Japan leading the pack in rising debt at 200% debt to GDP...

This article ties in with my recent article on the obsolescence of human capital... remember Japan has the jump on nearly the whole world when it comes to automation and the the impact on their economy as their workforce transitions from 70+ hours of hard salaryman labor to 40+ hours a week of leisure time.  Hey if you aren't working and you aren't saving, you must be spending. 

Japan's Cheap Debt Could Cost the World Dearly

By CHARLES HUGH SMITH Posted 5:30 PM 08/04/10 Economy, Investing

Comments Print Text Size A A A

EmailMore

Japan has been piling up debt for years. Over two decades, the government of the world's second-largest economy has borrowed staggering sums of money to fund domestic stimulus spending. Much of the spending has produced public goods of questionable value, the Japanese equivalents of "bridges to nowhere."

This profligate borrowing has left the island nation with ratio of debt to gross domestic product (GDP) nearing 200%, almost double that of troubled Greece (113%).

Japan's government debt has more than tripled since 1992, and that doesn't include local government borrowing, the equivalent of state and county municipal bonds in the U.S.

How has Japan been able to sustain a debt load that would have crushed other economies long ago?

Saving -- and Retiring

The answer lies in a dynamic few nations share: a populace which saved an extraordinarily large percentage of its income, and then invested those savings in its own government's debt. More than 90% of Japan's government bonds are owned by its people.

In effect, Japan's soaring debt was self-funded. As long as the Japanese people saved trillions of yen and handed them to their government for 1% interest, then the government had a cheap and seemingly limitless supply of low-cost money to tap.

But demographics are finally putting the squeeze on this arrangement. As Japan's population ages, the nation's savings rate is plummeting. A recent report from the McKinsey Global Institute summed the situation up succinctly: Japan: The World's Savers Retire.

The consequences are visible in this chart, which shows that Japan's savings rate is slowly dropping to zero.



Why is the savings rate falling so dramatically? As workers retire, they stop saving as their income declines in retirement. They need cash to live and cover the costs of aging -- additional health care, home care, etc. -- so they sell their investments (often Japanese government bonds) to raise cash. This puts double pressure on bonds: buying dries up and selling accelerates.

Japan Faces a New Reality

The net result of this demographic trend toward lower savings means Japan's government must soon start competing on the world market for capital. In other words, it must start selling its bonds to international investors since its own savings will no longer be substantial enough to fund its enormous debt.

For two decades, Japan's fiscal policy has operated on the assumption that the government can always borrow money at very low interest rates. But as domestic demand for government bonds declines, the government will have to raise interest rates to attract buyers.

Currently, Japanese ten-year Treasuries currently yield 1.3%, compared to U.S. bonds yielding 3.5% or German bonds offering 3%. Facing international competition for capital, Japan will have little choice but to double or even triple the interest rate paid on its bonds. This jump in servicing costs will place impossible pressures on the nation's budget, as roughly 40% of all tax revenues have long gone to paying interest on Japan's ballooning debt.

Global Implications

The consequences of Japan's declining savings rate and the necessity of paying higher interest rates will not stay bottled up in Japan. As the second-largest holder of U.S. government debt behind China, Japan may decide to start selling some of its hundreds of billions of dollars in U.S. Treasuries. That would put pressure on the U.S. Treasury, which already must sell $1.5 trillion in new bonds every year, in addition to rolling over hundreds of billions in bonds which mature.

As Japan's need to sell bonds on the global market increases, the world may see an increasingly desperate competition for global capital arise, as all nations seeking to fund their sovereign debt must raise the yield (the interest rate) they pay on their bonds. That would dramatically raise the interest costs each government pays annually, further pressuring their other spending priorities.

If Japan's cheap debt balloon finally does pop, the consequences will reverberate throughout the global economy.

Tagged: bond yields, debt to GDP ratio, declining savings rate, demographics, Japan, Japan national debt, Japanese bonds, Japanese debt, McKinsey Global Institute, sovereign debt

Print

EmailMore

Read more >>

Aha, I guess these guys read my Token Economy Article... too!

