Commentaries

from Rolfe Winkler:

Afternoon Links 1-4

Living on nothing but food stamps (Deparle/Gebeloff, NYT) The safety net of last resort: 2% of U.S. households report zero income other than a food stamp card.

Twenty years on Japan is still paying its bubble era bills (Economist) Heard on the Street also writes today that Japan is looking at its third consecutive lost decade. Copious amounts of deficit spending and money printing hasn't worked for Japan. It won't work for us.

Petition halts Iceland's repayment plan (UPI) Icelanders want bank creditors -- in this case foreign depositors -- to eat the loss of bank failures. Probably sensible. Depositors were foolish to chase returns in Iceland to begin with. Putting Icelanders into debt slavery to pay them off does little good.

Lessons learned but not applied (Simon Johnson) Summers/Geithner know the right prescription to handle bank failures. They just aren't willing to follow it themselves... (ht Walker Todd)

Real estate in Cape Coral is far from recovery (Goodman, NYT) Another foreclosure tour. Notes that busted homeborrowers often leave lots behind when ditching their house. See again: trash-outs.

The year in Review (Doug Noland) Skip to the last section at the bottom. Reader Paul M. points to Doug's comment that healthy corporate leverage ratios are misleading because their customers (and the system in general) are still leveraged to the hilt.

Australian lotto winner keeping it real (Paddenburg, Couriermail)

from Rolfe Winkler:

Unemployed Japanese living in 30sqft “capsules”

Sad/fascinating piece from Hiroko Tabuchi in NYT: For some in Japan, Home is a tiny plastic bunk

For Atsushi Nakanishi, jobless since Christmas, home is a cubicle barely bigger than a coffin — one of dozens of berths stacked two units high in one of central Tokyo’s decrepit “capsule” hotels....

Now, Hotel Shinjuku 510’s capsules, no larger than 6 1/2 feet long by 5 feet wide, and not tall enough to stand up in, have become an affordable option for some people with nowhere else to go as Japan endures its worst recession since World War II.

Such quarters are surprisingly expensive: $640 per month. About $20 per square foot per month. A 650 square foot one bedroom in a good Manhattan neighborhood -- the most expensive rental market in the U.S. I'm sure -- probably averages about $2500. Less than $4 per sqft per month.

The comparison is not totally fair. These are technically hotels, not apartments.  Still, I think it's worth making because the article says many now stay months on end.

Tabuchi doesn't mention how widespread such hotels are in Japan, though his use of the plural in his opening paragraph suggests this isn't the only one of its kind. He does mention Japan's "hidden" homeless, noting that many overnight in internet cafes.

Make sure to see the slideshow attached to the article. The "capsules" may be 6.5 feet long, but sure don't look 5 feet wide.

from Rolfe Winkler:

Lunchtime Links 12-31

Bankers get $4 trillion gift from Barney Frank (Reilly, Bloomberg) David pours over HR 4173, all 1,279 pages of it. He finds some interesting nuggets. One of the bigger problems I see is the proposed insurance fund that would pay for resolving systemically dangerous banks. Talk about moral hazard!

Show some balls (Saletan, Slate) A colorful take on new TSA security procedures.

New jobless claims hit 17-month low (Kaiser, Reuters) Good news for the economy but, paradoxically, bad news for stocks (and gold). If the economy improves, the Fed will have to raise rates. That will hit equity values and strengthen the dollar. But don't count on strength lasting very long. As soon as the Fed meaningfully tightens, we'll head right back into debt deflation.....which is why many think the Fed is trapped.

The land of the rising bearish wager (Zuckerman/Slater, WSJ) Betting on a "sudden stop" in Japan. (ht Walker Todd)

Shoplifters? Keen an eye on workers (Greenhouse, NYT)

UBS whistleblower asks why he's going to prison (Brown, Reuters) This will be an interesting 60 Minutes piece.

Europe's vast farm subsidies face challenges (Castle/Carvajal, NYT)

from Rolfe Winkler:

Economic calcification, Japanese edition

Japan's labor market is desperately troubled. For years, the number of temporary workers has been on the rise as Japanese employers find it harder to afford full-timers. Like the rest of the Japanese economy, the labor market needs the flexibility to deflate. But the government won't allow that to happen. The latest example is a proposal to ban manufacturers from hiring temporary workers (Otsuma/Hagiwara, Bloomberg):

The government is preparing legislation “that will stop manufacturing firms from employing temps and encourage them to hire full-timers,” [Health and Labor Minister Akira] Nagatsuma said yesterday on a business program....

Japanese companies have cut jobs to remain profitable in an economy struggling with deflation and as a strengthening currency erodes export earnings. Unemployment [recently at 5.1%] rose to a postwar high 5.7 percent in July...

Effectively, the Japanese government is trying to put a price floor underneath the labor market. But banning "temporary" work won't help full-time employment; it will just mean less employment overall.

Japan's plan is not unlike measures being employed to prop up the U.S. housing market. The problem with price floors is that in preventing markets from clearing, they prevent transactions from happening. Fewer transactions means less economic activity. It means fewer jobs.

The numbers in the chart are for illustration purposes only, but the numbers from the Japanese labor market demonstrate suggest precisely this kind of economic calcification:

The proportion of [Japanese] college students with job offers tumbled 7.4 percentage points from a year earlier to 62.4 percent, an Education Ministry report showed last month, the steepest drop since the survey started in 1996.

