The IMF Wants You To Pay 71% Income Tax

Submitted by Simon Black of Sovereign Man blog,

The IMF just dropped another bombshell.

After it recently suggested a “one-off capital levy” – a one-time tax on private wealth as an exceptional measure to restore debt sustainability across insolvent countries – it has now called for “revenue-maximizing top income tax rates”.

The IMF’s team of monkeys has been working around the clock on this one, figuring that developed nations can increase their overall tax revenue by increasing tax rates.

They’ve singled out the US, suggesting that the US government could maximize its tax revenue by increasing tax brackets to as high as 71%.

Coming from one of the grand wizards of the global financial system, this might be the clearest sign yet that the whole house of cards is dangerously close to being swept away.

Think about it– solvent governments with healthy economies don’t go looking to steal 71% of people’s wealth. They’re raising this point because these governments are desperate. And flat broke.

The ratio of public debt to GDP across advanced economies will reach a historic peak of 110% next year, compared to 75% in 2007.

That’s a staggering increase. Most of the ‘wealithest’ nations in the West now have to borrow money just to pay interest on the money they’ve already borrowed.

This is why we can only expect more financial repression from desperate governments and established institutions.

This means more onerous taxation. More regulation. More controls over credit and capital flows.

And that’s only the financial aspect; the deterioration of our freedom and liberty will continue at an accelerated pace.

Can a person still be considered “free” when 71% of what s/he earns is taken away at the point of a gun by a bankrupt, bullying government? Or are you merely a serf then, existing only to feed the system?

This is why we often stress having a global outlook and considering all options that are on the table.

Because the other side of the coin is that while some countries are tightening the screws and making life more difficult, others are taking a different approach.

Whether out of necessity or because they recognize the trend, many nations around the world are launching new programs to attract international talent and capital.

I’ve mentioned a few of these already– economic citizenship programs in places like Cyprus, Malta, and Antigua (I met a lot of these programs’ principals at a recent global citizenship conference that I spoke at in Miami).

Then there are places like Chile and Colombia which have great programs for entrepreneurs and investors. Other places like Georgia and Panama have opened their doors to nearly all foreigners for residency.

Bottom line– there are options. Some countries are really great places to hold money. Others are great to do business. Others are great places to reside.

The era we’re living in– that of global communications and modern transport– means that you can live in one place, your money can live somewhere else, and you can generate your income in a third location.

Your savings and livelihood need not be enslaved by corrupt politicians bent on stealing your wealth… all to keep their destructive party going just a little bit longer.

The world can truly be your playground. You just need to know the rules of the game.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/MDDFXbKJ4VM/story01.htm Tyler Durden

Poll: 50% Oppose, 45% Favor Allowing Cell Phone Calls During Flights

As Ed Krayewski
noted earlier
 and CNN
reports
 today, “The Federal Communications Commission
voted 3-2 Thursday to consider lifting its ban on in-flight cell
phone use. On the same day, the federal Department of
Transportation and three members of Congress took steps to block
those calls.”

The latest Reason-Rupe
poll
 finds 45 percent of Americans are in favor of
allowing cell phone calls during flights, with 50 percent opposed.
This level of support is considerably higher than the AP-GfK and Quinnipiac polls
this week. AP-Gfk found 19 percent favor allowing passengers to use
their cell phones to make calls on planes, 48 percent oppose, and
30 percent don’t have an opinion. Quinnipiac found 30 percent favor
and 59 percent oppose such a policy.

However, these questions do not make clear whether Americans
want the government to ban their fellow passengers from talking on
cell phones during commercial flights, or if they think that
decision should be left to the individual airlines. What is clear
is that Americans are not enthusiastic about listening to
neighboring passengers’ cell phone conversations during
flights.

Differences in age significantly impact support for a policy
change. 56 percent of Americans under 35 favor allowing people make
calls on flights while 41 percent are opposed.   In
contrast 60 percent of those over 55 years old oppose allowing cell
phone calls on flights while 33 percent are in favor.

Slim majorities of Republicans and independents oppose their
fellow passengers making cell phone calls, and Democrats are evenly
divided. Among Republicans who don’t identify as tea party
supporters, 57 percent oppose and 39 percent favor allowing cell
phone calls on flights, while tea party supporters are evenly
divided.

