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The latest John Mauldin and well worth some thought... If you think the US can go on borrowing and
spending forever, this should give you some pause ...
http://www.ritholtz.com/blog/2009/07...re-5-trillion/
Buddy, Can You Spare $5 Trillion?
By John Mauldin - July 11th, 2009, 7:58PM
There is no doubt that the US is in financial trouble. Those talking of a strong recovery are just not
dealing with reality. But the US is in better shape than a lot of countries. This week, we begin by looking
at Japan. I have written for years about how large their debt-to-GDP ratio is, yet they keep on issuing
more debt and seemingly getting away with it. But now, several factors are conspiring to create real
problems for the Land of the Rising Sun. They may soon run into a very serious-sized wall. And it is not
just Japan. Where will the world find $5 trillion to finance government debt? We look at some very
worrisome graphs. Those in the US who think that what happens in the rest of the world doesn’t matter
just don’t get it. There is a lot to cover in what will be a very interesting letter. I suggest removing sharp
objects or pouring yourself a nice adult beverage.
*snip* (section on program trading)
The Land of the Setting Sun
One of the real benefits of writing this letter is that I get to see a lot of really interesting information from
readers and meet with very savvy investment professionals. This week I had the privilege of sitting with a
team of analysts from Hayman Capital here in Dallas. Hayman runs a global macro hedge fund, so they
spend a lot of time thinking about how all the different aspects of the global markets fit together.
A one-hour meeting stretched to three hours, as the discussion was quite lively. I learned a lot more than
I contributed (which is not unusual). After I made my presentation, they showed me a presentation they
had been using. Some of the graphs were quite eye-opening. While I had seen some of the data in
different places, there were a lot of new ideas, and having it all in one place was extremely helpful. There
was a lot of work (as in months) done here; and Kyle Bass, the founder of the firm, graciously allowed me
to share some of it with you (and kudos to Wes Swank, who pulled this together). The graphs are theirs,
and my discussion about them is certainly informed by our meeting; but I am using the material as a
launching point, so they are not responsible for my conclusions and interpretations.
Over the years, I have written about Japan often. Its economy is very important to the world, and its
banks have funded and loaned a great deal to companies outside of Japan. Global growth would have
been a lot slower without the Japanese. Up until recently, their population has saved a great deal of its
disposable income, and those savings have allowed the Japanese government to run massive deficits.
And we are talking truly massive. Over the last ten years, the government has seen the level of debt-to-
GDP rise from 99% to over 170%, not including local governments. They ran those deficits to try and pull
themselves out of the doldrums of their Lost Decade of the ’90s, following the crash of their real estate
and stock markets, starting in 1989. They built bridges and roads to nowhere, all sorts of programs,
quantitative easing, etc. Sound familiar?
Of course, they were coming out of two really large bubbles, far larger than those recently in the US. I
think I remember reading that at one point the land on which the Imperial Palace in Tokyo is built was
valued at more than all of the real estate in California. Why not buy Pebble Beach or a few iconic buildings
in New York, when they were so cheap? Today, Japanese real estate is still massively down (on the order
of 50-80%, depending on location). And the Nikkei is still down roughly 75%, 20 years later. Do you think
the Dow will be at 3,500 in 12 years?
As late as 1999, personal savings plus pensions were running at 12% and had been as high as 16%. And
much of those savings went into government debt. The government kept borrowing, and rates stayed in
the area of 1%. Today, a ten-year bond yields 1.3% in Japan, so they could run up a very large debt and
the interest-rate cost was not a big factor in the budget.
But now things are changing. Demography is starting to change the landscape. Japan is a rapidly aging
nation. The population is shrinking, and the birth rate is among the lowest in the world. And the
dependency ratio is starting to rise. There are currently 1.2 nonproductive citizens (under 15 years old
and over 64) for every productive Japanese; the ratio will reach 2.0 by 2020 and will continue to grow
thereafter. (See chart below.)
This also means that the ability to save is dropping, since so many retirees now need to dip into savings
to live. Notice in the chart below that savings have dropped from 18% to 1.8%. Also notice that annual
net savings is now down to 5 trillion yen.
But this year, the Japanese will want to issue roughly 33 trillion yen in debt! Also note that the national
pension fund has informed the government that this year they will for the first time be net sellers of debt.
