I saw this video from the National Inflation Association (hat tip Zero Hedge). This is a continuation of the inflation/deflation debate that is going on today among many economists, bloggers, and Wall Street money thieves. The first video is from the NIA where they make their case for not only inflation, but hyperinflation. NIA attempts to deflate the argument of the deflationists that we will experience a Japanese style economy for years to come. Essentially, the NIA argues that Japan’s savings rate allowed the government to borrow from its citizens to fund government stimulus even at absurdly low rates. In America, we depend on foreign creditors since we have a low savings rate. Right now, Japan is our largest creditor with over $1 Trillion in US Treasuries. Further, Japan’s savings rate is now dropping from its historical average of 10% to 3%. This means they have less to loan us going forward. NIA also points to other foreign creditors such as the Middle East diversifying out of US dollars and into gold. Eventually, these countries will stop funding us as our social security and Medicare liabilities increase our need for debt. The NIA estimates our debt to GDP when unfunded liabilities are added in (mostly SS and Medicare) is 560%.
Second, Japan has other factors that put it in a better position than the US when the Japanese deflation began in 1989. Japan had a large trade deficit which continues today. The US, on the other hand, has an enormous deficit. This deficit will effect our ability to pay for needed goods, especially commodities (think oil). This will drive up the cost of goods, which is inflationary.Also, the peak spending for a person is age 46. The last of the baby boomers hit age 46 in 2010 so we are on the verge of an economic slowdown in the US.
While I cannot argue against these facts, I don’t think the NIA makes a case for hyper-inflation…at least not now. Maybe we will have a problem funding our debt in the future once the unfunded liabilities of Medicare and Social Security kick in, but right now we have a classic debt deflation environment. People and corporations are paying down debt as opposed to leveraging up by taking on more debt. The only way you can rid yourself of debt is by reducing spending to pay down debt, selling assets to pay down debt, or defaulting. We are experiencing all three right now.
The chart above shows consumer credit, especially revolving credit like credit cards, is shrinking. Part of this is consumers paying off cards, but it is also consumers defaulting on debt. Everyone screams about the US government taking out more debt, but the reality is the government is only taking on debt as fast as the private sector is shedding debt. It is a zero sum game, at least until the unfunded liabilities kick in.
I don’t want the above statement to imply that government debt isn’t the wrong policy. It is. I am just pointing out that it is not inflationary right now.
This second video is another argument that we won’t experience a Japanese style deflation. Like the NIA, this author claims that there is a difference between Japan and the US. Namely, the Japanese consumer does not like to take on debt like Americans do. The Japanese pay cash for items; we charge it. Japan also saves more than we do. For the NIA and this author, I point to the credit demand in the previous graph. We are reducing our reliance on credit. As this debt deflation continues, I expect our reliance on debt to decrease. As Mike Shedlock points out frequently on his blog, consumers are going to pay down credit cards charging 20% interest, rather than save in a bank paying 1%.
Further, our savings rate is climbing, albeit slowly. The latest estimate from the Bureau of Economic Analysis (BEA) has the US consumer saving 6.2% of her or his pay.
So these arguments may be true now, but I believe we will see the savings and debt repayment continue. It has to continue. We have too much debt as a nation. This is my biggest argument. See this previous post. With a debt to GDP ratio of 380%, we can’t afford to take on more debt. Until we get to a healthier level, say 175% debt to GDP, we will have a sub-optimal economic environment. Japan is living proof. As the previous post shows, Japan’s crash came after its consumers and corporations had an unhealthy debt to GDP ratio. In 1989 when Japan’s crash hit, the Japanese government had a healthy debt to GDP ratio. As the consumer and corporation improved its debt ratio, the government exploded theirs. Today, Japan, as a nation, still has a high debt to GDP ratio. They are no closer to a healthy balance sheet today than they were when the funk began two decades ago.
This last video is from Reason TV. I think this video nails it on the head as far as the causes and responses of Japan. We are following the same actions exactly. The only thing I would add to this video is unmanageable debt levels were a key cause to Japan and the US situation. What really scares me about this video is the opening where President Obama believes that Japan waited too long to implement monetary and fiscal stimulus. This is wrong lesson…if you believe what I just wrote. Reducing debt and putting capital in the hands of the private market is the key.