Paul Krugman is on again today about the disappearing middle class, and how the Bush tax cuts are and always have been a huge, unfair giveaway to “the rich,” whoever they are. Because I happen to remember that the Bush tax cuts actually were an across-the-board cut in marginal rates, together with strong reductions in taxes on capital, I wondered how Krugman gets from there to considering them unfair.
Well, of course it’s because high-income people pay more taxes than lower-income people. A LOT more taxes. So any change in marginal rates necessarily affects them more, whether you raise rates or cut them. Clearly enough, Krugman doesn’t have a problem with low tax rates. He has a problem with the fact that some people earn a lot of money.
That got me wondering why we have so much income inequality in the first place. I don’t think there’s one simple answer to that question, but a lot of it comes down to the amount of risk you take.
First, let’s quickly acknowledge a few important things. It’s true that a lack of good education means that millions of unfortunate people have little of worth to trade in return for a good living. That accounts for a lot of inequality at the low end of the scale.
It’s also true that much if not most of the financial industry has shifted from making capital available for investment, to a range of rent-seeking behaviors which are made possible by wrong-headed government regulation. Wall Street and the banking industry are ripping the rest of us off. This accounts for a lot of inequality at the high end.
But what’s happening in the middle? Think about what it means to be middle-class, a category that in much literature represents the ideal of a good, gentle life, conducive to moderation, societal health, and the raising of good children.
In practice, to be middle class means you have a job that gives you little risk and pressure, while also paying you enough money to escape material need. Unlike a small businessman, you don’t ever have to worry if today is the day you lose your biggest customer. Unlike an unemployed unskilled laborer, you don’t have to worry where your next meal is coming from. At worst, you adjust to economic vicissitudes by modifying your consumption of small luxuries, like clothing from Neiman-Marcus or your annual vacation.
Being middle-class, as Roosevelt astutely realized, is all about SECURITY, which is the absence of risk.
I was led to this thought, as I mentioned, by noticing that in today’s uncertain environment, many people are adjusting by becoming contractors. They offer their services (from web-site design to domestic help to high-end legal work) on an ad-hoc basis, rather than as part of a permanent full-time job with benefits. A steadily increasing number of people get much of their income on Form 1099 rather than Form W-2.
Something similar happened during the Depression, but I saw it start to happen at mid-decade, even before the crisis hit. America has upwards of 20 million small businesses, and many of them are people who are simply marketing their skills as best they can, possibly employing a small number of assistants and tradespeople along the way.
Every entrepreneur understands the linkage between risk and reward, in an immediate and visceral way. There’s no safety net. Your success is determined by your hard work, intelligence, and no small amount of good luck. The reverse is true in equal measure. Plus, luck is out of your control, and it changes on a daily basis.
It makes a lot of sense that people who take a lot of risk should be rewarded for it. On the other hand, Paul Krugman, Robert Reich, and many others who see salvation in a rejuvenated labor movement, fantasize that we can somehow engineer a prosperous but genteel society in which nearly everyone can make a comfortable living without exposure to the gut-wrenching swings faced by entrepreneurs.
And can you blame them? This is a wonderful fantasy! How, indeed, can you focus on the most important task in your life, which is raising your children, if you’re constantly worrying about money? The natural human desire to avoid risk is indeed the source of most of the inherent instabilities in the financial system, and current reform efforts do less than nothing to change this.
(Have you ever seen a TV commercial while watching golf or the evening news, from some insurance company that promises you investments that gain value in good times, but provide good yields in weak times? If this notion attracts you, then you’re part of the problem.)
Market and finance people like me tend to believe that there is a fundamental linkage between risk and reward, cast in stone when the Hebrew God wrote the Ten Commandments. (“Thou shalt not leave thy gamma-exposure unhedged.”) Other people insist that the linkage is not fundamental. They say it’s not only possible, but actually a moral imperative to construct a society in which most people have a job that is both well-paying and secure, so they can rest easy at night.