Look at the chart below. Notice that as debt was increasing through 2006, actual interest-rate expense
for government debt was decreasing, because rates were dropping, getting to 0.1% in 2001. Yet with no
more room to cut rates, interest-rate expenses have started to rise. Total government debt is now close
to 900 trillion yen.
Interest-rate expense is now about 18% of the Japanese government budget. What if rates went to a
lofty 2%? That would over time double the interest-rate expense. And the Japanese are borrowing
between 30-40% of their annual budget. The total debt isrising rapidly.
Ok, let’s go over these points:
Japan’s population is shrinking, and the number of workers per retiree is rising. Japan has the highest ratio
of debt to GDP in the developed world. And that debt is growing by 7-8% a year, and does not include
local debt. Interest rates cannot go lower. Savings are falling rapidly and will not be able to cover the
need for new debt issuance, by a long shot. Within a few years, because of the aging of the population,
savings will go negative. Social security payments are rising. GDP is shrinking, and export trade is off
about 30-40%, depending on the industry. Machine tools are down 80%!
If rates were to go up by 1%, let alone 2%, over time Japan’s percentage of tax revenue dedicated to
interest payments would double to 18% and then to 40% and then just keep going up. It is conceivable
that it will take 100% of tax revenues in less than ten years, at the current trajectory. Why? Because
Japan is going to have to start to compete with the rest of the world to sell its bonds. Who but the
Japanese would buy a Japanese bond at 1.3%? From a country that is rapidly going to 200% of debt-to-
GDP? Doesn’t really seem like a smart trade to me. And as the data shows, the ability of the Japanese
consumer to buy more debt is rapidly waning.
The Japanese government is coming to a crossroads with no good exits. Cut the budget drastically in the
face of a deflationary recession? Monetize the debt and let the yen go the way of all fiat currencies? Can
someone say Zimbabwe? Increase already high taxes in a very weak economy?
And yet the yen has been getting stronger over the last month. It is now at 92 to the dollar, up from 120
just two years ago. Why would a country with such bad fundamentals have such a strong currency?
Shouldn’t the yen be a screaming short?
Let me offer two speculations that are mine alone. First, it is well-known that the Japanese are very
involved in the reverse carry trade. That is, since they can’t find yield in Japan, they convert to another
higher-yielding currency for income. So, maybe the retirees actually need to spend some of that money
they have outside of Japan to live, so they have to convert to yen.
Second, Japanese corporations are getting hammered. Could it be that they are bringing yen home to pay for
current transactions like rent and payroll? Japanese corporations dependent on exports desperately need
the yen to fall, yet the central bank can’t seem to engineer a falling yen. I wrote about five years ago
that the Japanese Central Bank has to rank as one of the most incompetent of all central banks, because
they can’t even destroy their own currency.
But I think the central bank is going to figure it out. If they do not monetize the debt, rates will have to
rise over time (say the next 2-3 years), and that is most definitely a problem. Monetizing the debt would
mean the yen would fall in value, which is something they actually want to happen. How much
monetization? When? I don’t know, and I doubt they do. If I were the head of the central bank or the
government, I would not sleep easy.
Japan is the second largest economy in the world. There is a rule in economics: “If something can’t
continue, then it won’t.” Japan can’t continue down this path. All the trends are going against them.
Sadly, Japan is going to hit the wall, maybe some time in the next few years. This will be very bad for
the world, as they have financed much of Asian growth. They do in fact buy a lot of world goods, and
their buying power is going to fall. This is going to mean fewer US and European jobs. Not to mention
fewer jobs in the countries that are Japan’s neighbors.
And unless we change things in the US, this will be us in less than ten years. As in hit the wall, serious
depression, etc. I am hopeful that we can actually get our act together. But then I am an eternal
optimist.
Buddy, Can You Spare $5 Trillion?
I have been writing for months that I don’t think the US can find $2 trillion
dollars this year and then come back to the well for another $1.5 trillion next year without serious
disruption in the markets. Where do you find that much money when all the rest of the world also wants
to borrow massive amounts? How much are we talking about? The friendly folks at Hayman actually spent
the time to add it all up. This is not a comforting graph.
