July 31, 2008
Elaine Meinel Supkis
Today we got the latest Bank of Japan statistical study concerning the Balance of Payments for 2007. It is important to understand Japan's true condition and true problems for it is a mirror for the US. Just as the UK is in the same, wretched condition as the US. Also,the FDIC is now out of money and has to borrow from the brand new open window the Federal Reserve created last Thanksgiving. This window is going to probably fund our entire banking system, our governments and our personal debts? Are they nuts? It is hard to keep up with the whacky economic news lately. The Doha Free Trade rounds have died and I say, good riddance. But we still have not grasped the true nature of the dangerous trap we are in. Despite the Japanese carry trade not running smoothly anymore.
Say what you will, the Lords of the Crumbling Manor are moving fast.
Now the FDIC gets access to the Fed’s discount windows. Why do I think it’s getting just plain spooky when government institutions (and that’s what the FDIC is) start to engage in emergency lending from a country’s central bank?Yes, I know the FDIC has very little in assets; I have warned about that for ages. But come on, this just makes everything worse. The FDIC takes over banks that are insolvent, not temporarily illiquid. And the discount windows provide liquidity, short-term and -supposedly- only in emergencies. Nothing about them says solvency, for good reason.
What is Sheila Bair going to do with TAF flows? Pay off those "guaranteed" deposits when banks fail? Let’s hope and pray she does not.
And what is the next step now? Are we going to fund Social Security through these windows too? Is General Petreaus going to finance his fighter jets through them? Someone please tell me where we can expect to end up, once we’re on our way down this road.
Several things here: banks are supposed to have savings in reserve. This is the fundamental basis of all banking. No bank can function in a negative flow. They have to have the FICTION of a reserve ratio of savings to back up the money processing business of a bank. Now, these savings also have to be insured. And protected. If people think they won't get their savings back PLUS interest because the banks are using this to create fees, funds and more money, why, no one would put their money in a bank! It gets parked nearer to home in various ways including burying it in the back yard.
So, to attract savings so this can be the basis of easy money creation, banks have to offer financial returns above the rate of inflation. Inflation is when bankers and the government ignore balancing the books and have no reserves and overspend their funds and make money appear out of thin air with no balance of savings. This devalues the currency and kills savings unless the banks offer better returns.
Now, in a normal world, when there are too many people clamoring for more borrowing and fewer and fewer are saving money, bankers MUST offer higher rates of return to savers to attract them so the bankers can still lend money! But instead, we live in this queer, insane historical situation that demands the bankers offer ever-lower rates for savers! So savings collapses and the banking system becomes this queer creature which is debt on top of debt on top of debt. All of which is called 'assets' by the bankers while they call savings, 'deficits.' Well, if there is no positive flow of savings to counterbalance LOSSES in lending when deadbeats don't pay interest on loans and even dumps paying principal, if there are no savings to balance this, the bankers go bankrupt, themselves.
The FDIC was supposed to be funded by the bankers since they are responsible for capitalizing their banks. But even as the creation of more money flooded the markets with more dollars, thus, creating inflation, this wasn't balanced by bankers giving the FDIC more money. So the protector ended up equally decapitalized. So now, the FDIC itself must borrow money instead of holding money!
Now let's go to the epicenter of all this mess: Japan. The latest statistical report has finally been translated! So time to dig through it and then tie everything together again:
Japan's Balance of Payments for 2007*
Japan's current account surplus increased to 25.0 trillion yen in 2007, up from 19.8 trillion in 2006, marking a new record high for the second consecutive year. This was mainly due to the growth of the surpluses in the trade and income balances. The capital and financial account deficit (net outflow) increased to 21.9 trillion yen in 2007, up sharply from 12.5 trillion yen in 2006, reflecting the increase in net outflows of "other investment." Reserve assets continued to increase, registering 4.3 trillion yen in 2007, up from 3.7 trillion yen in 2006. Balance of payments data for the whole of 2007, the second half of 2007, and the fourth quarter of 2007 in this report are preliminary unless otherwise stated.In balance of payments statistics, the following relationship holds true at all times:
Current account + capital and financial account + changes in reserve assets + errors and omissions = 0. Japan's balance of payments for 2007 shows that the current account surplus earned is mirrored by reverse flows abroad in the form of a capital and financial account deficit (outflows) and an increase in reserve assets.
