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What Happens When the World Economy “Goes Japan”
dailyreckoning ^ | By Bill Bonner

Posted on 05/16/2012 4:52:50 PM PDT by dennisw

The Dow sinking.

Gold sinking.

Oil sinking.

Copper sinking.

Yields sinking.



We struggled with this, Dear Reader. We meditated. We prayed. We drank heavily.

And finally…we overcame the rank desire to say: “We told you so!”

As you know, Martin Wolf, of The Financial Times, is the voice of The Economics Establishment. All that is great and good in the field — which isn’t very much — is given voice by Wolf. Then, it is acceptable for policymakers, Treasury ministers, and central bankers, not to mention the people you talk to at cocktail parties.

And lo! Here cometh the neo-Keynesian economist. What saith he?

He says the world is drifting towards Japan.

Of course, that was the message 10 years ago from a certain feral economist who will not be mentioned. He maintained that Japan was a leader, not a follower…and that the US would follow in Japan’s footsteps…with about a 10-year lag.

He even wrote a book on the subject, with Addison Wiggin: Financial Reckoning Day.

Where he got these ideas, we don’t recall. What we do recall is that almost everyone laughed at him. “Japan?” they said. “The US is nothing like Japan. We have a dynamic, robust economy. We have Lehman Bros., Bear Stearns and Countrywide ‘low doc’ mortgages. We have Alan Greenspan. And George W. Bush. We have ‘mission accomplished’ in Iraq. We have Silicon Valley, Bernie Madoff and a housing boom. Japan has none of those things. Ha. Ha.”

But now, the last laugh is on the other foot!

Japan’s market topped out in 1990. The US market topped out — in real terms — in 2000. Thereafter, Japan saw on-again, off-again recession…sinking prices, generally…and slumpy conditions. The US economy staged a limp recovery in the ’02-’03 period…then gave investors a bubble head-fake. Now, it’s back to the slump…

…and now, both Europe and America are looking more Japan-like every day.

Martin Wolf explains:

On May 10, 2012, the yield on the German 10-year bund was 1.44 per cent, on the US 10-year Treasury was 1.85 per cent and on the UK 10-year gilt was 1.9 per cent.

These are extraordinary numbers. They are particularly striking in the cases of the US and UK, which unlike Germany, run very large fiscal deficits and are experiencing very rapid increases in public sector indebtedness.

This combination of falling government bond rates with very rapid rises in public sector indebtedness reminds us, of course, of the experience of Japan since 1990.

At the end of 1990, when its “bubble economy” went pop, the Japanese government’s 10-year bond was yielding 6.7 per cent. As the economy subsequently declined, deflation took hold and fiscal deficits and public debt exploded. But yields on 10-year Japanese government bonds (JGBs) fell to close to 2 per cent in 1997 and then, with sizeable fluctuations, to troughs of 0.8 per cent in 1998, 0.4 per cent in 2003 and, recently, to 0.9 per cent. In short, the worse the Japanese government’s present and prospective debt position has become, the lower the interest rates on JGBs has also become.

Similarly, in July 2007, just before the beginning of the crisis and consequent explosion in fiscal deficits and debt, the US 10-year Treasury yielded 5.1 per cent. Now, almost five years later, the bonds of this alleged fiscal basket case yield less than 2 per cent. Again, in the UK, another supposed basket case, with huge fiscal deficits and a slipping austerity programme, yields have fallen from 5.5 per cent in July 2007 to below 2 per cent.

What does it mean?

Well, if the US and Europe are following Japan…and Japan is going nowhere…then three of the world’s large major areas are dead in the water.

And if that is the case, you can expect the entire world economy to “go Japan.”

That will mean lower commodity prices. A lower price of oil. A lower price of gold. Lower interest rates — yes, look for the yield on US 10-year notes to drop below 1%. Bad unemployment figures. Low…or negative growth…falling real estate prices.

…and probably a stock market crash.

Hold onto your hats!

And more thoughts…

Well, okay…so the Yahoo! guy ‘embellished’ his resume a little. Big deal. Really, we’re surprised to see people make such a fuss about it. After all, who can honestly say they haven’t put a little positive spin on their own achievements. We have!

But let us rush to clean up our credentials before Dear Readers make a federal case of it.

Okay…on our age. It says we were born in 1959. Must be a typo. We were really born in 1953…okay…’48.

And, it says we attended Harvard University. Well, yes…we certainly did ‘attend’ Harvard… But through some bureaucratic mix-up our name was never on the official student list and our diploma must have gotten lost in the mail.

As for the Pulitzer Prize, we wouldn’t say that we were awarded the prize, not exactly. There again, it seems to be a case of a slight mis-wording. “Pulitzer Prize-winning” describes the quality of our work…as widely recognized, at least in the office here.

And we didn’t exactly invent the Post-It note. We just invented something like it, with scotch tape and a piece of paper. Same idea.

And, okay, did we really “win” the Nobel Prize in economics? We probably shouldn’t have used the word “win.” We were nominated…well, mom thought should have been nominated. She was putting us “in the running”…or something like that.

There, we hope that clears up any misunderstandings.

*** How do you like that? A guy comes from Brazil. He makes billions helping Zuckerberg launch Facebook. And then he leaves the country. You’d think he’d be more grateful. Or at least more sentimentally attached to the land that gave him so much loot.

But no. Edouardo Saverin is pulling out of the USA. Bloomberg reports:

Eduardo Saverin, the billionaire co-founder of Facebook Inc. (FB), renounced his US citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill.