Nationwide telephone poll conducted Dec 4-8 2013 interviewed
1011 adults on both mobile (506) and landline (505) phones, with a
margin of error +/- 3.7%. Princeton Survey Research Associates
International executed the nationwide Reason-Rupe survey. Columns
may not add up to 100% due to rounding. Full poll results,
detailed tables, and methodology found here. Sign
up for notifications of new releases of the Reason-Rupe
poll here.

from Hit & Run http://reason.com/blog/2013/12/12/reason-rupe-poll-45-oppose-50-favor-allo
via IFTTT

Charting The Unquenchable Investor Thirst For Kool-Aid

Thanks to the “pulling forward” of future production in the channel-stuffing-based inventory build of Q3, consensus estimates for the growth of the US GDP in Q4 2013 has collapsed to new lows for this cycle at a mere 1.5%. However, the “escape-velocity” recovery remains just around the corner as estimates for Q1 and Q2 2014 remain unimpacted by such nuance as reality…

 

Consensus GDP hits new lows for Q4 2013 – but 2014 will be just fine…

 

…just like 2013 was supposed to be in 2012…AND 2011… AND 2010…

Chart: Bloomberg and Deutsche Bank


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Cs8mQUqfquI/story01.htm Tyler Durden

Obama Birth Certificate Verifier Is Lone Fatality In Small Plane Crash

Of the nine passengers aboard the small Makani Kai Air plane flight that crashed off the shore of Molokai Wednesday night, eight survived. The lone fatality was Loretta Fuddy, infamous for her “I have seen the original records” confirmation of the long-form birth certificate of the US President in 2011. Fuddy, who was 65 years old and had served as Hawaii’s state health director since January 2011, is described as “selfless, utterly dedicated, and committed” is a “terrible loss for the state“.

 

 

Via USA Today,

The plane, carrying a pilot and eight passengers, went down Wednesday in the water a half mile off the Hawaiian island of Molokai, the Maui Fire Department said. The lone fatality was Loretta Fuddy, who has served as state health director since January 2011.

 

Fuddy, 65, made national news in April 2011 when she verified the authenticity of certified copies of President Obama’s birth certificate. Obama had requested the release to curb claims by so-called “birthers” that he was born in Kenya and not eligible to be president.

 

 

Makani Kai Air President Richard Schuman told Honolulu-based KITV that he spoke with the pilot of the single-engine turboprop Cessna Grand Caravan after the crash.

“What he reported is after takeoff … there was catastrophic engine failure,” Schuman said. “He did the best he can to bring the aircraft down safely and he got everybody out of the aircraft.”

 

Schuman said the cause of the engine failure had not yet been determined.

 

Coast Guard Petty Officer Melissa McKenzie said a Coast Guard helicopter got three passengers out of the water while Maui fire crews picked up five people. One person swam ashore.

Paging Donald Trump…


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/iIUmbKFonB4/story01.htm Tyler Durden

If You Don’t Trust the Fed, Here’s An Inside View That Confirms Your Worst Suspicions

Submitted by F.F.Wiley of Cyniconomics blog,

Earlier this year the notion that the Fed might modestly taper its purchases drove significant upheaval across financial markets. This episode should engender humility on all sides. It should also correct the misimpression that QE is anything other than an untested, incomplete experiment.

– Former FOMC Governor Kevin Warsh, writing in the Wall Street Journal on November 13.

If I may paraphrase a sainted figure for many of my colleagues, John Maynard Keynes: If the members of the FOMC could manage to get themselves to once again be thought of as humble, competent people on the level of dentists, that would be splendid. I would argue that the time to reassume a more humble central banker persona is upon us.

– Dallas Fed President Richard Fisher, speaking in Chicago on December 9.

I fault the Fed for its lack of intellectual leadership on the economy and, in particular, Bernanke’s lack of forthrightness about the limits of the Fed’s ability to address slow growth and fiscal disequilibrium.

– Former St. Louis Fed President William Poole, speaking in Washington D.C. on March 7.

Does anyone else see a common theme?

