Debt! Which is Worse Off Japan or USA Part II

In a former blog, the question was asked, "Which is worse off, the USA or Japan, when it comes to debt?"

I asked my friend and world famous investment advisor Mish Shedlock about it and he graciously replied:

Japan is worse off - Their problem hits first (Japan already has debt at 190% of GDP - USA debt 87.6% as of May 15, 2010). Also Japan is much worse off because of demographics – a much older population... Timing is the key! The USA actually has some time to do something (even if we know they won’t) 


Now, Japan expert Marc Abela (who is running the Mises Institute site in Japan chimes in:

Mish is unfortunately wrong (IMHO) this time around (as in "180 degrees" wrong) on the situation if his conclusion is that "Japan is worse off" (note that I only agree with Mish's viewpoint "once in a while"... I also tend to disagree with him with respect to his approach to the "deflation/inflation" argument as well). But I have a tremendous amount of respect for his work so far.

To lay it out like it is:

The company called the "Japanese government" has debt of up to 200% times that of the company called the "Japanese economy" (GDP) but the "Japanese economy" (i.e. Japan as a country) in aggregate still has plenty of savings (both in local and foreign denominated assets).

Now the company called the "USA government" located within the USA feeding (as in "parasiting" - just like any "government" does) on the company called the "USA economy" has a debt of up to 100% of the country's overall GDP but:

Point 1. 100% of that US debt has been borrowed from abroad - mostly because the local domestic pool of savings has been completely (totally) depleted years ago.

Point 2. 100% of the debt in the USA is very short term (3 months? 6 months? type of material) - a lot shorter than in most countries (even some in Europe believe it or not).

Point 3. Finally most of the GDP numbers in the US (up until last year at least) were comprising of mostly consumption and not much investment (70% versus 30%) where as in Japan the situation is still closer to a 60/40 ratio (if not even better than that? it was even better than that in China a few years ago - don't have the latest data for both countries).

Now let us put things in perspective because a lot of people tend to repeat what most bankers seem to get wrong... regarding...

Point 1: put simply, imagine I (USA) had borrowed from YOUR parents 100% of my $50,000 early salary, and you (JAPAN), had borrowed 200% of your $50,000 early salary from YOUR parents (Japanese citizens). Most wannabe bankers today would argue that "well, 200% versus 100% - Japan is clearly in worse shape". But if your parents still have plenty (loads) of savings (Japan) then YOU can still fuss around quite a bit - while I have to cross fingers that your parents (for mine are totally broke - and my parents already owe your parents as well some amount!) will keep on lending "me" more money (for I borrow from "abroad" - just like the USA does today). As a result JAPAN is in a much better position due to its massive amount of savings (both in domestic/foreign currencies) and local financing of the government debt.

Point 2: Also, time frame, very subtle but quite important, imagine I owe you $500,000 and I promised you the cash "all of it" for next week latest I swear to god - this gives me only 7 days to find the money. The chances I default on that debt are 100% (unless I print my way out of it and get my printer going 24/7 in an attempt to dilute my current pool of paper fiat IOU/promises). On the other hand if I owe you $1,000,000 but I have 10 years to find it then sure, I'm still stuck, but "stuff" can somewhat still happen. The debt in the USA is just like the ARM loans banks were providing to sub-primers, it's in a great proportion "short-term" material - waiting to reset big time in a few weeks? in a few months? As a result the company called the "JAPANESE government" is still somewhat better off - even though it's just a matter of "time".

Point 3: Finally, if I borrow $10,000 from you each year and yearly 70% of that money is spent in me partying building myself pools traveling getting me some plasma TVs and new imported SUVs - chances 10 years later I reimburse and make good on all the money are usually slim. On the other hand if I borrow the same $10,000 from you each year and I only spend yearly 60% on the same kind of stuff - this means I have "invested" what's left 40% like Japan has (which is a 33% increase when compared to just 30% like in the US) by building nets to fish and/or factories towards building "productive" assets, then this usually means I'm still more likely to reimburse my debt. As a result even in point 3, JAPAN is still better off.