Dollar should be replaced as international standard, U.N. report says By Gabriella Casanas and Mick B. Krever, CNN STORY HIGHLIGHTS U.S. "dollar has proved not to be a stable store of value," report says Dollar under increasing scrutiny since U.S. entered recession U.N. report supports proposal to create standardized international system Under proposal, countries would no long have to buy up foreign currencies RELATED TOPICS Economic Issues International Monetary Fund Asia New York (CNN) -- The dollar is an unreliable international currency and should be replaced by a more stable system, the United Nations Department of Economic and Social Affairs said in a report released Tuesday. The use of the dollar for international trade came under increasing scrutiny when the U.S. economy fell into recession. "The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency," the report said. Many countries, in Asia in particular, have been building up massive dollar reserves. As a result, those countries' currencies have become undervalued, decreasing their ability to import goods from abroad. The World Economic and Social Survey 2010 is supporting a proposal long advocated by the International Monetary Fund to create a standardized international system for liquidity transfer. Under this proposed system, countries would no longer have to buy up foreign currencies, as China has long done with the U.S. dollar. Rather, they would accumulate the right to claim foreign currencies, or special drawing rights, or SDRs, rather than the currencies themselves. The special drawing rights would be backed by a basket of currencies, which would make them less susceptible to volatility in any one currency. And because the value of a special drawing right is defined by the IMF, changes in the value of any one currency could be adjusted for. These initiatives, supported by U.N. Secretary-general Ban Ki-moon, are meant to help sustain the international trade and financial systems that will allow less-developed countries to participate and integrate into the global economy. In addition to the proposed reforms regarding international currency, the survey also offered guidance on increasing social well-being. The survey said that "the number of the poor in the world living on less than $1.25 a day decreased from 1.8 billion in 1990 to 1.4 billion in 2005, but nearly all of this reduction was concentrated in China." The number of poor increased in sub-Saharan Africa and South Asia over the same period. Income inequalities within countries have increased since the early 1980s with few exceptions, the report said. "There's too little aid being provided, it's too fragmented, and it's too volatile in terms of the resources that are flowing to countries," said Rob Vos, director of the development policy and analysis division of the U.N. The survey projects that by 2050 the population will be at 9 billion, with 85 percent living in developing countries, and the global economy will have to sustain a system that will allow for "decent living." By 2050, one of every four people living in a developed country and one in every seven in countries now being developed will be over age 65. The fast ageing of the population will call for proper pension and health care systems that are sustainable.

Read more >>

Gold, in them there vaults!

Glad to know I was missed!

Sorry for the long hiatus, I took a couple of days off for Father's Day weekend and ended up stretching into a week due to a nasty microsoft virus which i finally gave up trying to fight and just wiped and reinstalled...  there has to be a better way.  My daughters' MAC nary an issue, expensive, but money well spent!

I'll be catching you all up from this point forward.  For now this is a good thing to know.  The more Gold goes up the better off the dollar as I said in Token Economy.

Curiously the UK is not on the list and they should have made it, just to highlight the disastrous trade Gordon Brown executed while Exchequer.

http://williamtellstradecraft.blogspot.com/2010/05/token-economy-system.html

Where's All the Gold? Start with the Federal Reserve

By DAN BURROWS Posted 11:00 AM 06/23/10 Investing, Currency

Comments: 82 Print Text Size A A A

EmailMore

The bull market in gold shows no signs of abating, as investors big and small pile into bullion, coins, mutual funds and exchange-traded funds (ETFs) -- and who can blame them? With the world awash in more than $200 trillion in household, corporate and government debt, it's not unreasonable to question the long-term value of fiat currency like the almighty dollar.

It sure looks like a bunch of country's central banks have caught the gold bug. The dollar might be the world's reserve currency, but something about the U.S. being $13 trillion in debt -- or roughly the equivalent of its gross domestic product -- has other nations taking on greater reserves of the yellow metal.

Central Bank Gold Reserves Are Growing

Gold reserves held by countries now total 27,069 metric tonnes, up from 26,356 a year ago, according to the latest findings of the World Gold Council, an industry group that tracks all things gold-related. Gold futures, meanwhile, hit a record closing high of $1,258.30 an ounce last week on the Comex division of the New York Mercantile Exchange (CME), up 35% year-over-year, making some big central bank moves look pretty canny, indeed.

The U.S. government remains by far and away the world's biggest hoarder of gold, with more than 8,100 tonnes in reserve, according to the World Gold Council. (The Fed still stores much of this wealth at the U.S. Bullion Depository in Fort Knox, Ky. And as anyone who's seen Die Hard: With a Vengeance knows, the world's biggest gold vault sits 50 feet below sea level under the Federal Reserve Bank of New York. You can even take a tour.)