Last month, we offered a plain language translation of the Warsh op-ed, because we thought it was too carefully worded and left readers wondering what he really wanted to say. Translation wasn’t necessary for Fisher’s speech, which contained a clear no-confidence vote in the Fed’s QE program. Poole’s comment was from a seminar question-and-answer session earlier this year, but it reached our inbox only last week in a transcript published in the latest Financial Analysts Journal. The Q&A was attached to an article that I’ll discuss here, because it makes claims we haven’t heard from others with FOMC experience.

Here’s an example:

Ben Bernanke talks a lot about risk management and the tradeoff between benefits and costs; he maintains that the need to balance these two issues justifies proceeding with the current policy. But Bernanke does not discuss the risk of political intervention in Fed policy despite numerous examples of the Fed giving in to political pressure and waiting too long to change its policy, which results in a detrimental outcome for the economy.

 

 

Essentially, pressure on the Fed will come from inside the government and may not be very visible; it may be limited to a few op-ed articles from the housing lobby. [FFW – presumably, Poole intended “it” to refer to the visible part of the pressure.] The true amount of political pressure will be largely hidden.

Poole is more or less saying that we have no idea what’s truly behind the Fed’s decisions. But he doesn’t stop there. He’s willing to make a prediction that you wouldn’t expect from an establishment economist:

[T]he real issue is the politics of monetary policy … I believe that the Fed will not successfully resist the political winds that buffet it. I am not a political expert or a political analyst by trade. My qualification for speaking on this topic is that I have followed the interactions between monetary policy and politics for a very long time. As with all things political, the politics of the Fed means that realities often fail to match outward appearances … I believe the Fed is likely to overdo its current QE policy of purchasing $45 billion of Treasuries and $40 billion of MBSs per month.

So there you have it: a 10-year FOMC veteran wants us to know that central banking isn’t all about the latest hot research on the wonders of unconventional measures.  On the contrary, monetary policy is no different than other types of policymaking; it’s guided by hidden political forces.

If you don’t mind our saying so, we feel a bit vindicated. Our very first Fed post ten months ago included the following:

As for the flip-flop [the Fed’s commitment to lifting the stock market through QE so shortly after claiming no responsibility for stock prices in recent bubbles], it’s easy to find a logical explanation. The banks want QE. Influential political and economic leaders want QE. Therefore, the path of least resistance is to give them QE. On the other hand, market manipulation to prick the Internet and housing bubbles would have been widely unpopular. Therefore, policymakers rejected the idea that they should manipulate markets and prick bubbles. No one likes to be unpopular.

 

More generally, QE seems to me to be explained by Bernanke (and his colleagues) being unable to sit still. This is natural behavior when you have to continually justify decisions. It’s not easy to explain to Congress, the media or public why you’re doing nothing but waiting for past policies to work. It won’t be long before people portray you as weak and indecisive and tell you to “Get to work, Mr. Chairman.” But once you start implementing new policies, especially if they’re in a direction that’s expedient for everyone in the short-term, then those criticisms go away. They’re replaced by adjectives like bold and proactive. And who doesn’t want to be known as bold and proactive?

We haven’t returned to this theme often, partly because it can’t be tested like we can test the Fed’s economic beliefs. Regular readers know that we do quite a lot of empirical work. We try our best to follow David Hume’s maxim that: “A wise man, therefore, proportions his belief to the evidence.”

As we see it, the Fed’s economic beliefs are proportioned more closely to political factors than real-life evidence. You might replace Hume with Upton Sinclair, who said “it is difficult to get a man to understand something when his salary depends on him not understanding it.”

In other words, politics and personal incentives are a huge part of the picture, and not just in central banking but in the economics profession more generally.

The theories underpinning current policies, which have built up over the last 80 years or so, can’t be properly understood without thinking through the motivations behind key developments. Some of the motivational factors are obvious, while others are more subtle, but I won’t clutter this post with our musings on the hidden drivers in economics. Detlev Schlichter offered a nice summary in his book, Paper Money Collapse:

It would be naïve to simply assume that the exalted position of [mainstream economic] theories in present debate is the result of their superiority in the realm of pure sciences. This is not meant as a conspiracy theory in the sense that professional economists are being hired specifically to develop useful theories for the privileged money producers in order to portray their money printing as universally beneficial. But it would be equally wrong to assume that the battle for ideas is fought only by dispassionate and objective truth-seekers in ivory towers and that only the best theories are handed down to the decision makers in the real world, and that therefore whatever forms the basis of current mainstream discussion must be the best and most accurate theory available. No science operates in a vacuum. The social sciences in particular are often influenced in terms of their focus and method of inquiry by larger cultural and intellectual trends in society. This is probably more readily accepted in the other major social science, history. What questions research asks of the historical record, what areas of inquiry are deemed most pressing and how historians go about historical analysis is often shaped by factors that lie outside the field of science proper and that reflect broader social and political forces.

