IMF Warns Japan Debt Could "Quickly Become Unsustainable"

Japan has the largest public debt in the world. Please see my previous post, Next Victim Of Debt Crisis are France and Japan, which has a video from legendary hedge fund manager Kyle Bass and hear what he has to say about the danger Japan presents to the global economy.

Now, the International Monetery Fund is raising the red flag about Japan. Please see the Wall Street Journal article:

The International Monetary Fund warned in a new report that market concerns over fiscal sustainability could trigger a "sudden spike" in Japanese government bond yields that could "quickly" render the nation's debt unsustainable as well as shake the global economy.

The fund's Japan Sustainability Report, released on its Web site Nov. 23, serves as a fresh reminder to Tokyo policymakers that the international community is already worried about fallouts from Japan's potential fiscal problems, after debt problems in some European economies evolved into a continent-wide crisis.

Japan's public liabilities amount to roughly twice annual economic output--a ratio worse than any other industrialized economies,' including a turmoil-hit Spain or Italy. Japanese finance ministry bureaucrats worry that something may happen to tip Japan into a fiscal chaos, but the government is slow to move amid political reluctance to lift taxes, particularly after the March 11 earthquake.

Next Victims of Debt Crisis are France and Japan?

Kyle Bass discusses the Euro, and why France and Japan are in trouble in a very entertaining and informative interview with the BBC.



Talk is cheap, so it's important to note, as Bass says in the video, his beats against Japan are more like insurance, so he doesn't stand to loose very much if he is wrong.

Italian Default "Months, weeks, or days" Away

SF Fed: Risk of Recession 50%

The Federal Reserve Bank of San Francisco says, in their Future Recession Risks report,  that because of the European debt crisis the danger of recession the possibility of recession in early 2012 is 50%:

In the next few months, the odds of recession due to domestic factors appear reasonably contained. Those odds increase gradually and reach about 30% in the second half of 2012, after which they decline. However, the curve reflecting the international odds suggests more imminent danger to the economy, although this threat is harder to calibrate using historical data and only indirectly reflects the health of the European financial system. Recession odds based on international factors peak at about 45% toward the end of 2011, but decline rapidly thereafter.

Figure 2
Recession probability forecasts

The combination of these two recession coins, shown in the combined risks line of Figure 2, is quite disconcerting. It indicates that the odds are greater than 50% that we will experience a recession sometime early in 2012. Because the international odds of recession are more imprecisely estimated, one must be careful with a strict interpretation of this result. But the message is clear. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession. However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.

Most of the risk is coming from Europe, who despite repeated attempts have failed to pacify the markets. The nature of the European Union makes it difficult to make a comprehensive solution, the way the United States did with TARP. When compared to the USA, the EU is a very weak political union. Germans don't want to bail out other nations the way Americans bailed out their failed financial instetutions. Please see

ECB: can a lender of last resort defuse Europe's liquidity timebomb?

Amid the head-scratching over how best to solve the eurozone's crippling sovereign debt crisis, one solution is being increasingly championed by an influential cast of economists: to allow the European Central Bank (ECB) to become a "lender of last resort".

This, say the Nobel prizewinner Paul Krugman and other big guns, will defuse a liquidity timebomb by guaranteeing that cash will always be available to pay out bondholders of government debt. They argue that absence of such a safety net is why the financial crisis has proved so virulent in the euro area.

But despite the consensus forming among the economic elite in thinktanks and newspaper op-ed pages around the world, there is fierce opposition in Germany to any plan which would appear to give the ECB a licence to print as much money as it pleases.

 Additionally, there is the question of moral hazard. Americans were much more willing to ignore issues of moral hazard because they saw saving their economy as being more important. In Europe, on the other hand, Germany is not willing to let debtor nations off the hook so easily. Germany wants them to fully understand the consequence of their actions, with painful austerity to bring their budgets under control.

The irony, however, is that cure of austerity is likely worse than the sickness for nations that have long past the point of no return. The more austerity these country's implement, the worse their economies become and the less likely the are to pay off their debts. See Krugman's The Path Not Taken:

Now, however, the results are in, and the picture isn’t pretty. Greece has been pushed by its austerity measures into an ever-deepening slump — and that slump, not lack of effort on the part of the Greek government, was the reason a classified report to European leaders concluded last week that the existing program there was unworkable. Britain’s economy has stalled under the impact of austerity, and confidence from both businesses and consumers has slumped, not soared.