Which of these views is true is a deep question that I can’t answer. But I will say that we achieved (or appear to have achieved) a near facsimile of the prosperous, stable promised land in the decades after World War II. These of course were the good old days of high labor-union participation.
But they were also days of extremely high rates of capital investment, and a generally closed economy with relatively little dependence on trade. They were the days when Detroit automakers could sign lavishly expensive labor contracts, incorrectly believing that they would never face real competition, and therefore needed no cost-structure flexibility.
We can’t go back to that world. But the fact that it existed suggests that we might be able to construct something like it.
Right now there is a notable lack of new ideas for macro policy that can foster a return to high real growth in the long term. This is what all the headscratching, chinpulling, and posturing from pundits, economists, and elected officials is all about. They got nuthin’.
But I think we can find our way back to the answer. As always, real answers and real change will come from people not heavily invested in the status quo. (Having a Nobel Prize in either economics or peace is a contrary indicator for new ideas and the ability to change.) In the absence of actual good answers, the intelligent policy is for government to step back and leave the private sector to either find the answers or not. This is the essence of the opportunity, and the challenge, facing the Republicans who will be returned to power this November.
The middle class is disappearing because the lack of long-term growth means that we don’t have enough prosperity to give most people a comfortable, risk-free life. This is a secular trend, having nothing to do with the recession that ended twelve months ago. We know that we can have a middle class because we did it once. But we also know that it was very much a historical anomaly.
There’s a right way to do this and a wrong way. Nostalgia for the Fifties is the wrong way. I don’t know what the right way is, but 20 million entrepreneurs will probably be able to find it.
As long as we stop taxing and regulating them to death.
Submitted by Gonzalo Lira
JPN ≠ US: Japan Is Not Us
Japan went through an equities and real estate boom during the 1980’s—a boom that was really a bubble. And like all bubbles, it eventually burst in 1990.
Since then, Japan has been lost. Equities have never again reached the heights of 1990, nor have real estate prices. The Japanese government has spent a fabulous amount of money for domestic stimulus, creating the most modern infrastructure on earth—yet it hasn’t helped at all. GDP has been anemic, as the population slowly begins to shrink. Japan is in full-on deflation—in every sense of the word.
Now that the United States has had its own real-estate bubble pricked, a lot of smart people have been selling the idea that the U.S. will experience what Japan has experienced: Persistently sluggish growth. Continued fiscal deficits, carried out by the Federal government in order to prop up aggregate demand by way of various stimulus programs. Slow and painful working out of the debt overhang. All of this happening within a deflationary environment, whereby the dollar—just like the yen in Japan—accrues value, as full-throttle deflation sets in.
In other words, this camp believes America is set to begin its own version of Japan’s Lost Decades.
This camp falls for what I call the “Japan Is Us” fallacy—and they are wrong.
Their rationale is simple—and superficially persuasive: Just like Japan in 1990, the United States went through a bubble in equities and real estate, which eventually popped in 2007–‘08. Since then—just like Japan—the U.S. has been experiencing deflation. Just like Japan, the U.S. now has zombie banks, the so-called “Too Big To Fail”. Just like the Japanese government, the U.S. government is spending-spending-spending, so as to prop up aggregate demand. The Federal Reserve—just like the Bank of Japan—is issuing enormous sums of money in order to prop up aggregate asset price levels—the Fed’s policies are so reminiscent of the BoJ’s money printing that Bernanke & Co. have borrowed the term outright: Quantitative easing.
Everything screams Just Like Japan—right? So according to the “Japan Is Us” camp, 2010 through at least 2015 will be just like Japan between 1990 and 2010: Sluggish growth, stagnation—and most important of all, deflation, deflation, deflation.
But there is one key difference that the Japan Is Us crowd conveniently ignore. They ignore it out of blindness, or incompetence, or—occasionally—out of malice. They ignore this key issue like the elephant in the room that’s gone and got drunk, and is now making a fool of himself: Balance of payments.
Balance of payments (BOP) is the measure of a country’s total exchange with the rest of the world. From the Federal Reserve’s “Fedpoints”:
- The balance of payments is an accounting of a country's international transactions for a particular time period.
- Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit.
- The BOP includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets; and the financial account, which records investment flows.
(Emphasis added.)
The current account is the key metric: It’s the net balance between imports and exports. In other words, the trade surplus or deficit.
As everyone knows, the U.S. current account has been negative for a long, long time—in fact the last time the current account was in surplus was 1973. Since then, current account deficits have totaled about $7.5 trillion in nominal dollars. (Data is here.)
Japan, meanwhile, has had a current account surplus. I found a nifty chart that neatly summarizes the differences between the two countries:
Current account surplus/deficit per country as percent of world GDP. De Mello/Padoan.
(Original chart by Luis de Mello and Pier Carlo Padoan can be found here.)
To finance this massive current account deficit, the U.S. has sold assets to the rest of the world. The U.S. Federal government has gone into deficit spending on top of this current account deficit—it too has sold assets to cover the fiscal deficit.
So in a net sense, both the U.S. Federal government and the United States as a whole have “sold assets” to the rest of the world, in order to pay for their spending.
What “assets” have been sold to pay for all this spending? Basically, Treasury bonds. And as everyone knows, Treasuries might be called “assets” by the sophisticates, but they are really nothing more complicated than a loan.
In other words, Americans and their government have gone into massive debt with the rest of the world, in order to finance all this spending.
Japan, meanwhile, has been carrying a current account surplus. Therefore, the Japanese government has been borrowing money not from overseas, but from its own citizen’s savings. All of the Japanese government’s stimulus spending has been paid for by the Japanese people.
This is the main difference between the United States and Japan. It should be obvious—and ominous—what this difference means.
The U.S.—unlike Japan—cannot pay back its loans: Because the United States is broke. The Federal government is running deficits of around 10% of GDP. America as a whole has racked up $7.5 trillion in current account deficits over the last 25 years—over 50% of total GDP—with no end in sight.
So the United States—unlike Japan—has been spending what it does not have. The U.S.—unlike Japan—depends on the rest of the world to lend it money to continue on this spending spree. Americans—unlike Japan—do not produce enough to self-finance its government’s stimulus programs.
Therefore—unlike Japan—the United States will eventually be unable to pay the Treasury bonds it has issued. Therefore, as I wrote in A Termite-Riddled House, there will be a collapse in the Treasury bond market. Therefore, as I wrote in How Hyperinflation Will Happen, a panic in Treasuries will mean a run up of commodities—which will bring about the death of the dollar, and hyperinflation in America.
This is why Japan Is NOT Us.
But even if you don’t subscribe to my hyperinflationary scenario—even if you think I’m full of shit on this issue (and plenty of sensible people think I’m full of it to the brim)—it’s obvious that Japan is not like the United States—it’s obvious to anyone who looks at the situation evenhandedly: The contrast in the two countries’ balance of payments is enough to show definitively and unequivocally that they are not the same.
The source of the two countries’ funding is key: One produces its own stimulus from its current account surplus, while the other borrows it from abroad, adding more debt on top of its already existing debt. Therefore, one country’s spending and stimulus programs—Japan’s—are sustainable, while the other’s—America’s—is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan, but lethal in America.
So if it’s so obvious that the two countries’ situations are so different, then who is selling this clearly false notion that Japan Is Us?
Why, people who have a vested interest in this point of view. People who are selling things. Or people who are trying to explain away why they have lost so much money by making the wrong bets.
For instance, money managers. A lot of pseudo-Austrian money managers in particular have been doing the hard sell to their clients, insisting and insisting that the U.S. is experiencing Japan-redux. They have been steering their clients’ money to Treasury bonds—because if you were in Japan in 1990, their sovereign bonds turned out to be the smartest investments in the long run.
But as we have seen, the U.S. is not Japan.
So these money managers who are playing the Japan Is Us trade have either lost their shirt, or are terrified that they are about to. Because everyone knows that U.S. Treasury bonds are overpriced, and that it’s only a matter of time before this Treasury bubble pops.