As a result, because of 1. mostly foreign borrowing, 2. very short term borrowing, 3. quite poor GDP "I/C" ratio, the USA is in much worse shape than Japan whatever matrix you use - even though yes, sure, just saying "200% versus 100%" may be quite misleading. The USA has today no other option but to print it's way out - unless it finds more suckers (central banks around the world?) to borrow from in an attempt to postpone facing the issue. Wait. Not only that - the above problem was the problem we had "before" 2008, while we still had Bush and Greenspan in office - i.e. we had this problem already while having (supposedly?) a limited republic on our side (ouch) and Ayn Rand's reasoning with us from Greenspan's school (ahem). Now that we have Obama and Bernanke with us - the sky is the limit to the hanabi we can get. Not that I particularly like the combo "Kan/Shirakawa" of course...

.... If the USD drops more and more heavily and faster every month (to 70? 60? 50? 40?) while burping here and there with tiny cardiac surges faking up in the upcoming weeks/months we'll know who was right (Mish or Me)... Now both currencies will drop when compared to commodities that are fixed in volume - so GOLD should rise versus both (all) paper currencies. But assuming GOLD is the non-moving line - one car will be feeling as if it is going backwards much faster than the other one..
.

NOTE! I do not exclude the possibility of "international bullying". This means - I do not exclude the eventuality where the US would simply use its "force/power/army" to keep having Japanese continue lending "more and more" money to the USA (and I do not exclude also corrupted Japanese politicians from accepting this as a temporary solution to kick the can further down the road) - but the more we wait to resolve the current imbalance the more the end result scenario will hit a harder wall.

Japan has been doing everything it could to prevent the USD from losing value over the past 24 months - and I keep insisting, they can't do anything, but most bankers just keep on telling me no Marc you'll see one USD will be worth 110 JPY in a week. Still waiting I am - cares to reply the Yoda in me... :)

Note finally that the more Japan throws their good savings after US consumer debt the heavier the USD will fall the day JAPAN runs totally out of savings. We're witnessing the very first interplanetary "vendor financing" in history. And just like all good "vendor financing" stories - they usually do not end very well. I'll take anyone on the above three points... anytime...

Marc Abela on TV: "TV Days are Counted...Revolution is on its Way"

I received lots of mail from different people about the article I wrote concerning TV Tokyo borrowing $5 billion dollars from Mizuho Bank.

I plan on commenting or placing data supporting facts on this site later today (I'm looking for English language based materials which is making it hard), but I did want to put up an excellent commentary about the entire debacle that was written by Marc Abela.

Marc Writes:

Yes, I read about the TV Tokyo loan - from your web page, mostly. Pretty weird deal indeed. I mean, of course, personally, if TV Tokyo wants to freely bet 5 billion dollars on their next idea, and Mizuho Bank's managers are dumb enough to bet 5 billion of their customers' money on the TV Tokyo "business model" - let them be my guest, just as long as they don't come knocking, of course, at the door of the taxpayer in 3 years in yet another attempt to force government to redirect resources coercively from unrelated neighbors to pay for the cleanup of their own mess. 


If Mizuho cares to lose its reputation as a viable financial institution where you don't want to put your money because the managers on top make all the wrong calls - I surely won't stop them (but like you said, I will definitely take my money out and move it elsewhere). 

I personally think (like you, I'm sure) that the days of "TV" as a concept (i.e. you sit there and someone tells you what to watch, when and how) are so totally counted. Hard to put a clear number, is it 2 years left, 5?, 10?, 1? But the amount of nonsense we regularly get on TV, weirdly covered news and biased reporting, wannabe "entertaining" programs that mothers wished they could just keep their kids from, crappy commercials about just that much more vendor financing for your already indebted father, dumb and dumber discussing on reality TV live, is driving most (all?) of its customer base away - at an unbelievable speed.