After the U.S., governments holding the biggest gold reserves are Germany, Italy and France. The central banks of Germany and Italy made no changes to their gold reserves over the last year, while France pared its holdings by about 15 tonnes, according to World Gold Council data (see chart below).



Most interesting is the rapid rise of China and India as gold bugs. The Middle Kingdom's gold reserves presumably held steady at 1,054 tonnes year-over-year, according to the World Gold Council, but then secrecy is one of the communist government's strengths. It was just little more than a year ago when China revealed it had quietly purchased 454 tonnes of gold over a six-year period. That's roughly equivalent to the current holdings of Turkey, Greece, Romania and Poland combined.

India, the world's largest consumer of gold, made a splash when its central bank bought 200 tonnes from the IMF back in November. Russia, meanwhile, has been stocking up on gold for years, boosting its reserves by about 132 tonnes in just the last 12 months.

Tagged: China, Federal Reserve, gold, gold futures, gold reserves, India, record gold prices, Russia

Print

EmailMore

Read more >>

Token Economy System

I remember being fascinated about a "Token Economy System" designed and implemented in a mental hospital setting. For me, a psych major with a bent for economics this was an easy concept to grasp as it was based on the model for a “real economic system”. This novel approach to reinforcing positive healthy behaviors amongst the hospital residents was a resounding success. However, if in duplicating this system and you skipped some steps or took shortcuts you could end up with something less than desirable, like for instance inadvertently reinforcing less desirable behaviors, while at the same time squashing good behavior. Or if there was cheating or widespread counterfeiting of Tokens it would quickly lose its value and usefulness as a carrot to the residents and not have any effect on behavior whatsoever. In fact, if the price of the Token was valued high and too difficult to attain, or too low in value to even expend the effort towards garnering, you would have a breakdown in its desired effectiveness in modifying behavior. These of course are the risks to a real economy system as well.


The last time I checked, the world was no sane place, and it is now apparent to me that it has a varying number of well developed "Token Economy Systems" that reward its “captive residents” with Token's, be it Credits, Euro's, Dollars, Rymimbi... for certain "desired" behaviors i.e. wanton consumption and production at any cost. These “Token Systems” started out it quite well, but it is plain to recognize that some of the “residents” are developing some really bad habits that are causing many “other residents” to be denied their basic needs.


Here is the definition you are likely to find in a psychology journal or text book:

"Token Economy System"

A token economy is a form of behavior modification designed to increase desirable behavior and decrease undesirable behavior with the use of tokens. Individuals receive tokens immediately after displaying desirable behavior. The tokens are collected and later exchanged for a meaningful object or privilege. Source: http://www.minddisorders.com/Py-Z/Token-economy-system.html.

Not too hard to understand. Relatively simple idea, good behavior = tokens vs. bad behavior = no tokens.


It is easy to see how pervasive the Token Economy Systems are, you don’t have to look very hard. For instance, if you look at the US One Dollar Bill, it says "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE" Did you know that the One Dollar Bill as does every US dollar denominationed bill is a "FEDERAL RESERVE NOTE"? Not too long ago you could take this note and exchange it for precious metal, ACTUAL Silver/Gold. That is not the case anymore. By calling it a note connotes that it can be turned into something of value, but what is that something?


Currently the US has 8,133.5 Metric Tonnes of Gold which at $1,000 per oz. Is somewhere in the $5 Trillion Dollar range of value. As a point of reference, there is currently $24 Trillion dollars in the US Retirement System/Structure (IRA's, Kehoe's, Pension, Mutual Fund and 401k Plans), $3 Trillion or 16% of which are in 401k plans or at least were as of 2006. As of April 26th, 2010 there was close to $8.47 Trillion Dollars in M2 Money Supply, see graph below.


Of course as long as Gold goes up so does theoretically the Dollar, unless the US, IMF, Germany or China decides to sell their Gold which could have an immediate impact on the price. As far as the EURO goes, Germany, France, Italy and the EU bank have Gold Reserves that together outweigh US reserves. This lends implicit credibility to the status of the Euro, however which of these countries in their right mind would spread their Gold around. This is at the root of federalization of the Euro zone. Funny when post becomes prologue, in regard to the US and the individual states.


