Japan and LT Bonds

[AdamA]

I heard Peter Schiff saying that he thinks the Japanese will begin to sell off their 900 billion dollars worth of US debt in order to finance the repair of this disaster.  He thinks that this will be very bearish for LT bonds.

To me, it seems like one of those things that sounds very logical, but is unlikely to play out for reasons yet to be obvious.  "Too logical to be true," as are many things in economics.

Any opinions?

[moda0306]

I tend to be skeptical of the "eventually foreigners are going to get sick of our debt" arguments, but this is a little different... I think I still agree with you, though.

[Gumby]

We've been over this before. A country like Japan may want to sell the bonds, but they would have difficulty selling all of those bonds for the simple reason that they would have trouble finding a buyer of that size (i.e. they would have to sell those bonds to another country). And even if they did find a buyer... some other country would simply own that debt. I wouldn't listen to such senseless predictions. Peter Schiff is probably just trying to temporarily push the price of Treasuries down so he can buy some.

[Lone Wolf]

We've been over this before. A country like Japan may want to sell the bonds, but they would have difficulty selling all of those bonds for the simple reason that they would have trouble finding a buyer of that size (i.e. they would have to sell those bonds to another country). And even if they did find a buyer... some other country would simply own that debt. I wouldn't listen to such senseless predictions. Peter Schiff is probably just trying to temporarily push the price of Treasuries down so he can buy some.

The concern is that in order to attract enough buyers, Japan would need to offer a lower selling price than the current market rate.  That's where the bearishness comes from.

The argument is that Japan is going to require some of these savings be used to rebuild her infrastructure.  If you buy the idea that Japan will try to sell Treasuries and that she'll succeed in finding some buyers, the bearish prediction doesn't seem unfounded.  If you offer a cheap enough price, there is always a buyer.  Price will be a matter of how desperate the seller is and how eager the buyer is.

I have no idea whether any of this will actually happen.  Therefore I keep my LT Bonds portion in balance (even though it is far from my favorite PP asset.)  But I do believe that if Japan starts selling US Treasuries then we are very likely to see QE3, QE4, QE5, QE... well, you get the idea.

[MediumTex]

Japan will just do QE74 if it needs more money.

The yen is stronger than ever so there is little risk right now in printing more money.

No need to sell treasurys.

Peter Schiff is like a toy that makes a small number of sounds, all of them annoying.

[moda0306]

Peter Schiff is like a toy that makes a small number of sounds, all of them annoying.

Jesus, MT, you make me laugh sometimes.  You are an analogy machine the likes of which would make Dennis Miller blush.

[Storm]

In the last 2 days, we've seen the LT bonds take their traditional role as a "flight to safety" has begun.  World crises are only bullish for LT bonds.  I suspect Japan will do better to print money to finance reconstruction, and let the LT bonds ride, profiting from the increase in value.

What really cracks me up, if it wasn't so wrong, are the Keynesians who keep saying an earthquake is bullish for Japan due to reconstruction spending.  No nation ever got rich from a natural disaster.

[moda0306]

I don't think Keynesians would say that.  Krugman admits war is awful from a productivity/wealth point of view, but as far as getting the positive feedback loop of employment and private balance sheets back on track it had a tendency to work.  We ran up HUGE defecits during the war build ships, blow things up, and send people to die... I'm sure Keynesians would rather use that debt to build schools and infrastructure.  The thing is, we had a couple of great decades employment-wise after the war and after running up huge amounts of debt, which I doubt most Austrian's would have predicted.

[Gumby]

If you buy the idea that Japan will try to sell Treasuries and that she'll succeed in finding some buyers, the bearish prediction doesn't seem unfounded.

I don't buy it. Think this through.

First, $900 Billion is a LOT of Bonds. Take a look at the last 30-year Treasury auction and see how much debt the US Treasury was able to sell. $900 Billion is an enormous amount of Treasury bonds. Absolutely enormous. Japan can't give the bonds away for next to nothing, because that will defeat the purpose of the sale. If they drive the price down, they can't achieve their goal of raising enough cash. So, unless another country comes along and needs to buy that many Treasuries (due to trade imbalances or what not) Japan isn't going to be able to find the buyer that will give them the prices that they need.