Maybe the most telling thing is what now passes for a success story. A few months ago various pundits began hailing the achievements of Latvia, which in the aftermath of a terrible recession, nonetheless, managed to reduce its budget deficit and convince markets that it was fiscally sound. That was, indeed, impressive, but it came at the cost of 16 percent unemployment and an economy that, while finally growing, is still 18 percent smaller than it was before the crisis.

Does Wall Street want us to be Financially Literate?

The financial post has an interesting article on financially literacy and the incentives of large institutions:

Banks, brokerage firms, fund companies and insurance companies make their billions off investors who are “clueless financial illiterates,” Farrell said, listing seven reasons Wall Street doesn’t want savvy customers. “Revenues would drop substantially if financial literacy really did work.”

He attributed to University of Chicago professor Richard Thaler the quip Wall Street “needs investors who are irrational” and “woefully uninformed.”

Read the full article here.

The article touches on a theme I've talked about on in other posts. For examples, see Who's on the Little Guy's Side,  and Are Mutual Funds A Scam.

100% Chance of Recession

"We don't make false alarms. I've been at this for 20 years."

Et tu, Italy?

Attention in Europe has switched from Greece, to the too big to save country, Italy.



The European bailouts facility cannot handle saving a country the size of Italy.

Meanwhile it was reviled that , Angela Merkel, Chancellor of Germany, and Nicolas Sarkozy  president of France, discussed a way to let countries leave the Euro:

German and French officials have discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone, EU sources say.

"France and Germany have had intense consultations on this issue over the last months, at all levels," a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.

"We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part," the official said.

This would certainly be a back up plan for them. A country may want to leave the Euro so they can print more money and use inflation to make their debt more manageable. Under the Euro, that is not possible.

How QR Codes can Benefit Your Business

You may have seen QR codes around and wondered what they were about. Here is an example of one:

They are away for Smartphone users to quickly connect to your business. If you want understand QR codes, and how they can benefit your business, check out this short and very informative video:

http://www.openforum.com/videos/american-business-cracking-the-code


The business case for using QR codes, is that they allow you to track the effectiveness of your marketing and promotions.


The most important thing with QR codes, is that you want to give the consumer an incentive to use it. Unless you give them a discount, or coupon for using the QR code, they simply won't bother.

Credit Squeeze With Chinese Loan Sharks

Bloomberg has picked up the problems emerging in China regarding private lending, which I mentioned in a previous post. I present China Credit Squeeze Prompts Suicides, Violence:

Hours after a creditor and his gang of tattooed thugs hustled Zhong Maojin into a coffee shop in Wenzhou, he says he wouldn’t yield to their demands.

They wanted to take over one of the pharmacies in a chain he’d built by borrowing from private lenders. Instead, he made an offer of traditional retribution in this eastern Chinese city, known for loan sharks who have sometimes meted out violence to bad debtors.

“If you like, you can cut off one of my fingers instead,” Zhong, 42, says he told them. Giving up the store would have made it impossible to pay back another 130 creditors, Zhong said. He’d borrowed 30 million yuan ($4.7 million) at interest rates as high as 7 percent a month to expand the business. Many of the lenders were elderly neighbors who’d mortgaged their homes....

Small and medium-sized businesses account for 80 percent of jobs in China, according to the country’s industry ministry. Yet they’re largely unable to get loans from banks, which prefer collateral to cash-flow...

Private lending in China doesn't always involve thugs. In fact, it is a way of life for many Chinese. They don't trust their stock market, and there is no social safety net. So they put their money to work in business owned by friends, family, or in their 'clan'. But it seems some Chinese are using their homes as collateral to get bank loans which they then lend out again to businesses

They built a lattice of interlocked credit, often borrowing from banks and other private lenders to arbitrage interest rates. Taking out bank loans at 1 percent a month, many lent out their cash for 2 percent or higher a month. They pocketed the difference to supplement meager income from odd jobs.

Sitting on a small stool, gray-haired Jin Xiaoyu fills a wooden box with the electrical clamps she makes to earn 10 yuan a day. Her left eye is the milky-white color of a cataract and she says she has difficulty seeing.

She lent Zhong 50,000 yuan and charged 1,000 yuan a month in interest, she said.

“I worry that I cannot get the money back,” Jin says. “I hope the government will help him out.” Some used their housing as collateral. Among them was Wu Suihua, who borrowed against her five-story home, she says

When I hear things like this I get nervous about China. And then we have "HK home sales fall over 50% in October":

HONG Kong's home sales fell for a 10th straight month, dropping by half in October from a year ago as buyers put off purchases...