If anyone of these three countries decides they have had enough of the Euro AND GO IT ALONE its splitsville. Bye, bye Euro. In fact, I would anticipate more of an alliance of the Euro countries into the haves and the have not’s. Curiously Portugal (383 Tonnes), has greater Gold Reserves than the U.K. (310 Tonnes) what does this say about the credit risk of a Portugal vs. the U.K. Spain has (282 Tonnes) and with Greece (112 tonnes) it is easy to see how Greece is the odd country out. Even Turkey (116 Tonnes) has more gold.

The components of the US money supply, expressed in terms of M0, M1, M2, and M3, measured monthly from January 1959. Most recent data is February 2006 for M3, and July 2009 for M0, M1 and M2. (Note: The Federal Reserve previously published data on three monetary aggregates, but on 10 November 2005 announced that as of 23 March 2006, it would cease publication of M3)

• M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.


• M1: The total of all physical currency part of bank reserves + the amount in demand accounts ("checking" or "current" accounts).


• M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).


• M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of Eurodollars and repurchase agreements.


Every country in the world now has a "Token Economy System" but how long before the Token ceases to be perceived as real value? The U.S. as an example of too many Tokens circulating is not acknowledging that this is a worldwide affliction. Quite simply there are just too many "Token" notes sloshing around the world. Add the dynamic that this Token money is able to move 24/7 chasing the Sun, so to speak, creating huge risks in any one currency and or asset. Bubbles literally can be inflated and burst in very quick and destructive ways, literally overnight.


I found it curious that the US Government would stop collecting and publishing information on the M3 money, particularly institutional money market mutual fund balances, deposits of Eurodollars and repo agreements. I doubt of course that they stopped gathering the data, more likely they just stopped reporting because it would fill in too much detail. Likely that the M3 money is enormous and static and is inherently problematic, because it can move incredible fast.

http://en.wikipedia.org/wiki/Money_supply

If you are brave enough you can check out this Wikipedia entry on Money Supply and quickly ascertain that many industrialized and emerging markets i.e. countries in the world have increased over the last 20 years their money supply. At least doubling or trebling it. Except Japan which likely accomplished this feat in the 1980's.


I urge you to look up the definitions of “Token”, “Economy” and “System”; actually if you just refer to the “system” I encourage you to follow the jump below. This definition in itself is a system.

http://www.businessdictionary.com/definition/system.html

If you took the jump it's not so hard to understand the complexity involved once you put a framework of simple ideas and declare it a system. How it quickly becomes alive, amorphous, unwieldy and wild. Like Frankenstein a patchwork of pieces, alive but no Soul.


So I bet you are asking how the heck did we end up here, with an out of control “Token Economy System” and how can we make it better. Well the answer believe it or not lies within our learning about successful and unsuccessful implementations of “Token Economy Systems” in mental institutions. Let’s explore this a bit more.

The Purpose of a Token Economy System

The primary goal of a token economy is to increase desirable behavior and decrease undesirable behavior. Often token economies are used in institutional settings (such as psychiatric hospitals or correctional facilities) to manage the behavior of individuals who may be aggressive or unpredictable. However, the larger goal of token economies is to teach appropriate behavior and social skills that can be used in one's natural environment. Special education (for children with developmental or learning disabilities, hyperactivity, attention deficit, or behavioral disorders), regular education, colleges, various types of group homes , military divisions, nursing homes, addiction treatment programs, occupational settings, family homes (for marital or parenting difficulties), and hospitals may also use token economies. Token economies can be used individually or in groups.

Missing from that description are countries, companies, organizations and yes even not-for-profits. When the "Token Economy System" for use in mental institutions was envisioned we were still on the Gold standard. It was easy to describe a "Token Economy System" juxtaposed with a "Real Economy System". Looking back we can now see how we have supplanted the "Real Economy System" with a "new and improved" "Token Economy System", which in and of itself is not a bad thing, in theory. It's just like in the mental institution you have to be aware of the risks of a bad implementation.


In using a “Token Economy System” as a euphemism for a "Real Economy System" it is important to recognize the basic tenets for a successful Token Economy System. For instance:

"Token Systems should never deprive individuals of their basic needs, such as sufficient food, comfortable bedding, or reasonable opportunities for leisure. If staff members are inadequately trained or there is a shortage of staff, desirable behaviors may not be rewarded or undesirable behaviors may be inadvertently rewarded, resulting in an increase of negative behavior. Controversy exists regarding placing individuals in treatment against their will (such as in a psychiatric hospital), and deciding which behaviors should be considered desirable and which should be considered undesirable."