So, they would have to sell the bonds in small batches and continuously reduce the value of their remaining bonds the more they sold. So, their $900 Billion investment would be far, far less valuable if they reduced the price to bargain levels. It's just not going to happen. No other country needs to purchase that much debt! There's just not that much demand for it.

And then if Japan were somehow able to sell all of their Treasuries, they would just have a pile of relatively worthless US Dollars that they would need to trade for extremely valuable Yen. This would make the Dollar even more worthless and the Yen even more valuable. By the time they were done going through this ridiculous exercise to raise capital, they wouldn't find themselves with a smart way of raising Yen.

And even if they did all this — which they won't — and trashed Treasuries as well as the Dollar and raising Treasury yields in the process, guess which asset would rally? Meanwhile, Japanese businesses would be hurt by a weaker Dollar.

There is no reason for Japan to sell its Treasuries. It would be an incredibly inefficient way for them to raise Yen.

I really do cringe whenever I hear people make predictions like this. As if some guru goes on TV, or on record, to give his opinion just to help the little guy who's tuning in. Give me a break. Anytime you see a guru making a prediction they are either hoping to land a once-in-a-lifetime guess that they can dine out on forever, or they are trying to move the market in a certain direction. They certainly aren't doing it for you and me.

[TBV]

I don't think Keynesians would say that.  Krugman admits war is awful from a productivity/wealth point of view, but as far as getting the positive feedback loop of employment and private balance sheets back on track it had a tendency to work.  We ran up HUGE defecits during the war build ships, blow things up, and send people to die... I'm sure Keynesians would rather use that debt to build schools and infrastructure.  The thing is, we had a couple of great decades employment-wise after the war and after running up huge amounts of debt, which I doubt most Austrian's would have predicted.

Real GDP doubled from 1940-45, then fell about 10% after the war. During that postwar period, federal expenditures fell about 70%. GDP regained 1945 levels in 1950 and accelerated quickly during the Eisenhower years, when increases in the base money supply were kept in check.  I think the Austrians would be right at home with that scenario.

[moda0306]

When dealing with ceasing such massive expenditures and overemployment (we actually had a negative unemployment rate because people who didn't want to work were working) you're going to have a bit of a contraction.  The point was, whether you call the spending during the depression large or moderate, the spending during the war was MUCH more. Maybe it took a short while for the economy to reach equilibrium after the war, but it still stand that the following are pretty much the facts:

1) During the depression a Keynesian would have argued for more stimulus to lower unemployment despite running defecits, and an Austrian would have argued for balanced budgets.

2) We had "moderate" stimulus during the depression, and "HUGE" stimulus during WWII.  Unemployment didn't improve significantly until after the latter stimulus, which forced our debt/gdp ratio to about 110% (if memory serves).  Austrians would usually argue that any unemployment gains obtained during a period of massive federal stimulus and the misallocation of resources would be short-lived, and the economy would revert to its previous trough due to said misallocation and having to finally service and pay back the debt it took to stimulate (and misallocate).

3) When the stimulus ended, I don't think a reduction in GDP and drop (from negative) in employment rates is a surprise to economists on either side given the re-direction of resources and an end of a huge war.  To be fair to Keynesians, they are for using defecits to improve the private economy during recessions, and then eliminating those defecits when the economy recovers.  The economy had recovered (GDP up, unemployment down... really TOO far) and, as Keynes had said to do, spending was pulled back.  The stimulus that lowered unemployment and increased GDP disappeared and the economy did well on its own at that point.  Austrians would have argued that it should have pulled the economy back into a terrible recession.  I don't think I'm unfairly mischaracterizing arguments here.

[moda0306]

I really don't see Austrian's "calling" the years of prosperity through the 50' and some of the 60's given unprecedented stimulus, defecit spending and subsequent servicing, government intervention, a breaking of the gold standard, and astronomical tax rates and inefficient allocation of resources that happened during our recovery from the depression... whether any of those were the cause of the recovery I'll leave up for debate.