 

Moreover, ever since mankind began writing its histories they have served political ends. History frequently provides a narrative for the polity that gives it a sense of identity or purpose, whether this is justified or not, and the dominant interpretations of history can be powerful influences on present politics. Similarly, certain economic theories have become to dominate debate on economic issues because they fit the zeitgeist and specific political ideologies. This is not to say that economics cannot be a pure, objective science. It certainly can and should be. Whether theories are correct or not must be decided by scientific inquiry and debate, and not in the arena of politics and public opinion. But it is certainly true that many economists do depend for their livelihoods on politics and public opinion, and that they cannot operate independently of them.

Schlichter is one of many authors and bloggers willing to discuss the awkward realities lurking behind economic theory and central banking. But these ideas are considered taboo by most mainstream media outlets. They’re not discussed in establishment venues or spoken by establishment figures.

Or so I thought.

Poole’s refreshingly honest take on the Fed’s inner workings – from someone who truly knows what goes on behind the curtains – is more than welcome.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/hRkL5rvMW3g/story01.htm Tyler Durden

Graham Summers’ Weekly Market Review

The markets are in a perilous condition today.

We’ve been noting for months that the markets were displaying signs of a top. Among other items, we recently noted:

1)   Margin debt (when investors borrow money to buy stocks) has hit new all time highs.

2)   The number of bearish investors has hit an all time low.

3)   Market leaders have peaked or are peaking.

4)   Market breadth (the number of stocks that are rallying) is falling.

5)   Earnings are falling at key economic bellweathers.

6)   Stocks have diverged dramatically from earnings and revenues.

Of course, market tops always take longer than one expects. The weakness of the S&P 500 over the last few weeks isn’t too promising.

A break below this line would open the door to a more serious correction, possibly to 1,700.

The key item to note would be if the market does correct in a big way while the Fed was engaged in its $85 billion per month QE plan. We’ve never had a correction greater than 5% since the Fed announced QE 3 and QE 4. A 5% correction from the most recent peak would bring us to 1,710.

That would be the key line to watch. I’ve drawn it in the chart below.

Is the market topping? It’s too early to tell. But for certain we are in a bubble. It’s just a question of when it bursts.

For a FREE Special Report on how to beat the market both during bull market and bear market runs, visit us at:

 

http://phoenixcapitalmarketing.com/special-reports.html

 

Best Regards

 

Phoenix Capital Research

 

 

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/O-j_VOwDqik/story01.htm Phoenix Capital Research

Graham Summers' Weekly Market Review

The markets are in a perilous condition today.

We’ve been noting for months that the markets were displaying signs of a top. Among other items, we recently noted:

1)   Margin debt (when investors borrow money to buy stocks) has hit new all time highs.

2)   The number of bearish investors has hit an all time low.

3)   Market leaders have peaked or are peaking.

4)   Market breadth (the number of stocks that are rallying) is falling.

5)   Earnings are falling at key economic bellweathers.

6)   Stocks have diverged dramatically from earnings and revenues.

Of course, market tops always take longer than one expects. The weakness of the S&P 500 over the last few weeks isn’t too promising.

A break below this line would open the door to a more serious correction, possibly to 1,700.

The key item to note would be if the market does correct in a big way while the Fed was engaged in its $85 billion per month QE plan. We’ve never had a correction greater than 5% since the Fed announced QE 3 and QE 4. A 5% correction from the most recent peak would bring us to 1,710.

That would be the key line to watch. I’ve drawn it in the chart below.

Is the market topping? It’s too early to tell. But for certain we are in a bubble. It’s just a question of when it bursts.