In replacing the "Real Economy System" with the new and improved “Token Economy System” we needed to make sure that we manage the risks carefully as though it were a real economy system. Instead, we have ignored the risks and we have an unsuitable situation and potentially a volatile one. These risks are not in the Token itself, for the last time I checked we don't have an issue with the token... paper, bits and bytes, copper etc. etc. Although very subjective the Tokens in use easily meet the basic tenets of proof in a "Token Economy System:

"Anything that is visible and countable can be used as a token. Tokens should preferably be attractive, easy to carry and dispense, and difficult to counterfeit."

Here in my view is where we fell short in our implementation. We need "A clearly defined target behavior". Perhaps we need to look at each "transaction" a reach for the common good? Are we doing enough in society to specify what acceptable behavior is? I know that we have delineated good behavior in comparison with bad behavior in broad terms, e.g. murder, stealing and terrorism, but are we not evolved enough to tackle the lofty aspects of what make us uniquely human. As many are oft to describe as created in the widely held notion of and in the "image" of an infinite being? Can we not prize more of humanity? Does this need to be regulated? In a successful "Token Economy System" it has to be in the manual, i.e. regulatory framework.

"Individuals participating in a token economy need to know exactly what they must do in order to receive tokens. Desirable and undesirable behavior is explained ahead of time in simple, specific terms. The number of tokens awarded or lost for each particular behavior is also specified."

Another need is for appropriate "Back-up reinforcers" does a 15-17 room starter castle count as an appropriate Backup reinforcer. Could we not use the amount of kids fed or clothed or educated as a meaningful status of accomplishment, wealth and celebrity? Or how about the number of elderly we idolize and respect.

"Back-up reinforcers are the meaningful objects, privileges, or activities that individuals receive in exchange for their tokens."

We could make adjustments to meet a new and growing demand for a "System for Exchanging Tokens"; quite frankly the current system apparently doesn't work too well, and now is too unwieldy. Of course while some of the “residents” are benefiting from the way it is currently, too many don't and for the time being they are ok with shuffling about staring blankly, but when this changes and the collectively start channeling Chief Bramden – in One Flew Over the Cuckoos’ Nest-- and throw the Hydrotherapy Console out the proverbial window it will be too late.


Perhaps a new system of accounting that records the Goodwill of a transaction is needed. In order for a good "Token Economy System" to flourish it needs a good "System For Exchanging Tokens" might I suggest a requirement to measure "Therapeutic" value in addition to Demand and Monetary value, just ask Goldman Sachs. A new system to value and provide a mechanism to exchange Tokens and place value on meaningful back-up reinforcers and recognition of good behavior would go a long way towards fostering a fairer more equitable “Token Economy System .

"A time and place for purchasing back-up reinforcers is necessary. The token value of each back-up reinforcer is pre-determined based on monetary value, demand, or therapeutic value."

Of course a successful ‘Token Economy System”, requires transparency. "A System For Recording Data" a baseline from which to measure how far someone, something or entity has come or gone is essential. Yes I know this sounds awfully Orwellian, but if we want a successful "Token Economy System" this is essential. If we don't like it let's go back to the "Real Economy System".


"Before treatment begins, information (baseline data) is gathered about each individual's current behavior. Changes in behavior are then recorded on daily data sheets. This information is used to measure individual progress, as well as the effectiveness of the token economy. Information regarding the exchange of tokens also needs to be recorded."


Last but not least we need to ensure "Consistent Implementation Of The Token Economy By Staff", i.e. government(s) and business structure. The lack of fairness, inconsistency of enforcement and counterfeiting of tokens and unfulfilling and gaudy back-up reinforcers is undermining the foundation of our floundering ”Token Economy System".

"In order for a token economy to succeed, all involved staff members must reward the same behaviors, use the appropriate amount of tokens, avoid dispensing back-up reinforcers for free, and prevent tokens from being counterfeited, stolen, or otherwise unjustly obtained. Staff responsibilities and the rules of the token economy should be described in a written manual. Staff members should also be evaluated periodically and given the opportunity to raise questions or concerns."

There is no doubt we are utilizing a collection of "Token Economy Systems" the world over. The problem inherent in this framework is that of perception. If the system is perceived as broken, unfair, the benefits and rewards mis-placed. The rules re-written the baseline's smeared or erased and the residents restless, the "Token Economy System" for which it stands for will breakdown completely, and the residents will be looking to run the asylum. If we can't make these changes to make it a better system, we will revert back to a "Real Economy System" whether we intended to or not.

Read more >>