Maybe we should try things in the same order as we did during the war... massive stimulus that will effectively bring us to debt at 110% of GDP, the subsequent overemployment of our workforce and improvement of private balance sheets, and then lets cut spending when we reach that point and balance the budget and hope for self-sustaining GDP growth after that point.... do you really see Austrian making an argument that that could work?  Or does that sound more like a Keynesian argument?

[MediumTex]

I really don't see Austrian's "calling" the years of prosperity through the 50' and some of the 60's given unprecedented stimulus, defecit spending and subsequent servicing, government intervention, a breaking of the gold standard, and astronomical tax rates and inefficient allocation of resources that happened during our recovery from the depression... whether any of those were the cause of the recovery I'll leave up for debate.

Maybe we should try things in the same order as we did during the war... massive stimulus that will effectively bring us to debt at 110% of GDP, the subsequent overemployment of our workforce and improvement of private balance sheets, and then lets cut spending when we reach that point and balance the budget and hope for self-sustaining GDP growth after that point.... do you really see Austrian making an argument that that could work?  Or does that sound more like a Keynesian argument?

When trying to explain post-WWII prosperity, isn't it also important to remember that the U.S. had a new industrial infrastructure that was more or less intact and an eager population ready to make it productive, while the rest of the industrialized world had economies in ruins and people in shock.

If I got to blow up the rest of the world's infrastructure while keeping mine intact, I would imagine that I would have a great competitive advantage for a few decades afterward as well.

[moda0306]

Sorry to hijack this thread, but this is important in my opinion.  Here is a chart showing the national debt through 1950.  http://www.treasurydirect.gov/govt/repo ... histo3.htm As you can see, the debt (and therefore defecit spending) didn't really skyrocket until the war... neither did employment rates get out of their duldrums.  Then, after the war, it really wasn't reduced a significant amount... which would signify balanced budgets, or at least relatively so.

Isn't that the Keynesian recipe?:

1) Massive stimulus and deficits in the face of recession and unemployment
2) Full unemployment is achieved, GDP is back up
3) Eliminate defecits and let the positive-feedback loop work

One may conclude from this period is that 1) defecit spending led to full employment (actually BEYOND full employment), 2) GDP growth and the subsequent self-fulfilling economic activity offset reductions in defecit spending and debt servicing was completely manageable.

And that was WAR!!... imagine if that would have been schools, roads, etc.

[TBV]

I really don't see Austrian's "calling" the years of prosperity through the 50' and some of the 60's given unprecedented stimulus, defecit spending and subsequent servicing, government intervention, a breaking of the gold standard, and astronomical tax rates and inefficient allocation of resources that happened during our recovery from the depression... whether any of those were the cause of the recovery I'll leave up for debate.

Maybe we should try things in the same order as we did during the war... massive stimulus that will effectively bring us to debt at 110% of GDP, the subsequent overemployment of our workforce and improvement of private balance sheets, and then lets cut spending when we reach that point and balance the budget and hope for self-sustaining GDP growth after that point.... do you really see Austrian making an argument that that could work?  Or does that sound more like a Keynesian argument?

When trying to explain post-WWII prosperity, isn't it also important to remember that the U.S. had a new industrial infrastructure that was more or less intact and an eager population ready to make it productive, while the rest of the industrialized world had economies in ruins and people in shock.

If I got to blow up the rest of the world's infrastructure while keeping mine intact, I would imagine that I would have a great competitive advantage for a few decades afterward as well.

You beat me to the punch, MT. I was thinking that external factors like the huge trade surpluses we enjoyed until the 60's had a big impact.  In Britain, which was more Keynesian than the US at the time, things were not so rosy.

[moda0306]

MT & TBV,

I realize that.. and I read an article regarding how our balance of trade really didn't change much after the war and therefore the reconstruction of Europe wasn't that much of a stimulus to the US.  It was pretty convincing and I'm hardly doing it justice, but I can't remember the source.  The real test would be to see if Europe/Japan were importing a lot of US produced goods at that time... and could very well be so.