For a FREE Special Report on how to beat the market both during bull market and bear market runs, visit us at:

 

http://phoenixcapitalmarketing.com/special-reports.html

 

Best Regards

 

Phoenix Capital Research

 

 

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/O-j_VOwDqik/story01.htm Phoenix Capital Research

“Defying Gravity” – Counting Down To Japan’s D-Day In Two Charts

While the distractions of the Japanese currency collapse, the resultant nominal offsetting surge in the value of the Japanese stock market, the doubling of the Japanese monetary base and the BOJ’s monetization of 70% of Japan’s gross issuance have all been a welcome diversion in a society struggling with the catastrophic aftermath of the Fukushima explosion on one hand, imploding demographics on the other, and an unsustainable debt overhang on the third mutant hand, the reality is that Japan, despite the best intentions of Keynesian alchemists everywhere, is doomed. 

One can see as much in the following two charts from a seminal 2012 research piece by Takeo Hoshi and Tatakoshi Ito titled “Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?” and which begins with the following pessimistic sentence: “Recent studies have shown that the Japanese debt situation is not sustainable.” Its conclusion is just as pessimistic, and while we urge readers to read the full paper at their liesure, here are just two charts which largely cover the severity of the situation.

Presenting the countdown to Japan’s D-Day. 

Exhibit A.

The technical details of what is shown below are present in the appendix but the bottom line is this: assuming three different interest rates on Japan’s debt, and a max debt ceiling which happens to be the private saving ceiling, as well as assuming a 1.05% increase in private sector labor productivity (average of the past two decades), Japan runs out of time some time between 2019 and 2024, beyond which it can no longer self-fund itself, and the Japan central bank will have no choice but to monetize debt indefinitely.

and Exhibit B.

Figure 12 shows the increase in the interest rate that would make the interest payment exceed the 35% of the total revenue for each year under each of the specific interest scenarios noted in the chart above (for more details see below). The 35% number is arbitrary, but it is consistent with the range of the numbers that the authors observed during the recent cases of sovereign defaults. In short: once interest rates start rising, Japan has between 4 and 6 years before it hits a default threshold.

The paradox, of course, is that should Japan’s economy indeed accelerate, and inflation rise, rates will rise alongside as we saw in mid 2013, when the JGB market would be halted almost daily on volatility circuit breakers as financial institutions rushed to dump their bond holdings.

In other words, the reason why Japan is desperate to inject epic amounts of debt in order to inflate away the debt – without any real plan B – is because, all else equal, it has about 8 years before it’s all over.

Here is how the authors summarize the dead-end situation.

Without any substantial changes in fiscal consolidation efforts, the debt is expected to hit the ceiling of the private sector financial assets soon. There is also downside risk, which brings the ultimate crisis earlier. Economic recovery may raise the interest rates and make it harder for the government to roll over the debt. Finally, the expectations can change without warning. Failure in passing the bill to raise the consumption tax, for example, may change the public perception on realization of tax increases. When the crisis happens, the Japanese financial institutions that holds large amount of government bonds sustain losses and the economy will suffer from fiscal austerity and financial instability. There may be negative spillovers for trading partners. If Japan wants to avoid such crisis, the government has to make a credible commitment and quick implementation of fiscal consolidation.

 

A crisis will happen if the government ignores the current fiscal situation or fails to act. Then, the crisis forces the government to choose from two options. First, the Japanese government may default on JGBs. Second, the Bank of Japan may monetize debts. The first option would not have much benefit because bond holders are almost all domestic. Monetization is the second option. Although that may result in high inflation, monetization may be the least disruptive scenario.

Finally, this is how the BOJ’s epic monetization was seen by the paper’s authors back in March 2012.

Bank of Japan could help rolling over the government debt by purchasing JGBs directly from the government. The Bank of Japan, or any other central bank with legal independence, has been clear that they do not endorse such a monetization policy because it undermines the fiscal discipline. However, at the time of crisis, the central bank may find it as the option that is least destructive to the financial system. If such money financing is used to respond to the liquidity crisis, this will create high inflation.

 

The prospect for high inflation will depreciate yen. This will partially stimulate the economy via export boom, provided that Japan does not suffer a major banking crisis at the same time.

