I say that considering how poor Japan is doing.
- Japan’s recession deepened in November as companies cut production at the fastest pace in 55 years and rising unemployment prompted households to pare spending. Factory output plunged 8.1 percent from October. The decline in production was the biggest since comparable figures were first made available in February 1953.
- "Exports and industrial production are falling so extraordinarily quickly that it almost defies analysis," said Richard Jerram, chief economist at Macquarie Securities in Tokyo. The drop in factory production is nearly double the previous biggest decline of 4.3 percent in January 2001, according to the Ministry of Economy, Trade and Industry
- Exports declined 26.7 percent in November from a year earlier, the sharpest drop since comparable data were made available in 1980, a government report showed this week.
- Mounting evidence of a weakening economy prompted the Bank of Japan to last week cut interest rates to 0.1 percent from 0.3 percent, increased purchases of government debt and announced plans to buy commercial paper for the first time. (sounds familiar?)
- The yen’s 23 percent gain against the dollar this year is also eroding exporters’ profits and adding to their woes.
Sure why not! I mean as long as you can increase taxes and cut spending (haha, just kidding there on the CUT spending part - the federal government never does that) ... as long as you can increase taxes on the people you can still maintain your rating it appears - no matter the fact you are increasing debt obligations and POTENTIAL debt obligations in exponential fashion. I wonder if/when the Federal Reserve backstops all US municipal debt and potentially is forced to backstop all corporate paper in the US in 2009 if we'll maintain our AAA rating. Of course! USA! USA! USA!
Now remember, as we tumble into our banana republic future my long term call is the U.S. will default on it's debt as it reaches a point where no amount of economic growth (and higher taxes) will be able to stop the avalanche. We'll tell the world "oops - it's a Black Swan event, never could see it coming!" Then ... just as a host of 3rd world dictator led crony governments have done, will say "just can't pay you back in full - you'll take 70 cents on the dollar right? 50 cents?" and promise "it won't happen again - trust us!" The other option is to devalue the dollar by a substantial amount i.e. if you devalue the dollar by 50% - you can have double the debt and call it "even". Not that creditors would like that, but that's ok too! We're AAA rated baby!
So let's see what the head of this Japanese credit agency offers about our "AAA" rated debt.
- Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.
- The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy.
- Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.
- “It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today. “Japan can help by extending debt cancellations.”
- The U.S. budget deficit may swell to at least $1 trillion this fiscal year as policy makers flood the country with $8.5 trillion through 23 different programs to combat the worst recession since the Great Depression. (most of the pundits are throwing out this $1 trillion figure - remember, up to this fiscal year the highest ever was $400Billionish so you can see just how much bigger our debt will be this year. [$400B ex wars since wars don't count in our budget] I have opined in my 13 2009 Outlier Predictions that the US deficit could hit $2 trillion this fiscal year - that would be epic)
- Japan is the world’s second-biggest foreign holder of Treasuries after China.
- The U.S. government needs to spend on infrastructure to maintain job creation as it will take a long time for banks to recover from $1 trillion in credit-market losses worldwide, Mikuni said.
- The U.S. also needs to launch public works projects as the Federal Reserve’s interest rate cut to a range of zero to 0.25 percent on Dec. 16. won’t stimulate consumer spending because households are paying down debt, he said. (that's what we say as well - but neither we nor Mr. Mikuni has a chance to appear on CNBC with that sort of realistic talk. Remember, if you make money free, indebted consumers who fear for their jobs will jump over each other to add more debt... of course that did not happen in Japan but we're Americans!)
- Combining debt waivers with infrastructure spending would be similar to the Marshall Plan that helped Europe rebuild after the destruction of World War II, Mikuni said.
- “U.S. households simply won’t have the same access to credit that they’ve enjoyed in the past,” he said. “Their demand for all products, including imports, will suffer unless something is done.”
- The Japanese government could use a new Marshall Plan as a chance to shrink its $976.9 billion in foreign-exchange reserves, the world’s second-largest after China’s, and help reduce global economic imbalances, Mikuni said. (what an awful problem to have, $1 Trillion in foreign exchange reserves) The amount of foreign assets held by the Japanese government and the private sector total around $7 trillion, Mikuni said. (another "terrible problem" to have)
- “Japan’s economic model has been dependent on external demand since the Meiji Period” that began in 1868, Mikuni said. “The model where the U.S. relies on overseas borrowing to fuel its property market is over. A strong yen will spur Japanese domestic spending and reduce import prices, thereby increasing purchasing power.”
- The flight to U.S. Treasuries is an Armageddon trade. It reflects investors’ panicked attempts to seek safety amid plummeting stock markets, collapsing property values and more than $1 trillion in losses and write-offs by banks worldwide.
- With yields at or near record lows, it’s hard to argue that Treasuries aren’t in bubble-land. Surely, the time will come when yields on U.S. government securities rise and prices fall, compliments of massive Federal Reserve pump-priming, steep interest-rate cuts, huge Treasury borrowings, the eventual pick- up in inflation -- maybe even a big drop in the dollar.
- The bursting of a bubble in the U.S. government bond market would be a perilous event. First, it would cause large losses for millions of investors, especially U.S. retirees who regard Treasury securities as the ultimate safe investment. Second, it might threaten Treasuries’ status as the global “risk-free asset” and would damage the international stature of the U.S. Foreigners, who own about half of all Treasuries, might stop funding the country’s growing trade and budget deficits without an increase in U.S. interest rates. Finally, a busted Treasury-market bubble could undermine the dollar’s global reserve-currency status, which in turn would spell higher U.S. interest rates, undercutting economic growth.
- A bigger issue may be how long U.S. government securities stay in bubble-land before bursting. Japan’s experience suggests it might be years. (but remember, we're not Japan - just keep repeating it)
- The U.S. Treasury bubble is a direct consequence of those that preceded it. One of the axioms of the past two decades is that defusing bubbles in one part of the financial markets begets bubbles in others. Like a balloon, squeeze tightly in one area and a bulge shows up in another.
- (1998) Russia defaulted and hedge fund Long-Term Capital Management had to be bailed out. The Standard & Poor’s 500 Index tumbled 15 percent in six weeks, the Nasdaq Composite Index fell 30 percent in less than three months.
- The Fed responded by cutting interest rates three times in late 1998. It also moved to neutralize concerns about the year- 2000 computer bug -- which never materialized -- by flooding markets with liquidity. The result averted a recession, but the pump-priming fueled the technology bubble. The Nasdaq soared 86 percent in 1999, and the S&P rallied 20 percent.
- Asian central banks added to the liquidity by buying hundreds of billions of dollars to keep their currencies competitive on world markets. To battle deflation, Japan adopted a zero-interest rate policy.
- After the technology bubble popped in 2000, the Fed and the European Central Bank cut rates. These easy money policies attracted investors to stocks, bonds and real estate, fueling the latest bubbles.