My, oh my. Isn't Japan just depressed as all hell? Record surpluses! They are rolling in dough. I get many links from readers showing me articles written by utter fools here in the US and in England, all of which toe the propaganda line that poor Japan has this amazing, low interest rate at near zero due to this awful depression they are having. Look at the above graph! Up and up and up it goes. Unlike the US.
Here is a Federal Reserve report showing the US trade deficits:
Japan has a series of record surpluses while we have record deficits. Anyone with half a brain looking at this can plainly see that Japan's industry and trade is growing and the US is SHRINKING. Duh. And shrinking badly. Every penny of this trade deficit is made up by foreigners lending us money or us lending ourselves money out of thin air from the Fed Reserve's little windows of opportunity that have been opened onto the Cave of Death.
******************************************************************
This chart details how the outlays worked this last three years [click on all images to enlarge]:
'Surplus registered a record high for the fourth consecutive year' for example, with 'Income'. What is 'income' anyway?
Well, it is something that comes INTO your pockets, not out! Simple, isn't it? Inward direct investment also registered a record high in 2007. Net purchases of bonds and notes grew. Reserve assets continued to increase. This is all in stark contrast with the US.
***************************************************************
The surplus in the balance of income rose to 16.3 trillion yen, an increase of 2.5 trillion yen or 18.4 percent from 2006. This marked a record high for the fourth consecutive year and reflected the following developments. First, the surplus in "portfolio investment income" increased as a result of an increase in receipts of interest on bonds and notes reflecting the continued accumulation of outward portfolio investment and the depreciation of the yen. Second, the increase in profitability of foreign subsidiaries of Japanese companies contributed to an increase in the surplus of "direct investment income.
The Bank of Japan admits that the depreciation of the yen increases portfolio incomes! If something stupid like this makes one richer, of course, the Japanese will want a lot of weak yen activity going on! But they have to pay for all this when they make purchases of commodities from other nations [they don't buy much manufactured goods]. Let's look at this pie chart by the Bank of Japan:
This is NOT A GOOD THING. It is an imbalance. And since Japan profits by weakening the yen vis a vis the dollar and since the dollar is backed by a government and economy running deep in the red, this is tremendously unbalanced and totally fiscally unreasonable. Japan is content with this imbalance since it amplifies Japan's paper profits! They will kill rather than let this get fixed!
When they export, half of the transactions are in US dollars. But imports are three quarters in US dollars. No one really wants to use these stupid, worthless yen! Not even the Japanese. Trade with Asia is bigger than trade with the US yet the dollar is used for trade, not any Asian currencies including the Japanese, themselves.
This graph clearly shows that Japan is passively making record profits via servicing debts for others. They can sit back and laugh while we struggle to pay them back for these lovely Japanese carry trade loans. The US is losing money, borrowing and Japan is making money, lending.
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We can see clearly when there was a 'depression' in Japan during the 1990-2000 decade. But not since then! Indeed, the growth is outstripping the 'bubble' years!
This Bank of Japan chart clearly shows that exports to the US shrank in 2007. It grew the most with Europe since the yen is tremendously much weaker than the euro. The yen, representing an economy that is enjoying RECORD SURPLUSES and RECORD GROWTH, is weaker than the dollar and the euro. And also does virtually NO trade transactions with euros! How about that? I don't see any stories or analysis of this queer, bizarre, and I think, utterly ridiculous situation. Is the euro even a currency?
Skittish Firms Tweak China Price Practices On Eve Of New Monopoly Law
BEIJING (Nikkei)--With a new anti-monopoly law set to take effect in China Friday, many big companies operating there are abandoning commercial practices that might be taken as abusing their dominant positions in a particular sector.**************************************************
As Economy Slows, Major Banks Face Climbing Bad Loans AgainTOKYO (Nikkei)--Major banking groups are grappling with a rise in bad loans stemming from the sluggish economy, not long after freeing themselves of similar troubles that had pushed Japan's financial system to the brink of crisis.