 

An unexpected inflation will result in redistribution of wealth from the lenders to the borrowers. This is also redistribution from the old generations to the young generations, since the older generation has much higher financial assets whose value might decline, or would not rise at the same pace with inflation rate. This may not have such detrimental impacts on the economy, since many who participate in production and innovation (corporations and entrepreneurs) are borrowers rather than lenders.

For now monetization is indeed less disruptive. The question is for how much longer, since both Japan and the US are already monetizing 70% of their respective gross debt issuance. And once the last bastion of Keynesian and Monetarist stability fails, well then…

Once the crisis starts, the policy has to shift to crisis management. As we saw above, the crisis is likely to impair the financial system and slow down consumption and investment. Thus, the government faces a difficult tradeoff. If it tries to achieve a fiscal balance by reducing the expenditures and raising the taxes, the economy will sink further into a recession. If it intervenes by expansionary fiscal policy and financial support for the financial system, that would make the fiscal crisis more serious. This is a well-known dilemma for the government that is hit by debt crisis…. If not helped by the government, the banking system will be destroyed, and the economy will further fall into a crisis. Rational depositors will flee from deposits in Japanese banks to cash, foreign assets or gold.

Ah… rational.

* * *

Appendix:

The private saving ceiling is the absolute maximum of the domestic demand for the government debt, but the demand for JGBs will start falling well before the saving ceiling is ever reached. One potential trigger for such a change is that the financial institutions find alternative and more lucrative ways to invest the funds. In general, when the economic environment changes to increase the returns from alternatives to the JGBs, the interest rate on JGBs may start to increase. If this suddenly happens, this can trigger a crisis. Increases in the rate of returns may be caused by favorable changes in the economic growth prospect. The end of deflation and the zero interest rate policy would also lead to higher interest rates.

In Figure 6 , the authors calculate Japan’s debt’GDP over the next three decades using the following assumptions on the interest rate:

  • R1: Interest rate is equal to the largest of the growth rate (?t) or the level at 2010 (1.3%).
  • R2: Interest rate rises by 2 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%).
  • R3: Interest rate rises by 3.5 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%) .

R1 is motivated by the fact that the average yield on 10 year JGBs over the last several years has been about the same as the GDP growth rate during the same time interval, but constrains the interest rate to be much lower than the current rate even when the GDP growth declines further. R2 and R3 assume that the interest rate rises as the government accumulates more debt. Many empirical studies have demonstrated such relation. R2 (2.0 basis points increase) uses the finding of Tokuoka (2010) for Japan. R3 (3.5 basis points increase) assumes the coefficient estimate used by Gagnon (2010). It is the median estimate from studies of various advanced economies

A more reasonable scenario is to assume the growth rate of GDP per-working-age person (or an increase in labor productivity) to be similar to that of the 1990s and 2000s. We consider two alternative growth rates per-working-age population. The low growth scenario is that the increase in labor productivity at 1.05% (average of 1994-2010) and the high growth scenario is at 2.09% (average of 2001-2007, the “Koizumi years”).12 Table 6 shows the growth decomposition on the assumption of the 1.05% growth rate of GDP per-working-age person…. The upper bound for the debt accumulation is reached by 2024 at the latest.

Full paper


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8NuME7zSM7o/story01.htm Tyler Durden

"Defying Gravity" – Counting Down To Japan's D-Day In Two Charts

While the distractions of the Japanese currency collapse, the resultant nominal offsetting surge in the value of the Japanese stock market, the doubling of the Japanese monetary base and the BOJ’s monetization of 70% of Japan’s gross issuance have all been a welcome diversion in a society struggling with the catastrophic aftermath of the Fukushima explosion on one hand, imploding demographics on the other, and an unsustainable debt overhang on the third mutant hand, the reality is that Japan, despite the best intentions of Keynesian alchemists everywhere, is doomed. 

One can see as much in the following two charts from a seminal 2012 research piece by Takeo Hoshi and Tatakoshi Ito titled “Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?” and which begins with the following pessimistic sentence: “Recent studies have shown that the Japanese debt situation is not sustainable.” Its conclusion is just as pessimistic, and while we urge readers to read the full paper at their liesure, here are just two charts which largely cover the severity of the situation.