And when it pops, it will be bad—a lot of people counting on the United States following in the footsteps of Japan won’t just lose a bit: They’ll lose huge. They’ll be wiped out—or maybe they won’t be wiped out, but their clients sure will be.
That’s why so many people keep insisting that Japan Is Us!-Japan Is Us!-Japan Is Us! They are selling their clients on something, or else trying to explain away their underperformance, by sheer force of personality—while ignoring the blindingly obvious fact that the U.S. is not Japan.
One prominent blogger in particular has been going insane, insisting day after day that Japan Is Us, to the point of psychosis—evidence to the contrary be damned. Every day, this blogger—Michael “Mish” Shedlock—bangs on the same old tired drum. Mr. Shedlock is affiliated with Sitka Pacific, whose performance leaves something to be desired. There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments. So it is reasonable to question whether Mr. Shedlock is ranting and raving how the U.S. is following the deflationary spiral that Japan did because he genuinely believes what he is saying, or because he is trying to convince someone—maybe his clients, maybe himself—of something that he knows in his bones might not be true.
What is true is that anyone who has made bets that Japan Is Us will soon find out if they were wise bets, or foolish ones. The Treasury bubble is soon to burst—so we’ll know the fate of the American economy soon enough.
If those bets turn out to be foolish—if it turns out that, indeed, Japan Is Not Us—just keep in mind one final fact: An average person can survive a leap from a third floor window, even a fourth floor window.
But a leap from a fifth floor window or higher? That’s how you get the job done right. You jump from a fifth floor window, and you’ll go splat!—guaranteed.
Full disclosure: I do not manage any money except for my personal stake and my family’s private interests. I do not provide professional investment advice to anyone. I am not affiliated to, nor am a spokesman for any third party investment or financial company. I do not endorse any product, save Head squash raquets, Slazenger squash balls, Montecristo (Cuba) cigars, Cálem vintage port wines, and Durex X-Treme X-Long X-Large X-Tra Comfort condoms.
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Paul Krugman is on again today about the disappearing middle class, and how the Bush tax cuts are and always have been a huge, unfair giveaway to “the rich,” whoever they are. Because I happen to remember that the Bush tax cuts actually were an across-the-board cut in marginal rates, together with strong reductions in taxes on capital, I wondered how Krugman gets from there to considering them unfair.
Well, of course it’s because high-income people pay more taxes than lower-income people. A LOT more taxes. So any change in marginal rates necessarily affects them more, whether you raise rates or cut them. Clearly enough, Krugman doesn’t have a problem with low tax rates. He has a problem with the fact that some people earn a lot of money.
That got me wondering why we have so much income inequality in the first place. I don’t think there’s one simple answer to that question, but a lot of it comes down to the amount of risk you take.
First, let’s quickly acknowledge a few important things. It’s true that a lack of good education means that millions of unfortunate people have little of worth to trade in return for a good living. That accounts for a lot of inequality at the low end of the scale.
It’s also true that much if not most of the financial industry has shifted from making capital available for investment, to a range of rent-seeking behaviors which are made possible by wrong-headed government regulation. Wall Street and the banking industry are ripping the rest of us off. This accounts for a lot of inequality at the high end.
But what’s happening in the middle? Think about what it means to be middle-class, a category that in much literature represents the ideal of a good, gentle life, conducive to moderation, societal health, and the raising of good children.
In practice, to be middle class means you have a job that gives you little risk and pressure, while also paying you enough money to escape material need. Unlike a small businessman, you don’t ever have to worry if today is the day you lose your biggest customer. Unlike an unemployed unskilled laborer, you don’t have to worry where your next meal is coming from. At worst, you adjust to economic vicissitudes by modifying your consumption of small luxuries, like clothing from Neiman-Marcus or your annual vacation.
Being middle-class, as Roosevelt astutely realized, is all about SECURITY, which is the absence of risk.