The graph shows the US will need to issue $3 trillion in debt. “Wait,” I asked, “I thought it was only 1.85″
The answer is that the number has grown to almost $2 trillion (as I wrote it would). Then you need to add
in off-budget items like TARP, state and municipal debt, etc. Pretty soon it adds up to another trillion. All
told, Hayman estimates that the world will need to find $5.3 trillion in NEW government financing. Never
mind the needs of corporations or individuals or commercial mortgages, etc.
I am still trying to get my head around this. Let’s hopefully assume that they made a mistake and it is
“only”$4 trillion. Where do you find that kind of money in a global deleveraging recession?
The World Bank says that total world GDP in 2008 was $60 trillion (http://siteresources.worldbank.org/D...ources/GDP.pdf).
That means we need to find almost 9% of world GDP to fund the new
government debt. Gentle reader, this is a serious problem. And now the next chart. Remove sharp objects
or take another drink.
This one is titled “The Potential Shortage of Capital to Fund Treasuries.” They take into account the need
for corporate borrowing, new corporate equity issuance, real estate debt, capital inflows and outflows,
household savings, etc.
Bottom line? There is simply not enough available capital under current conditions to do it all. Something
has to give. More household savings? More foreign investment (flight to safety, as the rest of the world
looks even worse)? Reduced corporate borrowing and thus less GDP growth? Higher rates to attract more
foreign and US investment?
The combinations are infinite, but none of them bode well. Increased household savings means less
consumer spending. To attract more foreign investment (in the amounts that will be needed) will mean
higher rates. And this is 2009. What happens in 2010? And 2011?
One trillion dollars is 7% of US GDP. And we will be running trillion-dollar deficits for a very long time.
Just a thought: Do you want to be a senator or congressman running for office next year with
unemployment nearing 11% (my estimate), with all of the problems mentioned above, and with a
record of having voted for the largest unfunded deficits in history? It is going to be a very interesting
election cycle.
I will close here, as going into the next slides will make the letter way too long, but we will get to them
next week. As a teaser, they asked me what my number-one concern was. I said Europe and European
banking. Interestingly, that was also their number-one concern for “exogenous” risk. It will make a great
launch for next week’s letter.
*SNIP*
spending forever, this should give you some pause ...
http://www.ritholtz.com/blog/2009/07...re-5-trillion/
Buddy, Can You Spare $5 Trillion?
By John Mauldin - July 11th, 2009, 7:58PM
There is no doubt that the US is in financial trouble. Those talking of a strong recovery are just not
dealing with reality. But the US is in better shape than a lot of countries. This week, we begin by looking
at Japan. I have written for years about how large their debt-to-GDP ratio is, yet they keep on issuing
more debt and seemingly getting away with it. But now, several factors are conspiring to create real
problems for the Land of the Rising Sun. They may soon run into a very serious-sized wall. And it is not
just Japan. Where will the world find $5 trillion to finance government debt? We look at some very
worrisome graphs. Those in the US who think that what happens in the rest of the world doesn’t matter
just don’t get it. There is a lot to cover in what will be a very interesting letter. I suggest removing sharp
objects or pouring yourself a nice adult beverage.
*snip* (section on program trading)
The Land of the Setting Sun
One of the real benefits of writing this letter is that I get to see a lot of really interesting information from
readers and meet with very savvy investment professionals. This week I had the privilege of sitting with a
team of analysts from Hayman Capital here in Dallas. Hayman runs a global macro hedge fund, so they
spend a lot of time thinking about how all the different aspects of the global markets fit together.
A one-hour meeting stretched to three hours, as the discussion was quite lively. I learned a lot more than
I contributed (which is not unusual). After I made my presentation, they showed me a presentation they
had been using. Some of the graphs were quite eye-opening. While I had seen some of the data in
different places, there were a lot of new ideas, and having it all in one place was extremely helpful. There
was a lot of work (as in months) done here; and Kyle Bass, the founder of the firm, graciously allowed me
to share some of it with you (and kudos to Wes Swank, who pulled this together). The graphs are theirs,
and my discussion about them is certainly informed by our meeting; but I am using the material as a
launching point, so they are not responsible for my conclusions and interpretations.
