REVISITED COMPARISONS TO JAPAN The entire world has drawn its attention to the United States and its co-called economic recovery. The recovery itself seems to have been dictated and shoved down our throats by US Govt leaders, their downstream agencies, the unaware press & media, brokerage sell-side analysts, and economic analysts of questionable objectivity and detachment.
When under 50% of Americans canvassed by national pollsters vote “NO” to the administration handling of the economy, one must ask tough questions like “is a recovery really underway?” The answer is not so clear. Rising residential real estate values, leveraged carry trade profits, and corporate cost reductions through cuts and Asian outsourcing hardly leave the observer convinced on the health of the engines of income sources and newfound prosperity. Rising debt levels serve as the foundation of capital flow for both the federal operations and household operations, a certain marshland upon which the foundation for recovery rests.
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The real economy has its own extreme dependence upon cheap borrowing costs. Zero percent deals continue for cars are likely to continue perpetually as sales have slumped. Detroit automakers announced June sales declines over 10%. Large electronic appliance sales and furniture sales still depend upon zero deals. These are not likely to go away.
The experts might expect easy finance deals to discontinue in a rising rate environment, but we are likely to see even more desperate credit terms in reaction to sluggish sales. The US Govt might be engaged in their own desperate sanitized initiative with both Fanny Mae mortgage bonds and Treasuries. Their printing press is now on steroids. The ultimate source of most cheap capital is the bond market (whose liquidity is still huge), the absurdly low prime rate for reliable corporate borrowers, and certainly a slew of devices such as rate swap contracts to stir the lethal debt brew. Banking leaders boast about international vendor financing by Asia to facilitate foreign trade dependence. This “flexibility” is mindless. Is a loan shark who doubles as a crack cocaine dealer also flexible?
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UNFAVORABLE COMPARISONS TO JAPANThe USA compares badly to Japan, despite what is published.
For over two years American business leaders, financial leaders, brokerage analysts, media pundits, and investors have denied that the United States is gradually entering a Liquidity Trap bearing strong resemblance to the one that has ensnared Japan’s economy since 1990. Such denials seem patriotic at best, and obtuse at worse. The trap of low interests is now very evident inside the USA. It is not characterized by low liquidity, but rather high liquidity. Official monetization initiatives are kept secret. Suspicions rage that both Fanny Mae mortgage debt and US Treasury debt are in the process of being monetized. This means the US Govt officials, whether from cabinet ministers in the Dept of Treasury, or the independent Congressional contractor called the Federal Reserve, are printing money and buying mortgage and federal debt securities. Can you say “Weimar”? The tight grip of the trap will become crystal clear over time. Interest rates will remain low, since their rise will slow the economy and prompt a bond response. Japan was stuck in the trap for over a decade. Their savings grew every year. Many companies were plowed under, or absorbed in conglomerates. Their bank system grew out of the underwater status when the Nikkei stock index was lifted. Japan slugged its way through the trap. The USA believes it can become the first nation in history to print its way out of the trap. Ain't gonna' happen. When the trap no longer holds the bond market, interest rates will accelerate in a stagflation worse than the 1970 decade. At that time, the risk of foreign flight will hit climax.
next: SPECIFIC CONTRASTING DIFFERENCES
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