Presenting the countdown to Japan’s D-Day. 

Exhibit A.

The technical details of what is shown below are present in the appendix but the bottom line is this: assuming three different interest rates on Japan’s debt, and a max debt ceiling which happens to be the private saving ceiling, as well as assuming a 1.05% increase in private sector labor productivity (average of the past two decades), Japan runs out of time some time between 2019 and 2024, beyond which it can no longer self-fund itself, and the Japan central bank will have no choice but to monetize debt indefinitely.

and Exhibit B.

Figure 12 shows the increase in the interest rate that would make the interest payment exceed the 35% of the total revenue for each year under each of the specific interest scenarios noted in the chart above (for more details see below). The 35% number is arbitrary, but it is consistent with the range of the numbers that the authors observed during the recent cases of sovereign defaults. In short: once interest rates start rising, Japan has between 4 and 6 years before it hits a default threshold.

The paradox, of course, is that should Japan’s economy indeed accelerate, and inflation rise, rates will rise alongside as we saw in mid 2013, when the JGB market would be halted almost daily on volatility circuit breakers as financial institutions rushed to dump their bond holdings.

In other words, the reason why Japan is desperate to inject epic amounts of debt in order to inflate away the debt – without any real plan B – is because, all else equal, it has about 8 years before it’s all over.

Here is how the authors summarize the dead-end situation.

Without any substantial changes in fiscal consolidation efforts, the debt is expected to hit the ceiling of the private sector financial assets soon. There is also downside risk, which brings the ultimate crisis earlier. Economic recovery may raise the interest rates and make it harder for the government to roll over the debt. Finally, the expectations can change without warning. Failure in passing the bill to raise the consumption tax, for example, may change the public perception on realization of tax increases. When the crisis happens, the Japanese financial institutions that holds large amount of government bonds sustain losses and the economy will suffer from fiscal austerity and financial instability. There may be negative spillovers for trading partners. If Japan wants to avoid such crisis, the government has to make a credible commitment and quick implementation of fiscal consolidation.

 

A crisis will happen if the government ignores the current fiscal situation or fails to act. Then, the crisis forces the government to choose from two options. First, the Japanese government may default on JGBs. Second, the Bank of Japan may monetize debts. The first option would not have much benefit because bond holders are almost all domestic. Monetization is the second option. Although that may result in high inflation, monetization may be the least disruptive scenario.

Finally, this is how the BOJ’s epic monetization was seen by the paper’s authors back in March 2012.

Bank of Japan could help rolling over the government debt by purchasing JGBs directly from the government. The Bank of Japan, or any other central bank with legal independence, has been clear that they do not endorse such a monetization policy because it undermines the fiscal discipline. However, at the time of crisis, the central bank may find it as the option that is least destructive to the financial system. If such money financing is used to respond to the liquidity crisis, this will create high inflation.

 

The prospect for high inflation will depreciate yen. This will partially stimulate the economy via export boom, provided that Japan does not suffer a major banking crisis at the same time.

 

An unexpected inflation will result in redistribution of wealth from the lenders to the borrowers. This is also redistribution from the old generations to the young generations, since the older generation has much higher financial assets whose value might decline, or would not rise at the same pace with inflation rate. This may not have such detrimental impacts on the economy, since many who participate in production and innovation (corporations and entrepreneurs) are borrowers rather than lenders.

For now monetization is indeed less disruptive. The question is for how much longer, since both Japan and the US are already monetizing 70% of their respective gross debt issuance. And once the last bastion of Keynesian and Monetarist stability fails, well then…

Once the crisis starts, the policy has to shift to crisis management. As we saw above, the crisis is likely to impair the financial system and slow down consumption and investment. Thus, the government faces a difficult tradeoff. If it tries to achieve a fiscal balance by reducing the expenditures and raising the taxes, the economy will sink further into a recession. If it intervenes by expansionary fiscal policy and financial support for the financial system, that would make the fiscal crisis more serious. This is a well-known dilemma for the government that is hit by debt crisis…. If not helped by the government, the banking system will be destroyed, and the economy will further fall into a crisis. Rational depositors will flee from deposits in Japanese banks to cash, foreign assets or gold.

Ah..
. rational.