************************************************Price Hikes Bolster Upstream Firms But Undercut Others
TOKYO (Nikkei)--Producers of consumer goods have struggled to pass skyrocketing prices onto consumers out of fear of reduced patronage, while their upstream counterparts, including steelmakers and trading houses, have fared much better.
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5 Brokers Bleed Red Ink, 12 Post Lower 1Q ProfitsTOKYO (Nikkei)--In the wake of the financial market turmoil stemming from the U.S. subprime loan crisis, five of the nation's 20 top brokerages logged net losses for the April-June quarter, while 12 posted reduced net profits.
************************************************
TOYOTA: Can It Return To Growth After Recent Troubles?TOKYO (Nikkei)--Although Toyota Motor Corp. (7203) surpassed General Motors Corp. to become the world's leading automaker in terms of sales in the first six months of this year, it was subsequently forced to revise its production and sales targets for the full year due to its failure to respond quickly to the ongoing U.S. economic slowdown and surging gasoline prices.
************************************************
Midsize Condo Builders Collapse As Financing Dries UpTOKYO (Nikkei)--The survival of midsize condominium builders is being threatened as their business model of relying on real estate funds to buy their properties has unravelled amid the thinning inflow of funds into the property sector in the wake of the subprime loan crisis as well as the slumping domestic condo market.
The exact same economic troubles are hammering Japan. The global housing bubble also raged in Japan but not as obviously as in Australia, England, Spain, the US, etc. But it was there, too. Now, liquidity has dried up in Japan! Yet how can that happen? Japan has ridiculously low interest rates! Let's look at what those fake banks in Japan are offering savers"
Nearly nothing. The Nikkei news even admits there is raging inflation in Japan now. As with the West, manufacturers can't pass on high costs to consumers because consumers can't borrow enough to buy things. This is because the cost of lending has shot up! All commerce will die if lending is at usury levels.
Ron Haruni: GDP Data: Stronger Than Financial Headlines Suggest
The Commerce Department reported on Thursday that real gross domestic product increased at an annual rate of 1.9 percent from April to June fiscal ‘08, versus a consensus expected 2.3%. Expansion in the second quarter, though 0.4% lower than expectations - outpaced the Q1′08, when the economy grew at a 0.9 percent annual pace.The increase in real GDP in the second quarter primarily reflected positive contributions from exports which added 2.4 points to the real GDP growth rate. Real exports of goods and services increased 9.2 percent in the second quarter, compared with an increase of 5.1 percent in the first. The weak dollar has made U.S. goods cheaper to foreign buyers, helping to bolster exports.
*snip*
Today’s GDP report, despite posting lower than expected results,shows a real economy that is functioning, and it’s managing to expand despite its troubles. If we exclude the massive decline in inventories, which we believe are overstated and likely to be subject to upward revisions, we get real final sales growth at a 3.9% annual rate.As we have stated before and continue to reiterate - these numbers are not recessionary. Any aspiration of experiencing a U.S. economy engulfed by a severe recession, is plainly delusional. While the economy is not growing at its full potential, we can’t argue with the fact that no matter what - it's still growing.
Japan, that has record growth, is now floundering this summer. The US is leading the way in this matter. We go down, everyone goes down. China is going down. So is Europe. This is a classic retraction. And at the root is the business of too much lending and not enough savings and hideously unbalanced global trade coupled with strange floating currencies that stink like some rotting great white whale stuck with harpoons!
Pretending that our great nation, running record budget and trade deficits, has a growing GDP is pure insanity! NO ONE should be allowed to talk about how we are 'growing' if the main thing that is growing is our deficits! This is wrong on every possible level! Until people grow the hell up and figure out that we are LOSING money, not growing it, when running in the red, then we might see things improve.
Pretending otherwise is futile, stupid and fatally dangerous. If our economy was 'growing' it wouldn't always be in the red. We can never claim this unless we wipe out our trade deficits and pay our taxes or cut government spending.
