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Europe, USA Have Learned Nothing From Japan

  • Written by Syndicated Publisher 3 Comments3 Comments Comments
    December 16, 2010

    Nomura’s chief macroeconomist, Richard Koo, whose views we have often repeated here, is out with his latest prediction which unfortunately has nothing good to say about the future of the US: “We have shown—using the example of the ¥2,000trn in output that was saved in Japan and the fact that the fiscal stimulus provided by World War II quickly pulled the world’s economies out of depression—that fiscal stimulus can be a potent tool during a balance sheet recession. Unfortunately, participants in the US fiscal debate remain oblivious to this point and continue to discuss the pros and cons of fiscal policy using fiscal elasticities measured when the economy was not in a balance sheet recession. This implies that economists are heavily underestimating the elasticity of fiscal stimulus during such recessions—just as their counterparts in Japan did a decade ago—making policymakers reluctant to implement further stimulus. This reluctance leads to further economic weakness. The situation in Europe is no different from that in the US. I therefore have to conclude that the western nations have learned nothing from Japan’s lessons and are likely to repeat its mistakes.” To be sure, Koo is more in the Krugman camp when it comes to rescuing a fallen Keynesian regime, and believes that stimulus at any cost is the only resolution. That said, the US now exists in a universe in which all the incremental debt issuance is being monetized directly by the Fed: an event is unparalleled in the history of the country. As such we fail to see how one can extrapolate arguments from even a bearish case that may be applicable to the current global state of affairs, which courtesy of Reinhart and Rogoff, we know is at or beyond a tipping point in terms of sovereign leverage.

    That said, the full note is a must read:

    Roller coaster ride for bond market participants

    The world’s bond markets have been on a two-week roller coaster ride. The week before last, the US jobs report appeared to show clear signs that any recovery in the labor market would be delayed. But that was followed last week by the announcement of an agreement between President Obama and the Republican Party that was seen as having positive implications for the economy.

    The November payrolls report, released on Friday, 3 December, came in below market expectations. However, some attributed the weak results to excessively strong October data, and the general view seemed to be that the results for October and November should be viewed together.

    Surprise agreement between President Obama and Republican Party

    The suddenly announced agreement between President Obama and the Republicans came as a surprise to many. The president secretly negotiated this deal with key Republican officials without consulting senior officials in his own party. News of the agreement initially sparked a heavy sell-off in the bond market. The resulting rise in yields was large enough to suggest that the downtrend in interest rates was finally over. The sell-off also led to higher mortgage rates.

    The agreement contains broad-ranging economic stimulus in the form of a two-year extension of the Bush tax cuts for all taxpayers, including high earners, full expensing of investments, an extension of unemployment insurance, and a reduction in payroll taxes.

    I do not think the extension of Bush tax cuts themselves will spark an economic recovery—after all, those tax cuts were unable to prevent the current recession. Most of the increase in unemployment insurance benefits will probably be earmarked for consumption, but it is difficult to tell how much the payroll tax cuts will boost spending.

    With the US household sector still deleveraging, I project that most of the tax cuts for that sector will either be saved or used to pay down debt. On the other hand, full expensing and other provisions may help. The IMF estimates the plan would lift US GDP by about 1%.

    Altogether, the package can be expected to provide a certain amount of support for the economy (compared with a situation in which nothing was done), although it remains to be seen whether the Democrats will approve all of the measures.

    Use of credit cards in US drops precipitously

    Thanksgiving Day, the third Thursday in November, marks the start of the Christmas shopping season. This year saw the lowest use of credit cards in the 27-year history of the survey.

    Only 17% of US consumers used credit cards during this period, down nearly half from the corresponding ratio for 2009.

    On a quarterly basis, credit card use in Q3 was off a full 11% from the same quarter a year ago. This is especially noteworthy given that the economy was already extremely weak in 2009 Q3.

    Part of the reduced activity, of course, is attributable to stricter card issuance standards adopted since the financial crisis, which are said to have caused 15 million Americans to lose their credit cards.

    More recently, however, credit card companies’ attitude towards lending has undergone a change. With profits depending on people using credit cards, issuers are now engaged in a fierce competition and have unveiled a variety of incentives to encourage consumers to make greater use of their cards.

    However, there has been little response from consumers, reflecting the continued efforts of US households to minimize debt.

    Keep reading this article here;

    Richard Koo’s Latest: “Europe And US Have Learned Nothing From Japan’s Lessons And Will Repeat Its Mistakes” | zero hedge.
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