Don’t worry about the weak dollar

By John M. Berry

There’s no way to shut off the incessant warnings about a weak dollar from foreign officials and some economists, but it’s perfectly safe to ignore them.

You can also yawn the next time Treasury Secretary Timothy Geithner repeats the mantra, “It is very important to the United States that we continue to have a strong dollar.”

Everybody is blowing smoke. (more…)

A chance for real change at the G20

For years, policy makers were able to cut and paste statements on global imbalances from one communique to the next. The words were never backed by action. This G20 meeting could very well be different.

Most commentators are not expecting much. Such cynicism is easy to understand. When the IMF tried to bang heads together in 2006 the result was a series of empty pledges. It now makes for comic reading.

The United States swore to eliminate the federal deficit by 2012 and contain spending growth. China agreed to allow further exchange rate liberalization. The euro area said it would reform labor markets. We all know what happened to these promises.

But self-interest is providing a strong tailwind behind the current talks.

One background motivator at the G20 may be the mounting suspicion that imbalances were a leading culprit of the 2008 financial crisis. The tide of savings flowing from China into the U.S. bond market certainly helped fuel the asset price bubble by lowering borrowing costs.

The influential governor of the Bank of England, Mervyn King, recently warned that unless the situation is resolved the world was “doomed to repetitions” of the meltdown and the “substantial recessions” that accompanied it.

This theory is unlikely to be the driving force, however. Imbalances may after all have only played a walk-on part in the crisis. The deluge of money from China did not oblige U.S. regulators to tolerate a surge of bank leverage and a slide in lending standards.

Carrying the dollar lower

There’s been lots of hand wringing over the fate of the dollar, with its recent slide giving rise to, in the words of blogger Macroman, the “dollar going down forever” crowd. Data released from the U.S. Treasury on foreign capital flows didn’t help matters. Seems in July foreign investors wanted to put their funds elsewhere.

Lots of ink has already been spilled on the well worn arguments that blame reckless borrowing by the US government and the growing movement toward establishing an alternative world currency as the drivers behind the dollar’s decline.

The latest theory gaining traction is the dollar is becoming the funding currency of choice. It’s a compelling case that the FT lays out nicely. It also fits snuggly into the “US. is becoming Japan” school of thought.

Analysts say negligible US interest rates, its quantitative easing measures and little sign that the country is set to withdraw from its ultra-loose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade.

“This puts the dollar in exactly the same position as the yen back in 2001 and makes it naturally attractive as a carry trade funding currency,” says Simon Derrick at Bank of New York Mellon. “The dollar is the new yen.”

The carry trade strategy, in which low-yielding currencies are sold to finance the purchase of riskier, higher-yielding assets, was widely used in the years prior to the eruption of the financial crisis.

But then again, it’s nearly impossible to prove how much this is driving the currency.

“It’s notoriously hard to find real data to determine the size of carry trades funded out of any currency, let alone the dollar. Hence, it has to remain the subject of conjecture,” he says. “Nonetheless, we feel that it is advisable to assume that this funding switch is happening.”

Macroman throws in his 2 cents here, and notes that the recent declines most likely have to do with foreign central banks cutting back on their dollar stocks that they built up over the last year. (China and Japan, however, added big to their US asset stock pile in July).

Tough talking for Rio on China iron ore

No great surprise that Rio Tinto has acknowledged it has given up trying to fix an annual iron ore price with Chinese steel mills.

What strains credibility is the miner’s insistence that this has nothing to do with the detention of its negotiating team in China.

It looks as though Rio’s iron ore head Sam Walsh may have broken ranks and told it as it is. Walsh was quoted by AAP as saying:

At this point in time we’re not negotiating….Remember we have our negotiators detained.

There can’t be many people rushing to fill the shoes of the four Shanghai-based Rio Tinto employees — including lead China negotiator Stern Hu –arrested by Beijing in a crackdown on speculation in the iron ore trade.

But with no talks, a big question mark hangs over what China will end up paying for the iron ore it buys from the world’s second-largest producer.

China has been pushing for a larger cut in prices than the 33 percent reduction Rio Tinto agreed with Japanese and South Korean mills in May.

Japan takes a kinder approach to growth

The victorious Democratic Party of Japan did not put economic growth at the heart of its electoral sales pitch. The party’s manifesto mentions “growth” only once. The word “support”, by contrast, appears 19 times.

Even so, there are reasons for optimism that the DPJ’s softer and more nurturing policies are just what the economy needs. (more…)

from Rolfe Winkler:

Peering into our future…

A WSJ article on Japanese elections comes with the following table.

Japan has spent 20 years fighting deflation with loose monetary policy and deficit spending. To what end?

Keynesians point to Japan's experience as evidence that the U.S. government can borrow much more before interest rates rise. I suspect they're right. But what's the point if, at the end of all of that, we're saddled with unpayable debts?

Sure, deficit spending prevented more violent economic upheaval last year. But the more debts we build up, the longer and deeper the downturn will prove to be over time.

The article has many interesting details...

• The party that's been in power for 59 years will likely lose the elections to another, which promises "ambitious spending programs" despite Japan's huge debt.
• Incomes continue to fall. Inflated artificially by a credit bubble, Japan's per capita income once ranked 4th in the world, but has since fallen to 14th.
• Declining birth rates mean younger Japanese don't have the voting power to reduce entitlement spending that's asphyxiating the economy.