I think it's overexagerated a bit the gains of "blowing everyone else up."  Do you guys really think that after the artificial stimulus (war)brought unemployment rates down that the only thing keeping the U.S. from the immediate Austrian reversion back to despair and debt service is foreign demand?  Despite reconstruction that needed to be done, I can't imagine crippled economies demanding steel and natural resources would have been better than thriving economies demanding more traditional produced goods.

Someone should take a look at the trade balance statistics of the years in question... this is interesting.

[Lone Wolf]

If you buy the idea that Japan will try to sell Treasuries and that she'll succeed in finding some buyers, the bearish prediction doesn't seem unfounded.

I don't buy it. Think this through.

Sure, I agree that it's an enormous "if".  (And certainly Japan wouldn't sell all of its Treasuries under almost any circumstance.)  I was only pointing out that even if "some other country would simply own that debt", they'd certainly demand a higher yield to do so.

On the other hand... what if a horde of Permanent Portfolio adherents needs to rebalance into LT Bonds all at the same time?  Maybe there's Japan's buyer.  

[moda0306]

Further, if trade-defecit is such an important issue (I can see it being quite important), isn't this where currency devaluation plays a large role?  Would China have exported and grown so much if it hadn't devalued its currency?

[Lone Wolf]

I don't think Keynesians would say that.  Krugman admits war is awful from a productivity/wealth point of view, but as far as getting the positive feedback loop of employment and private balance sheets back on track it had a tendency to work.  We ran up HUGE defecits during the war build ships, blow things up, and send people to die... I'm sure Keynesians would rather use that debt to build schools and infrastructure.  The thing is, we had a couple of great decades employment-wise after the war and after running up huge amounts of debt, which I doubt most Austrian's would have predicted.

This Keynesian idea of war and natural disaster being good for the economy is one of the most dangerous ideas I know of in all of economics.  I remember arch-Keynesian Paul Krugman even finding a "silver lining" just a few days after 9/11.  The statement is quite the mixture of bad economics, poor taste, and historical revisionism.

Ghastly as it may seem to say this, the terror attack -- like the original day of infamy, which brought an end to the Great Depression -- could even do some economic good.

During the war, prosperity was (of course) nowhere to be found.  World War II was a time of great sacrifice and poverty.  The only book you need to read to tell you that is a ration book.

What ultimately got us on our feet?  After the war, you saw an end to the policies of Hoover and FDR that had dragged the Depression out for well over a decade (nobody slaughtering pigs and burning crops to force prices up, as one small example.)  While much of the rest of the world was a smoking ruin, the United States had a fully intact industrial base primed and ready to go.  Women joined the American workplace for good, yielding a permanent increase in productivity.

With war winding down, the workforce expanding and terrible economic policies of the Depression dismantled, the United States was primed for economic success in the 1950s.

Consider on the other hand this idea that war brings prosperity.  If this were true, why not take all of our unemployed labor and build an enormous, unpopulated city somewhere in the Nevada desert once per year?  We could then use these same unemployed people to pilot bombers over the city and bomb the whole area back to the stone age.  It's clear (or should be) that such an act is simply a squandering of resources.  Why would we expect war to ever make us rich?

Bastiat spoke of That Which is Seen and That Which is Not Seen.  What Krugman "sees" is all of the economic activity resulting from rebuilding after a horrific loss of life and property like the Japanese earthquake or September 11th.  That which Krugman "does not see" (but nearly everyone else does) is the lives, property, and value destroyed in exchange for this "economic good".  The recovery effort just endeavors to bring us back to where we were before.

[moda0306]

I think Krugman has repeatedly stated that war is horrible for an economy on most levels.  His point was that the vastly increased spending that happened during WWII vastly decreased unemployment and increased GDP.  When that period was over, as most Keynesians call for, the defecit spending ceased.

Let's forget war for a second... the point is, massive defecit spending vastly improved unemployment and private-sector balance sheets, and when that spending stopped, the economy grew on its own.  We can try to find quotes and quips about certain opinions of war or find examples of horrible price controls (not anything keynes really pushed for is it), but that's not really relevant.  What I'm merely pointing out is the evidence that Keynesian stimulus in the form of a giant jobs program stimulated the economy to a point of being self-sustaining.