* * *

Appendix:

The private saving ceiling is the absolute maximum of the domestic demand for the government debt, but the demand for JGBs will start falling well before the saving ceiling is ever reached. One potential trigger for such a change is that the financial institutions find alternative and more lucrative ways to invest the funds. In general, when the economic environment changes to increase the returns from alternatives to the JGBs, the interest rate on JGBs may start to increase. If this suddenly happens, this can trigger a crisis. Increases in the rate of returns may be caused by favorable changes in the economic growth prospect. The end of deflation and the zero interest rate policy would also lead to higher interest rates.

In Figure 6 , the authors calculate Japan’s debt’GDP over the next three decades using the following assumptions on the interest rate:

  • R1: Interest rate is equal to the largest of the growth rate (?t) or the level at 2010 (1.3%).
  • R2: Interest rate rises by 2 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%).
  • R3: Interest rate rises by 3.5 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%) .

R1 is motivated by the fact that the average yield on 10 year JGBs over the last several years has been about the same as the GDP growth rate during the same time interval, but constrains the interest rate to be much lower than the current rate even when the GDP growth declines further. R2 and R3 assume that the interest rate rises as the government accumulates more debt. Many empirical studies have demonstrated such relation. R2 (2.0 basis points increase) uses the finding of Tokuoka (2010) for Japan. R3 (3.5 basis points increase) assumes the coefficient estimate used by Gagnon (2010). It is the median estimate from studies of various advanced economies

A more reasonable scenario is to assume the growth rate of GDP per-working-age person (or an increase in labor productivity) to be similar to that of the 1990s and 2000s. We consider two alternative growth rates per-working-age population. The low growth scenario is that the increase in labor productivity at 1.05% (average of 1994-2010) and the high growth scenario is at 2.09% (average of 2001-2007, the “Koizumi years”).12 Table 6 shows the growth decomposition on the assumption of the 1.05% growth rate of GDP per-working-age person…. The upper bound for the debt accumulation is reached by 2024 at the latest.

Full paper


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8NuME7zSM7o/story01.htm Tyler Durden

House Overwhelmingly Approves Spending Measure That Rolls Back Sequester

lolcutsThe House of Representatives overwhelmingly

approved
a multi-year budgetary framework negotiated earlier
this month by House Budget Committee Chair Paul Ryan (R-Wisc.) and
Senate Budget Committee Chair Patty Murray (D-Wash.). The measure
rolls back some of the reductions in spending increases known as
“sequester” that kicked in under the terms of the Budget Control
Act, which Congress passed and President Obama signed in the summer
of 2011. The Budget Control Act sought to slow the growth of
federal spending as the US debt was reaching its statutory limit of
$14.3 trillion. The sequester kicked in because legislators could
not agree on cuts, as required by the act. The US debt now stands
at more than $17 trillion.

The bill passed today limits federal spending to just more than
$1 trillion on defense and domestic programs for 2014 and 2015, and
does not touch spending on Social Security, Medicare, and Medicaid.
It does not balance the budget in the foreseeable future and the
federal government will continue to spend more than it brings in in
revenue.

169 Republicans joined 163 Democrats in voting in favor of the
bill. Nancy Pelosi had previously urged Democrats to
embrace the suck
and support the bill, while John Boehner
claimed conservative groups that opposed the spending measure had
lost
all credibility
.” Nevertheless, 62 Republicans opposed the
spending bill, including libertarian-leaning Republicans like
Justin Amash and Thomas Massie as well as Republicans sometimes
identified as “Tea Party.” Thirty-two Democrats also voted against
the spending bill, mostly because they wanted to see spending at
even higher levels.

You can see how your member of Congress, and the other 425
members* of Congress, voted here.

*7 didn’t vote.

More Reason on the budget and on the sequester.

Related: The Special Inspector General for the Afghanistan
Reconstruction is
investigating
why the military spent nearly half a billion
dollars on refurbishing aircraft for the Afghan air force before
abandoning the project. Top Obama Afghanistan experts, meanwhile,
were
stumped
at a Congressional hearing when asked just how much the
US has spent in Afghanistan this year.

from Hit & Run http://reason.com/blog/2013/12/12/house-overwhelmingly-approves-spending-m
via IFTTT