Real estate prices, which have surged over 70 percent since early 2009, fell for the first time in seven months in July after the government introduced new housing curbs in June. Banks raised mortgage rates in September.

And I look at the Shanghai stock market, which is down almost 2o% in past 12 months:

Are we finally seeing a significant slowdown in China?

What does National Default Mean for Average Person

What is it like to live in a country that defaults on it's debt? We hear a lot about the effects of a default on the global economy, but we don't hear much about what the consequences are for the average person. The Argentine economic crisis of 1999-2000 provides us with an interesting case study. According to wikipedia, the origins of the crisis are:

... huge debt was acquired for money that was later lost in unfinished projects, the Falklands War, and the state's takeover of private debts; in this period, a neoliberal economic platform was introduced...the country's industries were severely affected and unemployment, calculated at 18% (though official figures claimed 5%), was at its highest point since the Great Depression.

The state eventually became unable to pay the interest of this debt and confidence in the austral collapsed. Inflation, which had been held to 10 to 20% a month, spiraled out of control. In July 1989, Argentina's inflation reached 200% that month alone, topping 5,000% for the year... unemployment did not substantially increase but real wages fell by almost half (to the lowest level in fifty years). Amid riots President Alfonsín resigned five months before ending his term and Carlos Menem, who was already President-elect, took office.

It's interesting that the "state's takeover of private debts" is exactly what we are seeing now with the European bailout, and have seen with TARP, and Quantitative Easing in the United States.
The first hand account is written with a survivalist audience in mind. You can read the full article here. Here is an excerpt from "ferfal's" article:

One day the Minister of Economy declared that no one would be able to get more than 100 bucks a day from the ATM( correct?) nor close accounts. You could just get 100 bucks out of the bank a day. That was it.

Then came the devaluation. Before this happened 1 U$S= 1 $ Argentine peso. Suddenly this changed into 1 U$S dollar= 2 peso then 2.5 even 4 pesos. Today 1U$S= 3 Pesos.

The banks kept the people's money, including their deposits in US dollars. If you had 1000 U$S dollars in Bank Boston for example, they turned it into 1000 pesos, that equaled 333 U$S dollars. They stole 666 dollars from you!

Prices went up 200%, 300% and sometimes more. Imagine for one moment what your life would be like if today you go to your local 7-11 and everything has gone up 200%. How would you survive with your pay check?

The sheep got desperate. First, because they had been stolen by banks and wouldn't return the money to the people.(the so called "corralito" ) then because the classes with the lowest income found out that their salaries weren't high enough to buy the minimum food stuff to survive. The country marched asking for the presidents resignation. He had to leave the presidential palace in a chopper...

Banks were destroyed by people that wanted their hard earned money back. Supermarkets and other shops were looted, as well as regular houses.

This lasted for about a month, the chaos spread all over the country, concentrated in the largest cities.

I remember being at a supermarket and the mob outside, negotiating with the manager. Sometimes, they would not destroy the place if the supermarket surrendered them the goods peacefully.

Food got scarce. I mean, you could buy just a certain amount of milk or water, 4 bottles for example. And most imported goods disappeared. Electro domestics such as TV, videos, and refrigerators kept their prices in dollars, inaccessible for most people. The same happened with real estates, cars and luxury goods.

Today this all seems far away. Not because it got better, but because us humans have this damn capacity to " get used to".

How did our lives change? I cant even being to explain... everything changed!

The streets are more dangerous than ever, thanks to the general poverty.

Education suffered thanks to this as well. Kids working or stealing to survive instead of going to school.

How could I explain this to you?....

For example, tools are really expensive, since most come from abroad... remember, our national industry was sold out or destroyed.

Stuff like MRE, Emergency food bars are impossible to get. No one imports them anymore. (I paid 10 dollars for 1 MRE a guy had)

Guns and ammo are really expensive and are sold in small quantities.

Forget about buying a "case" of ammo! Forget it! I know it's hard for some of you to imagine this, but you just can't buy a " case" of anything. A large store may have 10 or 15 boxes of 308, 20 rounds each box. Small stores have 10. or less.

Only common ammo is available such as 22, 38, 357. 9mm, some 40 s&w, 12 ga 308 and a little 223, that's pretty much it. Ammo for my 357 sig is hard to get. I buy a box of it every time I find one around... and it's extremely expensive.