So I ask you folks, what caused unemployment to go negative during WWII if not massive government spending?  Further, if we can do the same thing now, and have a sustainable recover afterwards by then and only then eliminating the defecit spending, why don't we? 

[moda0306]

http://www.infoplease.com/ipa/A0104719.html
http://www.treasurydirect.gov/govt/repo ... histo3.htm

Follow those two... only when government spending VASTLY increased did unemployment drop into single digits.  If that drop happened then due to a giant jobs program (war), then why can't it happen today?  Please don't tell me you think it's just a coincidence that unemployment fell right as deficit spending skyrocketed.  If WWII had been a public works project, what would an austrian have argued?  My Guess: "This may decrease unemployment initially, but the accumulation of huge debt and misallocation of resources is going to decrease investor confidence in the recovery and we'll fall into the same duldrums we were in before... we're just delaying the inevitable."

Also, why, as Austrians argue would happen, did the US economy not sink under the weight of their debt at 110%?  My guess?  Increased GDP, low unemployment, and healthy private-sector balance sheets.

I'm trying to give the Austrian's a fair shake here... so please don't call the Keynesians a bunch of war-mongers... it's simply not true.

[Storm]

I don't think Keynesians would say that.  Krugman admits war is awful from a productivity/wealth point of view, but as far as getting the positive feedback loop of employment and private balance sheets back on track it had a tendency to work.

I said no nation ever got rich from a natural disaster.  I never said war.  Wars have a tendency to boost economic output by putting people to work, dropping unemployment, and getting a lot of money flowing through the system (workers have to spend their paychecks, it's their patriotic duty to help the war effort) 

[moda0306]

FWIW, I can find several Austrian quotes about how we didn't have a housing bubble due to the risks of inflation and the collapsing dollar.  Not all austrians thought that way, but many did.

I am not a Keynesian and not trying to rag on Austrianism... just trying to hold the latter accountable right now as most people here are of that religion.

[Lone Wolf]

If WWII had been a public works project, what would an austrian have argued?

They'd have probably said we'd see a much faster recovery if you simply keep burdensome and foolish regulation to a minimum, reduce government spending and the tax burden... then simply let events run their course.  This is the playbook that was used in 1920 to great effect by Harding.  The Keynesians would argue that this recovery was thanks to an injection of liquidity by the Fed, but whichever way you see it, the recovery in '21-'22 from that severe recession was extremely impressive.

Full employment in and of itself is not a useful goal.  The point is to employ people in productive work.  Killing Nazis is productive, to be sure, but you're much, much better off if the Nazis were never there in the first place and you simply follow sensible economic policies.

Incidentally, that's why I point out FDR's bad policies.  It's not because the Keynesians recommended them all but more to show how much better off the economy was without them (and why their absence greatly aided recovery.)

I'm trying to give the Austrian's a fair shake here... so please don't call the Keynesians a bunch of war-mongers... it's simply not true.

I don't think much of Krugman, but I doubt very much that he is a warmonger.  However, he is propagating an extremely dangerous misunderstanding of what war does to an economy, one that paints war as an economic benefactor.  This is false.

[moda0306]

If you want "quick" recovery take a look at the correlation of defecit spending and unemployment... and then the bridge to prosperity.  Unemployment was taken from 15% to 4% in a blink of an eye because of massive defecit spending.  Let's say we could replicate that today by taking it from 10% to 4%... but (and I agree) these people are now not being productive either improving infrastructure, or digging ditches or filling them in... well if the late 40's is any indication, once you've reached full employment, you can cut back the defecit spending (as keynes argued) and you will have a self-sustaining recovery.  Many of FDR's policy's may have been immoral and inefficient, but when you look at the numbers, REAL stimulus (the kind Austrians would have been crapping their pants about) brought down unemployment EXTREMELY fast, and then when unemployment was low, defecits were reigned in, and the economy was "fixed" and moved to what we'll both agree are more productive uses.