I was led to this thought, as I mentioned, by noticing that in today’s uncertain environment, many people are adjusting by becoming contractors. They offer their services (from web-site design to domestic help to high-end legal work) on an ad-hoc basis, rather than as part of a permanent full-time job with benefits. A steadily increasing number of people get much of their income on Form 1099 rather than Form W-2.
Something similar happened during the Depression, but I saw it start to happen at mid-decade, even before the crisis hit. America has upwards of 20 million small businesses, and many of them are people who are simply marketing their skills as best they can, possibly employing a small number of assistants and tradespeople along the way.
Every entrepreneur understands the linkage between risk and reward, in an immediate and visceral way. There’s no safety net. Your success is determined by your hard work, intelligence, and no small amount of good luck. The reverse is true in equal measure. Plus, luck is out of your control, and it changes on a daily basis.
It makes a lot of sense that people who take a lot of risk should be rewarded for it. On the other hand, Paul Krugman, Robert Reich, and many others who see salvation in a rejuvenated labor movement, fantasize that we can somehow engineer a prosperous but genteel society in which nearly everyone can make a comfortable living without exposure to the gut-wrenching swings faced by entrepreneurs.
And can you blame them? This is a wonderful fantasy! How, indeed, can you focus on the most important task in your life, which is raising your children, if you’re constantly worrying about money? The natural human desire to avoid risk is indeed the source of most of the inherent instabilities in the financial system, and current reform efforts do less than nothing to change this.
(Have you ever seen a TV commercial while watching golf or the evening news, from some insurance company that promises you investments that gain value in good times, but provide good yields in weak times? If this notion attracts you, then you’re part of the problem.)
Market and finance people like me tend to believe that there is a fundamental linkage between risk and reward, cast in stone when the Hebrew God wrote the Ten Commandments. (“Thou shalt not leave thy gamma-exposure unhedged.”) Other people insist that the linkage is not fundamental. They say it’s not only possible, but actually a moral imperative to construct a society in which most people have a job that is both well-paying and secure, so they can rest easy at night.
Which of these views is true is a deep question that I can’t answer. But I will say that we achieved (or appear to have achieved) a near facsimile of the prosperous, stable promised land in the decades after World War II. These of course were the good old days of high labor-union participation.
But they were also days of extremely high rates of capital investment, and a generally closed economy with relatively little dependence on trade. They were the days when Detroit automakers could sign lavishly expensive labor contracts, incorrectly believing that they would never face real competition, and therefore needed no cost-structure flexibility.
We can’t go back to that world. But the fact that it existed suggests that we might be able to construct something like it.
Right now there is a notable lack of new ideas for macro policy that can foster a return to high real growth in the long term. This is what all the headscratching, chinpulling, and posturing from pundits, economists, and elected officials is all about. They got nuthin’.
But I think we can find our way back to the answer. As always, real answers and real change will come from people not heavily invested in the status quo. (Having a Nobel Prize in either economics or peace is a contrary indicator for new ideas and the ability to change.) In the absence of actual good answers, the intelligent policy is for government to step back and leave the private sector to either find the answers or not. This is the essence of the opportunity, and the challenge, facing the Republicans who will be returned to power this November.
The middle class is disappearing because the lack of long-term growth means that we don’t have enough prosperity to give most people a comfortable, risk-free life. This is a secular trend, having nothing to do with the recession that ended twelve months ago. We know that we can have a middle class because we did it once. But we also know that it was very much a historical anomaly.
There’s a right way to do this and a wrong way. Nostalgia for the Fifties is the wrong way. I don’t know what the right way is, but 20 million entrepreneurs will probably be able to find it.
As long as we stop taxing and regulating them to death.
Submitted by Gonzalo Lira
JPN ≠ US: Japan Is Not Us
Japan went through an equities and real estate boom during the 1980’s—a boom that was really a bubble. And like all bubbles, it eventually burst in 1990.
Since then, Japan has been lost. Equities have never again reached the heights of 1990, nor have real estate prices. The Japanese government has spent a fabulous amount of money for domestic stimulus, creating the most modern infrastructure on earth—yet it hasn’t helped at all. GDP has been anemic, as the population slowly begins to shrink. Japan is in full-on deflation—in every sense of the word.
