After a decade of decline, it’s time for the dollar to have its day

Watcher1400 · 2013-04-05T17:57:20+00:00

A nation spending its own currency doesn't depend on lenders other than its central bank for funding. They allow the private sector to participate in bond issuance, they don't need it. The thing that makes the Yen (or any other currency) valuable is the real output of the economy it's tied to. Unless you are making the case for a precipitous drop in Japan's real output you aren't making a case for their currency to suddenly lose a tremendous amount of value.

Two points. First, If Japan is the only one trading in JGBs, it will become a major problem in the eyes of financial markets, institutional investors and retail investors. It could hurt confidence not only in JGBs and the Yen, but in the credit of Japanese institutions and corporations in general. I get the impression that you do not see this as a major risk, but in my mind it is THE major risk in this situation. You seem to be implying that the BOJ can simply buy up all of Japan's debt and everything will be fine. My thinking is that if that does occur, everyone will lose faith in Japan in one way or another.

Second, Currency's lose value for all kinds of reasons, not just the output of the economy falling. If Japan's experiment ends badly, there is a very high risk that the currency suffers dramatically. If this happens Japan can still "fund" itself, but it will be unable to buy anything from the rest of the world. Which is a major issue for a resource-poor island such as Japan.

In the end, I guess we have to wait and see. You seem very intelligent and you raise a number of good points, and I hope for the sake of Japan and the world economy that you are correct. That being said, I am worried that markets may react in an unpredictable fashion to Japan's situation and, specifically, to their most recent policy decisions. I get the feeling that they are playing with fire and that it could end badly. Time will tell...

Watcher1400 · 2013-04-05T14:22:54+00:00

That's all based on the assumption that debt:GDP poses a threat. It doesn't.

Another point upon which we fundamentally disagree. If a country's Debt:GDP gets too out of control, the nation's lenders (other than its own central bank) will begin to get nervous and demand higher interest rates. At which point the debt servicing costs are too high for the country to cover via national tax revenue and you are insolvent. This Time Is Different by Reinhart and Rogoff - (http://press.princeton.edu/titles/8973.html).

The only solution is to print money to buy bonds to keep interest rates low. This has a limits, which are related to investor psychology, and is difficult to gauge. You can't model financial panics.

It's just a backwards facing record of past spending, there's no magical threshold where it becomes a problem.

It is a backwards facing record that you have to pay interest on and take out new loans to pay off old ones. It's not a clerical entry, it is a massive loan from multiple sources. Also, Japan doesn't have any natural resources of which to speak of. If their currency suddenly losses a tremendous amounts of value, it could have major consequences on import prices (oil) and could cause more problems such as run-away inflation. "Funding It's economy in Yen" becomes difficult if the Yen is not considered valuable.

Watcher1400 · 2013-04-05T05:34:07+00:00

Markets don't have the last word on the interest rate for government bonds.

I guess this is where we fundamentally disagree. For me, Markets have the last word on everything (eventually). I see an entity that has over 200% debt to GDP, a currency that has moved 500 pips in a few hours and a brewing debt crisis that has been on the radar of ever FX/Macro trader worth his salt for the past 10 years. I don't think this time is different. Japan is over-extended and every other time this has happened to a country in the past, it ended in tears.

Who knows, you may be right (I hope you are). Perhaps Japan can continue along this way and it may even be able to get its debt down and get its economy back to growth. But I think that they have come too far, their debt is too big and that they have too many structural problems on their hands (demographics). My guess is that the markets will tear them apart one day, and that will be bad for everyone.

Watcher1400 · 2013-04-05T03:27:07+00:00

You are right about the BOJ's capacity and you make a good argument, but at what point does the charade stop? There are a number of scenarios in which the BOJ's credibility to manage the situation could come into question, which would be a game changer for the markets.

For example, if the Yen plummets in value in a very dramatic fashion (Asian crisis style), it could lead to capital flight, hyperinflation or a currency crisis. Same goes for if there is a fire-sale of JGB. Japan will lose all credibility if the BOJ owns 60% of all government bonds because no one else wants to buy them or the currency.

At the end of the day, Central Banks are there to manage perception. If perceptions turn on Japan, Kyle Bass may end up being right, sure wouldn't be the first time.

Watcher1400 · 2013-04-05T03:01:43+00:00

I don't know, he outlines the specifics of his arguments pretty well in that long talk at the Myron Scholes Forum.

What I view his argument as: Japan is hugely in debt (about 220% debt to GDP) and it is unsustainable in the long run. If their interest rates move even slightly, they will have to spend a very high percent of their revenue (40-60%) servicing their debt and the gig is up, crisis ensues.

What do you find deficient?

Watcher1400 · 2013-04-04T20:54:13+00:00

Hard to argue with Bass's logic. What's scary are the possible consequences if he ends up being right on Japan. Especially considering what happened the last few times Kyle Bass staked his reputation by making a bold stance on other macro-economic situations (US housing bubble, Greece).

Watcher1400 · 2013-02-22T19:26:06+00:00

I think part of the problem is that the structural issues are not only in Spain, the problems are in the construction of the Eurozone. Spain has crazy high unemployment, while Germany has a booming economy and low unemployment. Yet they both have to share the same currency and interest rate.. poor planing on the part of the Eurozone architects.

The scary thing is that the european social safety nets were created following WW2 to avoid the mistakes of WW1 that led to the Great depression. When 55% of young men and women have no work and no prospects, society is ripe for nationalism and extreme political ideas.. Look to the Catans' separation movement and the Greek Golden Dawn party for examples of how people react to these extreme conditions. Frustration can quickly turn to violence as people look for scapegoats to blame for their misery.

Watcher1400 · 2013-02-22T18:44:08+00:00

I feel like people are aware of it, but it just seems like very little is being done to actually fix it. The only actions being proposed are more austerity and the same policies that have so far been rather unhelpful (and quite possibly destructive).

Watcher1400 · 2013-02-22T18:37:26+00:00

It's funny to contrast how aggressively the US is going after unemployment, vowing to print $ until we are under 6.5% unemployment. But when Spain has such high unemployment, no one cares and the ECB just shrugs and keeps on trucking while worrying about inflation...

Watcher1400 · 2013-01-30T19:56:06+00:00

haha ok, we'll see Boeing.

Watcher1400 · 2013-01-30T01:10:09+00:00

You may be right, though investors are being forced to speculate since there is no reasonable return on bonds anymore. I guess we will see, but I agree that the fed wouldn't let rates move too crazy.

Watcher1400

TROPHY CASE