UNITED STATES Trade Indicators
Note how as our exports grow our imports also grow and stay ahead. We are always totally underwater. Ergo: we are not really growing, vis a vis trade, we are, at best, drowning.
GDP growth went from somewhat good if we ignored the flood of red ink to just plain terrible and even negative since last summer. The two 4.8 quarters was due entirely to the massive buy-out/buy-up frenzy when a flood of funny money had to exit the US and global housing markets and it all sloshed into Wall Street. The collapse of this GDP coincides with the unwinding of the Japanese carry trade last August! The fall is over 5%.
Industrial production stinks. The height was way back in the last quarter of 2004. Then, interest rates rose and manufacturing collapsed into negative numbers. It got boosted briefly only to fall even worse. This is due to government intervention boosting it artificially. Note the third wave here: the rise is even less than in 2004 and 2006. And the fall, far more spectacular. Japan, incidentally, in this same time frame, had record industrial output growth.
We cannot have a 'growing GDP' with industrial production shrinking by 3.2%. This is total insanity. This is like someone driving a car with flat tires, claiming he can race faster and faster.
The author in the linked article 'Calendar Yen Trading Patterns' provides historical record that EUR/JPY, which is the barometer of the yen carry trade, and USD/JPY, are frequently down in the month of August.
This will awesomely exasperate the unwinding of the trade that is just now commencing; and the coming fall of the US Dollar relative to the Yen.
Posted by: Richard | August 01, 2008 at 05:07 AM
Elaine, in my linked article, 'Gold Trades Up, While The Dollar, Stocks And Oil Trade Lower', I relate that gold is not riding oil's coat tail any more.
There is a strong investment demand for gold which can be seen in the following ratios:
gold relative to stocks, GLD:VTI,
gold relative to oil, GLD:USO.
gold relative to world currencies, GLD:DBV.
So as you might say Libra is rising to punish the gnomes.
You relate: "The yen, representing an economy that is enjoying RECORD SURPLUSES and RECORD GROWTH, is weaker than the dollar and the euro."
However, this is just now, like in just the last two days reversing; 'an investment sea change' is getting underway.
First, EUR/JPY is headed down; the yen is going to be getting stronger relative to the euro.
Second, USD/JPY is headed down; the US Dollar is going to win the race to the bottom, taking all currencies "right off the cliff" so as to speak.
Regional currencies may arise in South America, the Gulf oil exporting region, and in West Africa.
The weekly chart of EUR/JPY, FXE:FXY weekly, shows a dramatic 0.57% fall lower, from an all time, which came in a long running ascending wedge pattern, with four weeks of rising price on falling volume.
An unwinding of the yen carry trade has commenced with interest rate differential rate investing reversing.
More details are available in the linked article.
Posted by: Richard | August 01, 2008 at 05:15 AM
Correct, Richard with one gigantic difference: all trade partners with the US want the reverse. This is why it never goes all the way, they are heaving and struggling to regain a lost equilibrium which was very bad for all parties in the long run! So the major trend is for the dollar to fall. But it is artificially propped up by nearly everyone.
Posted by: Elaine Meinel Supkis | August 01, 2008 at 08:26 AM
Henry CK Liu has an interesting new article about the 'dollar hegemony' game.
http://henryckliu.com/page165.html
Interestingly he has a somewhat different view to Elaine in that to him the 'dollar hegemony' is largely enforced by the US for the benefit of the US. Liu is keenly aware of the negative aspects of the 'dollar hegemony' game for the exporting nations and the benefits for the US, while Elaine sees the negative aspects for the US with this game.
It looks to me like the game atm is both sides trying to wrestle a decisive advantage to their side. The US is trying to avoid to pay up what they owe while the exporting nations are trying to get the most of the buck they are owed before the US manages to destroy the value of the Federal note called the dollar.
Mr Liu talks about the Holy Dollar Empire much the same Elaine points out the similarities between the EU and the Holy Roman Empire.
What is clear is that the 'dollar hegemony' game is on it's last legs, only nobody wants it to end before they are prepared for the consequences. That is why the dollar is getting life support from exporting nations attempting to protect their own economies.
Posted by: Christian W | August 01, 2008 at 10:47 AM
Very good analysis, Christian W. I agree. Thank you.