Now that the United States has had its own real-estate bubble pricked, a lot of smart people have been selling the idea that the U.S. will experience what Japan has experienced: Persistently sluggish growth. Continued fiscal deficits, carried out by the Federal government in order to prop up aggregate demand by way of various stimulus programs. Slow and painful working out of the debt overhang. All of this happening within a deflationary environment, whereby the dollar—just like the yen in Japan—accrues value, as full-throttle deflation sets in.
In other words, this camp believes America is set to begin its own version of Japan’s Lost Decades.
This camp falls for what I call the “Japan Is Us” fallacy—and they are wrong.
Their rationale is simple—and superficially persuasive: Just like Japan in 1990, the United States went through a bubble in equities and real estate, which eventually popped in 2007–‘08. Since then—just like Japan—the U.S. has been experiencing deflation. Just like Japan, the U.S. now has zombie banks, the so-called “Too Big To Fail”. Just like the Japanese government, the U.S. government is spending-spending-spending, so as to prop up aggregate demand. The Federal Reserve—just like the Bank of Japan—is issuing enormous sums of money in order to prop up aggregate asset price levels—the Fed’s policies are so reminiscent of the BoJ’s money printing that Bernanke & Co. have borrowed the term outright: Quantitative easing.
Everything screams Just Like Japan—right? So according to the “Japan Is Us” camp, 2010 through at least 2015 will be just like Japan between 1990 and 2010: Sluggish growth, stagnation—and most important of all, deflation, deflation, deflation.
But there is one key difference that the Japan Is Us crowd conveniently ignore. They ignore it out of blindness, or incompetence, or—occasionally—out of malice. They ignore this key issue like the elephant in the room that’s gone and got drunk, and is now making a fool of himself: Balance of payments.
Balance of payments (BOP) is the measure of a country’s total exchange with the rest of the world. From the Federal Reserve’s “Fedpoints”:
- The balance of payments is an accounting of a country's international transactions for a particular time period.
- Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit.
- The BOP includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets; and the financial account, which records investment flows.
(Emphasis added.)
The current account is the key metric: It’s the net balance between imports and exports. In other words, the trade surplus or deficit.
As everyone knows, the U.S. current account has been negative for a long, long time—in fact the last time the current account was in surplus was 1973. Since then, current account deficits have totaled about $7.5 trillion in nominal dollars. (Data is here.)
Japan, meanwhile, has had a current account surplus. I found a nifty chart that neatly summarizes the differences between the two countries:
Current account surplus/deficit per country as percent of world GDP. De Mello/Padoan.
(Original chart by Luis de Mello and Pier Carlo Padoan can be found here.)
To finance this massive current account deficit, the U.S. has sold assets to the rest of the world. The U.S. Federal government has gone into deficit spending on top of this current account deficit—it too has sold assets to cover the fiscal deficit.
So in a net sense, both the U.S. Federal government and the United States as a whole have “sold assets” to the rest of the world, in order to pay for their spending.
What “assets” have been sold to pay for all this spending? Basically, Treasury bonds. And as everyone knows, Treasuries might be called “assets” by the sophisticates, but they are really nothing more complicated than a loan.
In other words, Americans and their government have gone into massive debt with the rest of the world, in order to finance all this spending.
Japan, meanwhile, has been carrying a current account surplus. Therefore, the Japanese government has been borrowing money not from overseas, but from its own citizen’s savings. All of the Japanese government’s stimulus spending has been paid for by the Japanese people.
This is the main difference between the United States and Japan. It should be obvious—and ominous—what this difference means.
The U.S.—unlike Japan—cannot pay back its loans: Because the United States is broke. The Federal government is running deficits of around 10% of GDP. America as a whole has racked up $7.5 trillion in current account deficits over the last 25 years—over 50% of total GDP—with no end in sight.