Over the years, I have written about Japan often. Its economy is very important to the world, and its
banks have funded and loaned a great deal to companies outside of Japan. Global growth would have
been a lot slower without the Japanese. Up until recently, their population has saved a great deal of its
disposable income, and those savings have allowed the Japanese government to run massive deficits.
And we are talking truly massive. Over the last ten years, the government has seen the level of debt-to-
GDP rise from 99% to over 170%, not including local governments. They ran those deficits to try and pull
themselves out of the doldrums of their Lost Decade of the ’90s, following the crash of their real estate
and stock markets, starting in 1989. They built bridges and roads to nowhere, all sorts of programs,
quantitative easing, etc. Sound familiar?
Of course, they were coming out of two really large bubbles, far larger than those recently in the US. I
think I remember reading that at one point the land on which the Imperial Palace in Tokyo is built was
valued at more than all of the real estate in California. Why not buy Pebble Beach or a few iconic buildings
in New York, when they were so cheap? Today, Japanese real estate is still massively down (on the order
of 50-80%, depending on location). And the Nikkei is still down roughly 75%, 20 years later. Do you think
the Dow will be at 3,500 in 12 years?
As late as 1999, personal savings plus pensions were running at 12% and had been as high as 16%. And
much of those savings went into government debt. The government kept borrowing, and rates stayed in
the area of 1%. Today, a ten-year bond yields 1.3% in Japan, so they could run up a very large debt and
the interest-rate cost was not a big factor in the budget.
But now things are changing. Demography is starting to change the landscape. Japan is a rapidly aging
nation. The population is shrinking, and the birth rate is among the lowest in the world. And the
dependency ratio is starting to rise. There are currently 1.2 nonproductive citizens (under 15 years old
and over 64) for every productive Japanese; the ratio will reach 2.0 by 2020 and will continue to grow
thereafter. (See chart below.)
This also means that the ability to save is dropping, since so many retirees now need to dip into savings
to live. Notice in the chart below that savings have dropped from 18% to 1.8%. Also notice that annual
net savings is now down to 5 trillion yen.
But this year, the Japanese will want to issue roughly 33 trillion yen in debt! Also note that the national
pension fund has informed the government that this year they will for the first time be net sellers of debt.
Look at the chart below. Notice that as debt was increasing through 2006, actual interest-rate expense
for government debt was decreasing, because rates were dropping, getting to 0.1% in 2001. Yet with no
more room to cut rates, interest-rate expenses have started to rise. Total government debt is now close
to 900 trillion yen.
Interest-rate expense is now about 18% of the Japanese government budget. What if rates went to a
lofty 2%? That would over time double the interest-rate expense. And the Japanese are borrowing
between 30-40% of their annual budget. The total debt isrising rapidly.
Ok, let’s go over these points:
Japan’s population is shrinking, and the number of workers per retiree is rising. Japan has the highest ratio
of debt to GDP in the developed world. And that debt is growing by 7-8% a year, and does not include
local debt. Interest rates cannot go lower. Savings are falling rapidly and will not be able to cover the
need for new debt issuance, by a long shot. Within a few years, because of the aging of the population,
savings will go negative. Social security payments are rising. GDP is shrinking, and export trade is off
about 30-40%, depending on the industry. Machine tools are down 80%!
If rates were to go up by 1%, let alone 2%, over time Japan’s percentage of tax revenue dedicated to
interest payments would double to 18% and then to 40% and then just keep going up. It is conceivable
that it will take 100% of tax revenues in less than ten years, at the current trajectory. Why? Because
Japan is going to have to start to compete with the rest of the world to sell its bonds. Who but the
Japanese would buy a Japanese bond at 1.3%? From a country that is rapidly going to 200% of debt-to-
GDP? Doesn’t really seem like a smart trade to me. And as the data shows, the ability of the Japanese
consumer to buy more debt is rapidly waning.
The Japanese government is coming to a crossroads with no good exits. Cut the budget drastically in the
face of a deflationary recession? Monetize the debt and let the yen go the way of all fiat currencies? Can
someone say Zimbabwe? Increase already high taxes in a very weak economy?
And yet the yen has been getting stronger over the last month. It is now at 92 to the dollar, up from 120
just two years ago. Why would a country with such bad fundamentals have such a strong currency?
Shouldn’t the yen be a screaming short?