Posted by: Elaine Meinel Supkis | August 01, 2008 at 11:36 AM
Over at Mish:
More government jobs, less manufacturing, more leisure and hospitality (what's that due? immigration of hotel room maids?).
Posted by: RobG | August 01, 2008 at 11:50 AM
Here is the link: Mish's Global Economic Trend Analysis
Posted by: RobG | August 01, 2008 at 11:52 AM
Thanks for your great analysis and thorough research. Your subtle but important point that while the US has shown GDP growth; it is absurd to see this as good given the fact that we are simultaneously increasing our debt and continue running an unsustainable trade deficit.
But, to be sure, the wall street cheerleaders will be flipping and dancing as if our economy just kicked a field goal - never mind that we are behind by four touchdowns and time is running out, late in the fourth quarter.
__________________________________
Richard - thanks for the great post. You make a point that has been bothering me when you said that "gold is not riding oil's coat tail any more." I have read a number of articles that link these two. I think you are correct in saying things are changing.
If one follows your logic, there is good reason to anticipate a bull run in the gold market.
__________________________________
Christian - I think you have hit the nail on the head in saying that "What is clear is that the 'dollar hegemony' game is on it's last legs, only nobody wants it to end before they are prepared for the consequences."
No doubt most nations want the US dollar hegemony to end, and who can blame them given our neoconservative government and predatory financial institutions. I've wondered why they have tolerated us this long but think your point is on the mark - they want a soft landing.
Posted by: DrKrbyLuv | August 01, 2008 at 12:18 PM
GDP increases when prison are built. Does this make any sense?
GDP is meaningless, or even worse, GDP is propaganda.
Posted by: Buffalo Ken | August 01, 2008 at 12:58 PM
Dr, nearly ALL nations run trade SURPLUSES with the US. So they love to keep the dollar strong! Europe followed the Germans who wanted a strong currency due to the emotions around the whole Weimar hyperinflation mess.
But they are now giving up and propping up the dollar, too. So now EVERYONE wants a strong dollar. But it is impossible, the dollar is way overvalued now. The oil exporters will be the ones who decide when to kill the dollar. This is when they do what Iran already did: demand payment in euros and yen.
Posted by: Elaine Meinel Supkis | August 01, 2008 at 01:00 PM
I guess China now flip the switch the other way around. This ought to be interesting, how low they will bring yuan to.
http://www.bloomberg.com/apps/news?pid=20601089&sid=aiO5OaX5q3VM&refer=china
China's yuan completed the biggest weekly loss since a dollar peg was scrapped in 2005, as policy makers check the currency's advance to aid exporters. Bonds fell.
President Hu Jintao today reiterated government goals of maintaining steady and fast growth in the world's fourth-biggest economy and controlling inflation. China will raise tax rebates on exports of textiles and garments to 13 percent from 11 percent, the State Administration of Taxation said yesterday.
Posted by: Anthony | August 01, 2008 at 01:04 PM
Nothing will change until massive amounts of people organize and demonstrate actively.
We can whine, bitch and moan and point out what is going on on the Internet, but people are POWERLESS and DIVIDED.
There is only power if people ORGANIZE.
It will take AGRESSIVE acts to make change.
A good start would be if millions of people organized and, and stopped paying income taxes all at the same time.
The only way to create change, is to starve the beast of the status quo.
Posted by: JZ | August 01, 2008 at 02:17 PM
Organizing is very hard work. First, all the easy options have to be eliminated.
Posted by: Elaine Meinel Supkis | August 01, 2008 at 03:47 PM
Britain has announced 35 to 40 % increases in gas and electricity prices this winter. Where I live in Scandinavia electricity will go up by 15 %...
I think most people are still in denial, while some people are still stunned. The real fury will come only when people start to feel the effects directly and actually realize how bad things will be. Even then too many people will be unable to look reality in the eye. They will prefer to go down the nazi/authoritarian route. These people will follow the leader who makes them FEEL good no matter what.