So the United States—unlike Japan—has been spending what it does not have. The U.S.—unlike Japan—depends on the rest of the world to lend it money to continue on this spending spree. Americans—unlike Japan—do not produce enough to self-finance its government’s stimulus programs.
Therefore—unlike Japan—the United States will eventually be unable to pay the Treasury bonds it has issued. Therefore, as I wrote in A Termite-Riddled House, there will be a collapse in the Treasury bond market. Therefore, as I wrote in How Hyperinflation Will Happen, a panic in Treasuries will mean a run up of commodities—which will bring about the death of the dollar, and hyperinflation in America.
This is why Japan Is NOT Us.
But even if you don’t subscribe to my hyperinflationary scenario—even if you think I’m full of shit on this issue (and plenty of sensible people think I’m full of it to the brim)—it’s obvious that Japan is not like the United States—it’s obvious to anyone who looks at the situation evenhandedly: The contrast in the two countries’ balance of payments is enough to show definitively and unequivocally that they are not the same.
The source of the two countries’ funding is key: One produces its own stimulus from its current account surplus, while the other borrows it from abroad, adding more debt on top of its already existing debt. Therefore, one country’s spending and stimulus programs—Japan’s—are sustainable, while the other’s—America’s—is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan, but lethal in America.
So if it’s so obvious that the two countries’ situations are so different, then who is selling this clearly false notion that Japan Is Us?
Why, people who have a vested interest in this point of view. People who are selling things. Or people who are trying to explain away why they have lost so much money by making the wrong bets.
For instance, money managers. A lot of pseudo-Austrian money managers in particular have been doing the hard sell to their clients, insisting and insisting that the U.S. is experiencing Japan-redux. They have been steering their clients’ money to Treasury bonds—because if you were in Japan in 1990, their sovereign bonds turned out to be the smartest investments in the long run.
But as we have seen, the U.S. is not Japan.
So these money managers who are playing the Japan Is Us trade have either lost their shirt, or are terrified that they are about to. Because everyone knows that U.S. Treasury bonds are overpriced, and that it’s only a matter of time before this Treasury bubble pops.
And when it pops, it will be bad—a lot of people counting on the United States following in the footsteps of Japan won’t just lose a bit: They’ll lose huge. They’ll be wiped out—or maybe they won’t be wiped out, but their clients sure will be.
That’s why so many people keep insisting that Japan Is Us!-Japan Is Us!-Japan Is Us! They are selling their clients on something, or else trying to explain away their underperformance, by sheer force of personality—while ignoring the blindingly obvious fact that the U.S. is not Japan.
One prominent blogger in particular has been going insane, insisting day after day that Japan Is Us, to the point of psychosis—evidence to the contrary be damned. Every day, this blogger—Michael “Mish” Shedlock—bangs on the same old tired drum. Mr. Shedlock is affiliated with Sitka Pacific, whose performance leaves something to be desired. There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments. So it is reasonable to question whether Mr. Shedlock is ranting and raving how the U.S. is following the deflationary spiral that Japan did because he genuinely believes what he is saying, or because he is trying to convince someone—maybe his clients, maybe himself—of something that he knows in his bones might not be true.
What is true is that anyone who has made bets that Japan Is Us will soon find out if they were wise bets, or foolish ones. The Treasury bubble is soon to burst—so we’ll know the fate of the American economy soon enough.
If those bets turn out to be foolish—if it turns out that, indeed, Japan Is Not Us—just keep in mind one final fact: An average person can survive a leap from a third floor window, even a fourth floor window.
But a leap from a fifth floor window or higher? That’s how you get the job done right. You jump from a fifth floor window, and you’ll go splat!—guaranteed.
Full disclosure: I do not manage any money except for my personal stake and my family’s private interests. I do not provide professional investment advice to anyone. I am not affiliated to, nor am a spokesman for any third party investment or financial company. I do not endorse any product, save Head squash raquets, Slazenger squash balls, Montecristo (Cuba) cigars, Cálem vintage port wines, and Durex X-Treme X-Long X-Large X-Tra Comfort condoms.
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