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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: macavity who wrote (41162)	11/8/2003 6:10:05 PM
From: macavity	Read Replies (1) of 74559

Low Long-Term Rates With Japan, I know a little bit about this. Firstly let us look at what is happening. After their own bubble there was/is little to no demand for new investments as they have a wee bit of a capacity problem that still needs to be resolved. The Goverment is trying to create demand 'to keep the economy going'. To do this the Government is borrowing money and the price of money is dropping! This in itself is a miracle, no? How can they do this? They issue bonds (denominated in Yen) and they 'convince' The Postal Savings Funds to buy these bonds. Obviously this money will be paid back from future governement revenues which can only arrive from two sources: i) A Taxation program - the explicit seizure of (current and future) savings/ surpluses. ii) An Inflation program - the implicit devaluation of (past and current) savings/surpluses. Firstly the projects that they (The Govt) determine to spend the money on have not been decided by the Market. This is Statism at its worse and is up there with Uncle Joe's 5 year plans. This is why they have been covering islands in concrete, pursuing pork-barrel politics, and lending more money to bankrupt companies. All things that no-one in their right mind would do. The excesses continue! These investments will most likely [sarcasm] not generate the returns to compensate the owners of these bonds for the surplus goods and services that they performed to generate their confiscated savings. Secondly the the rate of interest is most likely false!! Assuming that The Govt were unable to inflate the money supply then there is a possiblility that savings could simply be rushing to seek a sure haven in a post-bubble rush for safety. (This would only apply to sovereign-issued domestic currency bonds and not to non-sovereigns or non-domestic.) But they have been increasing the money supply so they have effectively been printing money to buy bonds to finance government projects. As they have been printing money they have created in effect pseudo savings. These pseudo savings (fresh from the printing presses) exist and compete side by side with the real savings (surpluses from the production of past goods and services) within the economy. It therefore appears that there is an excess of savings in The MarketPlace relative to the demand for borrowings. Therefore the Market price for money will stay low, as long as i)savings are not withdrawn, ii)printing continues, iii)the demand for real investements in the economy remains muted. If/When the US gets to this point it will have no savings to rely upon and will have to inflate to keep long-term rates down. Hence my quip (and Ben Bernanke's) that should rates rise to threaten this bull The Fed will step in to buy US Treasuries. Buying either the old ones from forigners, or the fresh ones issued by The Treasury to finance any government deficit. This will support the government and the mortgage market if rates rise and this is seen as causing 'pain' to the economy. The Govt will be bringing its own psuedo savings into the marketplace. As long-term rates in Japan appear to be rising from a bottom, I am actually more long-term bullish Japan than the US, as it would indicate that there may be real investments out there. share.esignal.com Rates needs to see 2% as support - some way to go. -macavity

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