IF you just HAVE to buy something strange like 300 magnum or 270 (strange for us J ) there's one place you can get them from but be prepared to pay +100 dollars for 20 rounds. While we are at it, there are also few models of guns, 70 % of it is used. You can find about 4 or 5 12 ga pumps, mossberg 500, Maverick or Rem 870 in each store. Handguns are relatively plentiful, not the newest models but still there's some Beretta, Glock, Colt, S&W, Walther, Taurus, Rossi and Sig. Same goes for Mausers and bolt action rifles as well as side by side shotguns.

Semi auto rifles are hard to get. Some big gun shops have 1 FAL each. M16 are quite rare and expensive. Saw a Galil and a SKS(600 dollars) the other day, but it's not common and the red tape is HUGE. I found a good FMK3, one of the few left around, and bought it for 250 dollars, but this isn't common.

Shoes and clothes are also, expensive, even in U$S. Labor is cheep; you can have a maid and a gardener for 300 dollars. There's no "safe" job. With 20% unemployment they pay you whatever they want and if you don't like it there are 100 persons waiting to get your job. Owning a shop-business is hard. You have to consider armed robbery (some get hit 10 times a month) and still you have to pay the police for protection (from themselves) Hope it helps, at least so you can have an idea how your world would be if this happened in your country, hope you never have to experience it in the flesh...

Well, one thing I learned with all this is that people adapt, people get "used to".

And finally, people accept.

I have a hard time seeing people eat out of trash cans, that's one thing I'll never get used to. Every night entire families, wife, husband and 2 or 3 kids, little kids about 3 years old go throw trash cans in search of food.

At almost every light stop there's little bare foot kids begging, all dirty and skinny.

That's the thing that affected me most, the starving children.

One guy in another board told me he didn't care for this "bleeding Heart thing" and that "Life is rough. Get used to it." I told him that I didn't need someone that lives in San Diego, California, explain me how rough life is.

I've seen dead people, man, I once saw a guy "sew" his mouth shut with a piece of rusted wire he got out of a broom, and all that I can handle, but a 3 year old sobbing because he's starving, Im sorry, I can't.

Believe me, it's one thing to see a little kid starving in Africa, you probably saw that terrible image a million times, but now imagine that that kid speaks English, with an American accent, and you see the Hollywood sign in the background.

Both cases are terrible, but the one that looks as if he could be your son and not some kid in Africa or Croatia hits a nerve. Because "those things don't happen here". It happens to others, not in my country, not in my neck of the woods.

The author also has a blog which can be found here: http://ferfal.blogspot.com/

Greek Update

Greek Prime Minister George Papandreou and the wrangling with the opposition is creating uncertainty for global financial markets. Greece needs to pass the bailout to avoid complete default, but the issue has been turned into a political football.

Occupy Oakland - Update

In my previous post Labor Unrest Grows, I described how protesters marched on the Port of Oakland, and had a violent confrontation with police. Today I have a video that shows the size of the crowd, which was reported as being 7,000 in the article I quoted. Please watch:

 

 Seeing the size of the protest puts things in perspective. I don't think it's 100,000 as the video claims, but regardless it's a big crowd. Unrest has come to the united stats.

We've seen protests in Iran, the Middle East, North Africa, and now the USA. And I feel that it is just starting.

 How will the American government react to the growing unrest? What if their was another financial crisis? The tone of the protests suggests to me that the political cost of bailouts is going up fast.

How Does Canada Compare to Dead Beat Europeans?

We've heard a lot about the Greek and European debt crisis recently. And if you live in Canada, you've heard a lot about how great the economy and our banks are since 2008.

But are things really that great in Canada? Here is the list 15 countries with the highest debt-to-GDP ratios in the world.

1 Zimbabwe 234.1 2010 est.
2 Japan 197.5 2010 est.
3 Saint Kitts and Nevis 185.0 2009 est.
4 Lebanon 133.8 2010 est.
5 Jamaica 126.5 2010 est.
6 Iceland 126.1 2010 est.
7 Italy 118.4 2010 est.
8 Greece 116.0c 2011 est.
9 Singapore 105.8 2010 est.
10 Barbados 102.1 2010 est.
11 Belgium 96.2 2010 est.
12 Ireland 94.9 2010 est.
13 Portugal 93.3 2010 est.
14 Sudan 92.6 2010 est.
15 Canada 84.0 2010 est.