Posted by: Christian W | August 02, 2008 at 09:57 AM
Christian: I think you make a very good point. An authoriarian figure, if he/she has enough charisma, can pervert his "fight for the people" into his own cynical agenda. Has happened before. But I think in the Information Age we live in, people CAN (but not necessarily) be better informed. I don't think someone can write a 'Mein Kampf' and propel himself to power. On the negative side, I think of how popular people like Limbaugh and Hannity are and I cringe; maybe we ARE going to go down the tubes. And then, the FIRST people the nazis targeted for elimination were teachers. So who knows? And people aren't always rational; the tendency is to look for the easy way out of a mess.
Posted by: Paul S | August 02, 2008 at 12:08 PM
I don't understand how anyone could FEEL good if it means going down the nazi/authoritarian route. Hasn't that been the mode of operation for some time now, and isn't it obvious that it always results in incredible suffering of innocence and eventually always fails?
Can't we just grow up a bit and learn collectively?
I'm not necessarily advocating a low-tech existance (in fact, I think we really need some technology), but I think the Amish and other similar groups are onto something when it comes to healthy community interaction. I think this used to be much more common but at least in the US of A has mostly been lost. I partly blame cars and TV for this because they make it so easy for folks to live in their own universe disconnected even from those who live in close proximity.
For me, feeling good means facing reality with open eyes, trying to always learn, trying to find solutions, and being part of a community that is working together for the benefit of all members.
It means a willingness to speak truth to power (especially power that is rooted in the status quo). It means taking risk and taking direct action when necessary. I think it starts individually, and if the approach one chooses individually has merit, it will resonate with others (you know - "be the change you want to happen"). Then perhaps "Organization" will manifest in a manner that almost seems as if it spontaneously arose.
I think momentous lifestyle changes are necessary today perhaps more than ever, but folks won't put their hearts into it unless they individually choose to make these changes themselves. In the US of A one suggestion that I think would be a true step in the correct direction would be for People to turn off their damn TV's and take a walk in the neighborhood or get their hands dirty in the soil.
We need to re-connect in so many ways and on so many levels.
OK - I'll get off my soapbox....
Peace,
Ken
P.S. I couldn't get on the site for the last little while, but now I'm glad it let me back....
Posted by: Buffalo Ken | August 02, 2008 at 12:12 PM
Courtesy of iTulip, I came across this illuminating (for me) BBC item on credit default swaps:
Part1:
http://www.youtube.com/watch?v=xNuBN9KJRs8
Part 2:
http://www.youtube.com/watch?v=gJI8hbZbLdk
I knew that these things were a form of insurance against defaults. What I didn't know was that anyone could take out CDS's without being the "owner" of the debt. As the report says, it's the equivalent of anyone and any number of people being able to take out insurance on your house - not just you.
Wow. What a house of cards.
Posted by: Bear of Little Brain | August 02, 2008 at 04:10 PM
Yes, that was utterly ridiculous and should have been outlawed along with naked short selling, etc. But people got rich doing this so no one wanted it to stop!
Posted by: Elaine Meinel Supkis | August 02, 2008 at 05:11 PM
Americans kill Muslims, and Muslims kill Americans. Who benefits from all this carnage? Zi juus and central bankers, that's who.
Zi central bankers want to lend money created out of thin air to people and governments who then must pay the money back in real stuff, like taxes, gold, silver, houses, cars, and the shirt off your back.
These central bankers are out to break the world. Enslave the world. Total power.
Zi central bankers' "Master Plan" calls for continual wars. They will fund all these wars with monies created out of thin air, until all countries are broke and defenseless.
And guess who will own all the gold, silver, oil, and real stuff at the end of these wars? Zi juus central bankers.
So, wake up America.
Posted by: PLovering | August 02, 2008 at 07:43 PM
Um, hate to say this but the old Norman families are really sitting pretty here.
Posted by: Elaine Meinel Supkis | August 02, 2008 at 09:31 PM
Elain I have no idea what you mean, so for that reaason, I will add that those of the small house are also sitting pretty.
Takes 2 2 tango!
Posted by: Buffalo Ken | August 02, 2008 at 10:43 PM
and for good measure here is a 2nd post in a row......off U go!
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