Facebook plans to raise as much as $11.8 billion through the IPO, the biggest in history for an Internet company. Saverin’s stake is about 4 percent, according to the website At the high end of the proposed IPO market capitalization, that would be worth about $3.84 billion. His holdings aren’t listed in Facebook’s regulatory filings.

Saverin, 30, joins a growing number of people giving up US citizenship ahead of a possible increase in tax rates for top earners. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dormitory and stand to reap billions of dollars after the world’s largest social network holds its IPO.

But the rich are doing it all over the world.

A report from London tells us that the French are moving to town. France’s new president has pledged to raise income taxes on the rich to 75%…and to boost France’s wealth tax too. Wealthy French people are buying houses in South Kensington to escape.

As for the rich in Argentina, they’ve been making tracks for many years. As soon as they get some money they buy an apartment, in Miami!

Here in Baltimore, wealthy people have been getting out of town since the top in real estate in 1927.

And now, the rich are leaving Maryland too. Governor O’Malley says “wealthy people can afford to pay a little more in taxes…”

Well, yes, they can afford it. But that doesn’t mean they will like it.

“We’re moving to Florida,” says an old friend.

“Wait for me,” says your editor…

Meanwhile, the Irish and Spaniards are leaving their homelands too. Money is the reason. But smaller amounts of it. There are few jobs in Ireland or Spain, so they’re leaving to find work.

Even the Chinese are jumping ship. No kidding. Taxes are low in China.

TOPICS: Business/Economy; News/Current Events
KEYWORDS: deflation; depression; eucrisis; recession

1 posted on 05/16/2012 4:53:00 PM PDT by dennisw
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To: dennisw

It won’t “go Japan”

It might hit there briefly on the way down.

It’s going Zimbabwe!!

2 posted on 05/16/2012 4:58:03 PM PDT by GeronL (The Right to Life came before the Right to Pursue Happiness)
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To: GeronL

It's OK with me...

As long as *I* get to be Shogun!

3 posted on 05/16/2012 5:39:13 PM PDT by The Duke
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To: dennisw; blam; GeronL; TigerLikesRooster
IT's going to be a bumpy ride.

4 posted on 05/16/2012 5:56:55 PM PDT by Travis McGee (
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To: Travis McGee

I dunno... is freefall bumpy?

5 posted on 05/16/2012 6:18:44 PM PDT by GeronL (The Right to Life came before the Right to Pursue Happiness)
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To: Travis McGee
Haha. Japan is the best case scenario for the current crisis. World economy was still prospering (in comparison with today's situation.) Japan had large cash reserve. They were able to buy time by continuing to export goods to the world market and pouring their cash into an unending series of bailouts and stimulus package.

While Japan has been slowly sinking, the Europe and U.S. are not that lucky. They are hoping the perpetual limbo: without resolution but no massive pain. However, the limbo would not be perpetual, but short followed by pain which the world has not experienced for more than half a century.

The establishment has finally spoken. That is, "Yes, we are forced to accept that the rebound after massive QE is a wishful thinking. We admit that our best hope is to become another Japan even if we laughed at Japan so many years ago when it slided into what has shaped up to be 'Lost 20 years.' It hurts so much, though. "

6 posted on 05/16/2012 6:18:52 PM PDT by TigerLikesRooster (The way to crush the bourgeois is to grind them between the millstones of taxation and inflation)
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To: dennisw

(in the words of Robert A. Heinlein):

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as “bad luck.”

7 posted on 05/16/2012 6:40:04 PM PDT by griswold3 (Big Government does not tolerate rivals.)
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To: TigerLikesRooster

I thought Japan’s 20 year slide was not too bad and not much of a depression though Americans gloated that it was. But now with the Fukishima impact they just ran up their first trade deficit in 30 years or so. That’s a bad sign. South Korea seems more vibrant and Taiwan is running away with the laptop, cell phone, iPad business. I’ll bet the birthrate in S Korea is much better than Japan

8 posted on 05/16/2012 7:03:05 PM PDT by dennisw
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To: Travis McGee

“Somebody wake up Hicks”.

9 posted on 05/16/2012 7:10:26 PM PDT by OldEarlGray
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To: OldEarlGray

10 posted on 05/16/2012 8:05:47 PM PDT by CapnJack
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To: TigerLikesRooster

Time to fuel up the escape pods.

11 posted on 05/16/2012 8:13:17 PM PDT by Travis McGee (
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To: Travis McGee

Fracking is saving the U.S. economy, far away from the machinations of central banks and DC corruptocrats.

Natural gas prices, and hence, electricity costs, decline because of fracking, and soon oil prices will follow.

Moreover, the oil that we are buying comes more and more from growing American oil fields...all because of fracking.

Keep the politicians away and Americans will right the ship.

12 posted on 05/16/2012 8:20:57 PM PDT by Southack (Media Bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: griswold3

That is another brilliant Heinlein quote I never heard!

13 posted on 05/16/2012 8:22:22 PM PDT by Travis McGee (
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To: Southack

I sure hope we find enough energy (and are allowed to get it) to keep the wolf and the commissars at bay.

14 posted on 05/16/2012 8:24:30 PM PDT by Travis McGee (
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To: griswold3; TigerLikesRooster
“What? Over? Did you say "over"? Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Hell no!” ― John Blutarsky
15 posted on 05/16/2012 10:38:03 PM PDT by Pining_4_TX ( The state is the great fiction by which everybody seeks to live at the expense of everybody else. ~)
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To: Travis McGee

From “The Notebooks of Lazarus Long”.

16 posted on 05/17/2012 12:19:05 PM PDT by DuncanWaring (The Lord uses the good ones; the bad ones use the Lord.)
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