Canada is 15th out of 133 of the world's nations. But look more carefully at the list. If we exclude very small or very dysfunctional countries like Zimbabwe, Saint Kitts and Nevis, Lebanon, Jamica, Iceland, Barbados, and Sudan, we see that Canada is 8th.

Is that anything to be proud of?

Understanding The European Debt Crisis

The New York Times has an interesting and interactive page that explains the European debt crisis, how things are interconnected, and financial problems act like "cotangent" and spread. See it here:

http://www.nytimes.com/interactive/2011/10/23/sunday-review/an-overview-of-the-euro-crisis.html?scp=2&sq=debt%20crisis%20infographic&st=cse

"Europe Is A Mess" - World's Biggest Bond Fund

Mohamed A. El-Erian CEO of PIMCO, the world's biggest bond fund says that "Europe is a Mess". See the Video here:

"Unfortunately, it is a mess. There are three parties to a solution and all three are unraveling. There are the debtor countries and they are starting to have even bigger political issues. There are the official creditors and they cannot agree on providing support. And then there are the private creditors. It is not sure that they will get all of the banks to agree on the 50% reduction for Greece, which is the minimum Greece needs. So I'm afraid it's a bit of a mess out there."

Labour Unrest Grows

In my previous post, Bernanke Discusses Income inequality, Pushes For Jobs Bill, I discussed how the Chairmen of the Federal Reserve is pushing for some sort of job's bill to stimulate the economy. In this post I will highlight the social tensions that result from high unemployment and income inequality.

Please see Police Fire Tear Gas; Oakland Protesters Close Port, from Bloomberg which reports that:

Police in riot gear fired tear gas and other projectiles and arrested several people after Occupy Oakland protesters closed the city’s port.

“Operations are effectively shut down in the maritime area of the Port of Oakland,” according to a port statement issued yesterday. “Operations will resume when it is safe and secure to do so.”

The clash followed a day of peaceful protest that attracted 7,000 protesters. That group assembled in downtown then marched to close down the port, the nation’s fifth busiest. Later, police in riot gear arrested dozens of protesters who broke into a vacant building, shattered windows, sprayed graffiti and set fires, the Associated Press reported.

It should be obvious to anyone that unrest is growing in the United States, as it is in the rest of the world. Policy makers have thus far been unable to deal with the impact and consequences of the of the 2008 financial crisis. It seems that the public is loosing faith with the solutions so far put forward. Unfortunately for everyone concerned, I'm afraid that there are no easy answers.

Bernanke Discusses Income inequality, Pushes For Jobs Bill

Ben Bernanke says:

I certainly understand that many people are dissatisfied with the state of the economy. I'm dissatisfied with the state of the economy. Unemployment is far too high. Inequality, which is not a new phenomenon, it's been going on - increases in inequality have been going on for at least 30 years. But, obviously, that - as that has continued we now have a more unequal society than we've had in the past.

So, again, I fully sympathize with the notion that the economy is not performing the way we would like it to be, and in that respect the concerns that people express across the spectrum are -- are understandable.

I think the best way to address inequality is to create jobs. It gives people opportunities. It gives people a chance to earn income, gain experience and to ultimately earn more. But that's an indirect approach that's really the only way the Fed can address inequality per se.

I think it would be helpful if we could get assistance from some other parts of the government to work with us to help create more jobs.

Bernanke is pushing for the for the government to pass some sort of jobs bill, like President Obama's American Jobs Act.

The American Jobs Act is a half-trillion dollar bill. Some of it's elements include:

• Cutting and suspending $245 billion worth of payroll taxes for qualifying employers and 160 million medium to low income employees.
• Spending $62 billion for a Pathways Back to Work Program for expanding opportunities for low-income youth and adults.
• Spending $50 billion on both new & pre-existing infrastructure projects.
• Spending $49 billion on extending unemployment benefits for up to 6 million long-term beneficiaries.
• Spending $35 billion in additional funding to protect the jobs of teachers, police officers, and firefighters
• Spending $30 billion to modernizing at least 35,000 public schools and community colleges.
• Spending $15 billion on a program that would hire construction workers to help rehabilitate and refurbishing hundreds of thousands of foreclosed homes and businesses.
• Creating the National Infrastructure Bank (capitalized with $10 billion), originally proposed in 2007, to help fund infrastructure via private and public capital.
• Creating a nationwide, interoperable wireless network for public safety, while expanding accessibility to high-speed wireless services.
• Creating additional regulations on businesses who discriminate against hiring those who are long-term unemployed.