Let me offer two speculations that are mine alone. First, it is well-known that the Japanese are very
involved in the reverse carry trade. That is, since they can’t find yield in Japan, they convert to another
higher-yielding currency for income. So, maybe the retirees actually need to spend some of that money
they have outside of Japan to live, so they have to convert to yen.
Second, Japanese corporations are getting hammered. Could it be that they are bringing yen home to pay for
current transactions like rent and payroll? Japanese corporations dependent on exports desperately need
the yen to fall, yet the central bank can’t seem to engineer a falling yen. I wrote about five years ago
that the Japanese Central Bank has to rank as one of the most incompetent of all central banks, because
they can’t even destroy their own currency.
But I think the central bank is going to figure it out. If they do not monetize the debt, rates will have to
rise over time (say the next 2-3 years), and that is most definitely a problem. Monetizing the debt would
mean the yen would fall in value, which is something they actually want to happen. How much
monetization? When? I don’t know, and I doubt they do. If I were the head of the central bank or the
government, I would not sleep easy.
Japan is the second largest economy in the world. There is a rule in economics: “If something can’t
continue, then it won’t.” Japan can’t continue down this path. All the trends are going against them.
Sadly, Japan is going to hit the wall, maybe some time in the next few years. This will be very bad for
the world, as they have financed much of Asian growth. They do in fact buy a lot of world goods, and
their buying power is going to fall. This is going to mean fewer US and European jobs. Not to mention
fewer jobs in the countries that are Japan’s neighbors.
And unless we change things in the US, this will be us in less than ten years. As in hit the wall, serious
depression, etc. I am hopeful that we can actually get our act together. But then I am an eternal
optimist.
Buddy, Can You Spare $5 Trillion?
I have been writing for months that I don’t think the US can find $2 trillion
dollars this year and then come back to the well for another $1.5 trillion next year without serious
disruption in the markets. Where do you find that much money when all the rest of the world also wants
to borrow massive amounts? How much are we talking about? The friendly folks at Hayman actually spent
the time to add it all up. This is not a comforting graph.
The graph shows the US will need to issue $3 trillion in debt. “Wait,” I asked, “I thought it was only 1.85″
The answer is that the number has grown to almost $2 trillion (as I wrote it would). Then you need to add
in off-budget items like TARP, state and municipal debt, etc. Pretty soon it adds up to another trillion. All
told, Hayman estimates that the world will need to find $5.3 trillion in NEW government financing. Never
mind the needs of corporations or individuals or commercial mortgages, etc.
I am still trying to get my head around this. Let’s hopefully assume that they made a mistake and it is
“only”$4 trillion. Where do you find that kind of money in a global deleveraging recession?
The World Bank says that total world GDP in 2008 was $60 trillion (http://siteresources.worldbank.org/D...ources/GDP.pdf).
That means we need to find almost 9% of world GDP to fund the new
government debt. Gentle reader, this is a serious problem. And now the next chart. Remove sharp objects
or take another drink.
This one is titled “The Potential Shortage of Capital to Fund Treasuries.” They take into account the need
for corporate borrowing, new corporate equity issuance, real estate debt, capital inflows and outflows,
household savings, etc.
Bottom line? There is simply not enough available capital under current conditions to do it all. Something
has to give. More household savings? More foreign investment (flight to safety, as the rest of the world
looks even worse)? Reduced corporate borrowing and thus less GDP growth? Higher rates to attract more
foreign and US investment?
The combinations are infinite, but none of them bode well. Increased household savings means less
consumer spending. To attract more foreign investment (in the amounts that will be needed) will mean
higher rates. And this is 2009. What happens in 2010? And 2011?
One trillion dollars is 7% of US GDP. And we will be running trillion-dollar deficits for a very long time.
Just a thought: Do you want to be a senator or congressman running for office next year with
unemployment nearing 11% (my estimate), with all of the problems mentioned above, and with a
record of having voted for the largest unfunded deficits in history? It is going to be a very interesting
election cycle.
I will close here, as going into the next slides will make the letter way too long, but we will get to them
next week. As a teaser, they asked me what my number-one concern was. I said Europe and European
banking. Interestingly, that was also their number-one concern for “exogenous” risk. It will make a great
launch for next week’s letter.
*SNIP*
:eek::mad::eek:
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