Lack of Willpower…

Unable to resist posting this.

My evidence for my theory that optimism is the modern disease:

One of Britain’s most closely watched economic indicators has heavily overstated the quantity of high street sales over the past two years, the Office for National Statistics admitted on Friday.

Britain’s supplier of official statistics conceded that since the financial crisis began in August 2007, it has overstated the volume of retail sales growth by 56 per cent.

Well, i suppose there is always the possibility of hiding behind incompetence… and besides, it’s not like anything is based on the income generated from VAT, or measures of disposable income.


Bond Talk

There has been more bond talk[1] this weekend. The following rather cryptic (in my opinion) Reuters wire snippet has a lot of people worrying:

[11:41 US GOVTS: Real Money Using Coupon Passes To Exit; FM Blast]

Boston, May 21. There apparently is a new wrinkle to the intermediation trade between buying from Treasury to sell to the Fed with real money, including central banks, now in on the act. Indeed, several Street sources relay central banks were aggressive offers into this morning’s coupon pass, with one letting go of a large block of old 5-years. Other offers too are coming in from embedded Asian real money longs — in the higher coupons — also looking to sell size without unduly upsetting the market, and especially considering the illiquidity in off- the-run bids from the Street.

Which pretty much says that central banks (European and Asian) are using the US Treasury’s bond auctions to dump existing holdings. Meaning that they are getting creative at dumping long term treasuries, without unduly freaking the market.

Denninger comments:

So now what Ben?

If Foreign Central Banks are selling into Ben’s bid then the game is literally weeks or even days away from being over.

I have written for over a year about the potential for a bond-market implosion and subsequent economic collapse.

and i can see why he might think that… if the real money is looking for the exits, the Fed will be left holding all the long term (10 to 30 year?) debt, with the rest of the world closing out at short-end.

However, i don’t think this game is going to play out in the suddenly apocalyptic fashion that people like Denninger (and many like him) fear. The holders of these bonds (mostly China, Japan, and other asian central banks) know that if they crash the dollar, debt they hold is going to be worthless. My guess is that they are going to push this as far as they can without actually letting it break. Over time they’ll push the yield higher and higher, hoping that they can bleed America dry without actually sending it into cardiac arrest.

If you’ve been watching the yield on the ten and thirty year you’ll see that they are still heading up. And that has to be halted or it’ll set off a next wave of defaults in the housing market… certainly agree with the question, “So now what Ben?”

As an aside, there are a bunch of stories[2] out there about the rating agencies (S&P, Moodys, Fitch, etc) downgrading the national debts of the US, UK, and Japan. This looks like a side- show to me – these are the same clowns who stuck AAA ratings on MBSs, and obviously don’t understand that Japan doesn’t give a flying about it’s debt rating because it’s not borrowing externally… ignore it, and keep an eye on that bond yield!

[As always, Cynicus Economicus is worth a read.]

1. Bond market Week of Reckoning, Lighten upBond Market To Bernanke and Obama: F&$k You

2. UK credit rating under threat as debt hits £8.5bnWhy US Debt Rating Poses Such a Big Worry to InvestorsTreasurys fall further ahead of auctions

Mining for Growth

For quite some time i’ve been looking for economic data on Japan. Much of the analysis written by western commentators is interesting, but often written with a sense of puzzlement, which is exactly what i’m attempting to overcome. There is also a tendency to attempt to tell Japan what it is doing wrong. This has run both ways, during the bubble there were no shortage of column inches / books describing the miracle… we all love a winner – right up until the hustle is revealed.

A few days ago i stumbled up the Japan Economy Watch blog. It’s put together by three non-japanese, is very data heavy, and appears to be well sourced / researched. I’m not going to tell you it’s great because i haven’t read through all of it, and certainly haven’t reached any new conclusions.

What prompted this renewed interest in Japan was last weeks reported fall in GDP:

There is no way to sugar coat the first quarter Japanese gross domestic product figures released on Wednesday: they are breathtakingly bad viewed from virtually any angle.

The economy shrank by a record four percent in the quarter, or an annualized fall of 15.2 percent, leaving the economy no bigger in real terms than it was in 2003.

The above quote, from Forbes, left me pretty confused. I was here in 2003, and i’ll be honest, it wasn’t much different from now. There might be a few less people on the trains, but the ridership numbers for my line are still increasing. There might be a few less people in Shibuya, sometimes you can catch a glimpse of the pavement… Which isn’t to say that it’s sensible to judge the economy of a country based on a couple of observations in the capital, but the impression that quote gives is that homeless should be lining the streets (yes, there are more than there were 5 years ago), soup kitchens, street urchins running through black snow without shoes on, etc. Er, no.

Here are two pages from the fancy new Wolfram Alpha:

[I don’t seem to know how to link directly to graphs… look at both the linear and log versions, they are revealing.]

What i take away from that comparison is that, over the last ~40 years both the UK and Japan have done a lot better than the US in terms of increasing GDP per capita, and that the growth in US GDP is clearly unsustainable. Any graph that shape (exponential increase) is inevitably going to be run into limits. Looking at the population graph over the same period, it make sense why the US has felt the need to push for a larger economy – it has more mouths to feed.

It’s not clear to me what is leading indicator: allowing the population to increase rapidly, causes the GDP to increase rapidly, or the rapidly increasing GDP, allows the population to rapidly increase. And, there is always the argument that the two are unrelated… but it’s hard for me to take seriously.

This raises an interesting question: is Japan so horribly worse off than it was in 2003? The population is indeed older, and therefore less people are supporting the aged, so it can hardly be an improvement. However, i’m having a hardtime seeing it as being a massive hardship to be back where things were 5 years ago.

The real problems in Japan are things like the construction state, the corrupt bureaucracy, the reliance on fossil fuels for 80% of energy, the loss of ability to feed itself, it’s poisoned relationships with the rest of asia. As far as i can see an increasing population let the government hide from all these issues, but now they are going to be bought into stark relief. Unfortunately there is very little chance of the much needed radical change happening in the absence of disaster.

I keep telling myself that (intellectually) this is a great time to be alive – we’re going to see if humanity is up to the challenge of sustaining itself in a much more constrained world. The planet really has got a good deal smaller with so many of us camped out here…

Update: Hmm. The data doesn’t immediately support my hypothesis. That’s a shame. Now i’m reduced to trying to find income distribution data for Japan (the US is easy, and obviously a basket case: First two papers two read:

Unfortunately i’ve now forgotten what point i was trying to make, and am just enjoying reading the paper trail!