. It is this borrowing that goes bad in recessions and depressions, and that is replaced by more and more borrowing traceable to the actions of the governments, which debt in turn goes bad. Debt money differs from exchange money in that debt money has a time fuse—the interest that must be paid back through some return of investment. This borrowing can be by individuals, companies or governments or all three sectors. It produces economic activity, but unless that economic activity continues to produce a return to pay the interest, then it must be replaced by more borrowing, increasingly unsupported by real economic activity (remember debt is being used not to produce more wealth but mainly to prevent bad debt from being liquidated).

    This is why we do not have inflation, yet. Increased bad debt to replace old bad debt has not yet resulted in enough economic activity to produce demand; it is mainly preventing bad debt from being liquidated.

    The governments want increased economic activity, not inflation. At best, inflation is a tool to drive savings into investments (but are not banks supposed to invest savings into investments?), or a buffer against deflation. It reflects economic activity, but does not cause it in most cases. Since most investments are no longer coming from savings (at least in the US) inflation would not help the economy much. It does help borrowers, mainly governments right now, but it hurts lenders, mainly the important financial sector. This is why high inflation was crushed by the Fed prior to Greenspan’s tenure.

    The goal of governments is not really to increase inflation (except perhaps in Japan where there are still large savings that could be driven into investment); the goal of governments it to increase economic activity, and in our modern finance economies that means, increased borrowing. Increased borrowing can only increase inflation until the point where borrowers fail to make the interest payments, then deflation sets in. The governments are desperately trying to prevent deflation by trying to encouraging the substitution of new debt for bad old debt, either through lower interest rate or through increased asset prices that secure the debt.

    Hyperinflation and deflation are actually two sides of the same phenomenon---the failure of governments to replace old bad debt with new (accepted) bad debt. In both cases, the lenders ultimately receive back a fraction of what they have lent, and the insolvency of the borrowers spreads to the lenders and then throughout the society (which has been existing on debt activity).

    In my opinion, what we have now is sort of like a tree that has lost its roots—on the one side of the tree the winds of deflation and debt default are pushing on the tree, and on the other side governments are desperately pushing to encourage new economic activity based on new debt. We have neither deflation nor hyperinflation. The tree stands, but it has lost its roots in real economic activity. It will fall, now, or later.

    Had we been honest with ourselves, we would admitted that our living standard was based on debts that can never be repaid, and we would have allowed the bad debts to be liquidated for pennies on the dollar, even if it meant loss of jobs and bankruptcies (even of large banks), and then allowed the real economic sectors (and they do exist) to rise up from the ashes and create real wealth. Instead, we risk major social disruptions and perhaps war when the hard and inevitable unwind comes.

    Thank you. Bill
    May 22 02:01 AM | 4 Likes Like |Link to Comment
  • Big Things Happening In Japan [View article]
    When real interest rates start rising then heavy borrowers will be in trouble. If we have such a case, then, since the Japanese government must borrow, it will soon be in very serious trouble.

    3rd grade economics 101. If I borrow on my credit card I am not wealthier as the amount borrowed equals the increase in debt. Everybody seems to know this about their own life, but many somehow believe that governments can escape 3rd grade arithmetic rules.

    I have tried to figure out where we collectively started to accept the insane concept that borrowing that does not come from someone's savings can increase wealth. I believe it comes from the short term apparent increases in wealth. Governments encourage and engage in this strange economic behavior, and even economists with doctorates believe the world (or at least interest rates) is flat. If a Cassandra points out that debt must be repaid and this plan will not work, they are quickly proven wrong, when the government encourages or engages in ever greater borrowing which results in an apparent increase in wealth. It’s hard to argue with increasing values in real estate or stock, and the sore loser Cassandra is ridiculed. But what do you do after the bubbles burst? Even more borrowing?

    Japan is close to the end game for the concept of better living through borrowing. Sure, maybe they will get lucky and make it for a few years. But, as Keynes might have said of this debt-ridden world if he had lived this long--in the long run, we are all dead--broke. Sadly, individual freedoms which could have made us truly wealthier may suffer when the stuff hits the fan. Why don't we finally tell people the truth--their living standard is based on debt and they must suffer to clear it away and get things rolling in a real way again. Thanks. Bill
    May 15 03:37 AM | 4 Likes Like |Link to Comment
  • 4 Scary Charts Warning Of The Next Financial Crisis [View article]
    Japan is like the guy down the street that ran up his credit cards too high. When he decided to get back into the job market he discovered that he could not find work unless he reduced his wages, which he did. This ticked off the other workers, as they also had to reduce their wages. In the end, it did not matter as none of them would ever be able to pay their debts anyway. But now they all had someone else to blame.

    If JGB rates continue to rise the Japanese government will soon not be able to pay its debts unless:
    1) it increases its revenues by higher effective tax rates; 2) it prints money to pay the bonds; 3) it borrows money to pay its debts; or 4) it increases its revenues by increasing taxes from a rapidly growing economy.

    No. 1 is not likely as the amount needed is too large. No. 2 is only temporary as borrowers will require greater interest as an inflation risk premium. No. 3 is only temporary as borrowers will also require greater interest because of the default risk premium. No. 4 is the only plan, but to work it requires that Japan grab huge amounts of market share from export competitors. This requires a very cheap Japanese yen.

    This in turn requires that the other major exporting countries accept losses to their own exporters, and do so without taking retaliatory action or trying to lower their own currencies. This does not seem likely, but if Japan could trade freely with a cheap yen it could revive its export sector and increase its tax revenue. Cheap yen would be inflationary in Japan and would destroy the living standard of the elderly lenders, but the export section of Japan and the workers in those sectors would do OK. Governments that are in severe debt trouble commonly confiscate the wealth of their own citizens, including the elderly, in the old days by seizure and in modern times by inflation. An “oldie but goodie” technique is to simply devalue the old currency or issue a new one. Another popular technique is to force locals to keep their money at home at artificially low interest rates during high inflation.

    The best that the Japanese government could hope for is a cheap yen without international reprisals, lots of dumb borrowers to loan them money at very low interest rates, and old people to see their living standard drop but too old to remember to vote out the government. It’s possible, but does it seem likely?

    As to default, Japan will probably not default on its loans, assuming they are in yen. Hey, if you could legally print money to pay your debts, what would you do?

    The problems for Japan are many, but in a nutshell, it does not have enough tax income to run its government and pay its government debts, and it will probably soon not be able to borrow the difference because of rising interest rates. Increased taxes, reduced services, destruction of the living standard of old people, higher interest rates, and higher inflation are all possible. It’s not likely that the Japanese banking system will do well when the government can no longer borrow easily, and this would be a hard hit for a weak world financial system.

    Every major economy on the planet has tried to maintain a living standard for its people through the use of debt. Those in power fear the loss of control and the civil unrest that would follow if economies plunged into the depression that follows large unsustainable debt build-ups.

    When you live on borrowed money, you live on borrowed time.

    What will the problems of Japan mean for the rest of us? No one knows. My guess—a stronger USD, more easing around the world, currency devaluations that will trigger new financial crises (although I don’t know where first), and military build-ups in Asia.

    The central bankers and treasurers have forgotten what each one of us knows: when you borrow money that you cannot pay back; you do not become richer—you become bankrupt. The ability to print money may hide that, but it does not change it.

    Thank you. Bill
    May 14 03:08 AM | 2 Likes Like |Link to Comment
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