It has been a year and some I have not turned my TV on. Not even once. Really. Weird. But it still sits in my living room. Antique. I currently just use my own personal channel registration on YouTube and other video web sites of people I personally trust and care to follow. When they post something new I get a note - and watch it if I can or skip it if I have to. Programs can last 7 minutes, or 77 minutes - as apposed to the 30 minute or 60 minute structure imposed by TV. 


New posts and programs come and appear freely, at times twice a day or sometimes only once a month - as opposed to the daily or weekly structure imposed by TV. Commercials are more targeted to me (guitar stuff, etc) and I click on it when I want - as opposed to having me patiently listen for 2 minutes about how the brand new shampoo will surely make me have better looking friends... What's wonderful is that the pay-per-click commercial on the internet makes both me "and" the shampoo company lose much less of our resources (time/money/etc), and finally, I can watch it all from where I want - when I want - starting from the second which fits me, and pause all the way until I'm done, with any more important phone call.

TV days are counted. Meanwhile the internet has not even started yet. Revolution is on its way.


Marc Abela is an extremely well-known businessman in Japan. He founded the Ludwig Von Mises Institute website at www.mises.jp. You can contact Marc Abela through Facebook.  

Marketing Japan: The Japan of Free Enterprise

Yesterday, I received some brilliant commentary about Japan by economic expert Marc Abela about the Time Lapse Journey Through Japan post that I thought I'd share with you.

It is just one more reason why Japan experienced such high economic growth until recently (when the Bank of Japan and Japanese government decided to interfere):

"Japan was up until very recently one rare and beautiful battalion of free enterprise, liberal thinking, private property and private responsibility, not just your name, but your whole family name directly on your brand, Honda-san, Matsushita-san, Suzuki-san, Toyota-san, with free customers roaming around and simply picking the favorite amongst a sea of different products to be found on the market, it was competition at its best... and if people didn't like you, no-one there to use violence, you just go through periods where the group decides to ostracize you at best/worst... Rothbard would have loved this country." - Marc Abela 


You can contact Marc Abela through Facebook.


Here's an addendum:


Allow me to push the argument a little further - men who row and fish on the outside of the boat (private sector) find it more and more difficult to feed a whole family, while men sitting in the middle of the boat (public sector) vegetablize themselves (sou-shoku-kei?) and grow in proportion, in the process slowing every day a little bit more the speed of the whole boat and making it more and more difficult for the private sector to row to keep the boat afloat and fish to feed all in the middle. Due to the lack of competition in the public sector and the over amount of competition in the private sector, most men loose their edge and/or their talent, and as a direct result, women tend to less trust men on a general social basis and find themselves choosing to work directly to provide for their own income. This translates into fewer kids per family, less couples, women wanting out of the system, more and more men not buildi ng up the strength to be able to support and feed a wife along with 3? 5? or even more kids, etc etc... A lot of people in Japan think that Chinese service is of a lesser quality, just because... well, just because, people there, are, well, see, they are "Chinese". Nothing to do with the geography or nationality if you ask anyone rational. People in China just spent decades bathing in a socially corrupt environment with tons of central planning and rotted ideas "a la" Mao - so the "social structure" was "the only" reason why Chinese are on average less up-to-date with "quality service" than some of their Japanese counterparts who have been used to "private competition". But the Chinese have been catching up (big time) in speed (at least since the end of the cultural revolution around 1976). Same with the Soviet Union. Many think the Soviet Union fell just because - well, see, it's easy, Soviet failed cause they were all... Russians. At least that's how most school bo! oks will almost attempt to portray things. Funny how so many today still think all they need to do is simply replace Lenine with someone smart and eloquent like Ozawa or with Obama to make it all work. Lenine spoke 7 languages. Not sure how many Obama & Ozawa speak but I bet the number is a tiny bit closer to... 1?