The Great Debate UK
Waiting for the other shoe to drop
-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own and do not constitute investment advice. -
The unemployed and the terminal insomniacs who have nothing better to do than read my blogs will know that I have long been gloomy about most of the Western economies. How can you fail to be pessimistic when the world economy is still dominated by the U.S. – a basket case, becoming weaker every day, with a political class too blind or too scared to admit in public the obvious fact that the country cannot carry on living beyond its means?
Now house prices are plunging again and, with the dollar still strong, the prospects for an export-led recovery look bleak. In fact, a return to recession is far more likely, and the markets are starting to show signs of that sickening here-we-go-again feeling.
How will it all end?
Anyone who claims to know how this will all play out is on no account to be trusted, but there’s nothing wrong with trying to guess – in fact, that’s exactly what we have to do before we can decide what assets to invest in, or whether to invest at all rather than simply blowing it all on a long bankruptcy binge.
So here goes. I start from the observation that the bond and currency markets, in their infinite lack of wisdom, seem to have divided the whole membership of the United Nations into two classes, high-risk countries and low- (or no-) risk countries.
from The Great Debate:
At least U.S. has Japan to fall back on
(James Saft is a Reuters columnist. The opinions expressed are his own)
The bad news for holders of U.S. debt, in case you missed it, is that China has sold so many Treasuries that it is no longer America's leading lender.
The worse news is that there is a new creditor-in-chief, and it is Japan, an aging country with its own government debt bubble to contend with.
China sold about $34 billion of Treasuries in December, taking its holdings to $755 billion, while Japan increased its purchases and now is in the top spot of the Treasury Department's scroll of merit, with $768 billion. China's holdings peaked in April, since when the trend has been gently downward.
From a demographic point of view, though, the United States making a long term borrowing plan based on access to Japanese funding is a bit like my daughter making a retirement plan that has me continuing to work when she stops at its centre.
Japan is a wonderful country with many strengths, but one salient feature of Japan is that it is aging, or should that be aging, deeply in debt and dependent upon very low rates to continue to make those debts manageable.
Japan's government debt to GDP ratio is 190 percent, as against 84 percent for the U.S. That huge debt, which has nearly quadrupled in the past 15 years, is made tenable because the Japanese are great savers and own the vast majority of their government's stock of debts, unlike Americans, who own instead the vast majority of stuffed animals made in China. Japanese debt is also manageable because market interest rates are so low -- just a 1.32 percent yield on 10-year government bonds.
This is really big. Perhaps 2010 will be the year when we will see the fall of modern Spain empire. To understand this you have to look to 16-17 century Spain and its overseas silver production. It may seem that the things are different now but in its essence the story is the same.
However in these times you need to prepare yourself mentally. You need to start growing peace in yourself in order to take advantage of these times we are living in.
My blog tells about it (see my webpage if interested in).
What I would love to see from Mr. Copeland is an acknowledgement and discussion of the dire scenarios facing the Asian economies of which he is so enamoured. I do not suspect that this level of objectivity and intellectual honesty will ever be forthcoming, however, as I have found that those seriously discussing “treasury dumping” and the other memes he propagates here are simply too laden with baggage to do so. These are men and women are well-enough educated to know better, but who engage in these arguments anyway. Sometimes they are simply defeatist and declinist. Sometimes they want to make their name on the bandwagon. Sometimes they just want to stake a claim to be able to cover their bases so that in any negative scenario they can say they “called it” (hence being a long-term hyper-bear on western economies). Sometimes they simply romanticize the other, which seems to be something the British are particularly prone to.
Sometimes it’s all of the above.
Always, though, these people peddle what is essentially thinly disguised gossip and rumour into fearmongering, all the better that people will read what they produce.