Europe, America drift closer to Tokyo

Baltimore, Maryland

Hold onto your hats. Grab your wallet. All over the world, central planners are getting together. They're watching the whole developed world tilt towards Tokyo. And they're determined to "do something" to stop it.

What's wrong with Tokyo, we want to know... On the other hand, what's not wrong with it?

But never mind that...

The Dow fell again yesterday, down 17 points. Not a big deal. But hardly a day goes by without a loss. And look at the yield on a 10-year T-note. Barely above 1.5%.

This market and this economy seem to want to go down. Like Japan. Which is fine with us. They probably have some business to attend to down there - such as cleaning up the mess that comes after a long credit expansion built on phony money and EZ credit. There's trash that needs to be swept up and hauled away.

But the fixers want to stop Mr. Market from doing his job.

And you can see why they might want to do something. They've got elections to win...jobs to keep...reputations to doctor up and resumes to forge.

The world's advanced economies are almost all in a dreadful funk. And some people say the fixers caused the problem themselves.

So, they've got their work cut out for them. They've got to mislead the voters...and flim flam the markets... Not easy!

Last Friday, for example, analysts turned on their Bloomberg terminals to find out how many jobs had been added last month. Remember, it takes about 100,000 new jobs in order to keep the unemployment level about even. So what number came up on the terminals? Twenty-six thousand!

Whoa, nowhere near enough.

But wait. That wasn't the number of new jobs created. That was the number of old jobs lost. Net. For men, there were actually 26,000 fewer jobs at the end of the month than there were at the beginning.

What kind of a recovery is this?

We've asked that question - rhetorically - many times. We know the answer. It's not a recovery at all. Instead, it's the deadest cat bounce in US economic history. Never before has a 'recovery' been so weak. Felix Salmon: This is about as bad as the jobs report could possibly be: just 69,000 jobs created, split between 95,000 new jobs for women and 26,000 fewer jobs for men. The market reaction has been swift and merciless, with stocks and bond yields plunging: the 10-year Treasury bond now yields less than 1.45%. When stock prices fall, of course, the earnings yield on the S&P 500 goes up, even as bond yields go down.

While market failures clearly happen all the time, things are really bad when they persist for this long. And what you're looking at, here, is a market failure, as Brad DeLong explains: what we're seeing, he says, is nothing less than "a massive failure of our economic institutions".

Just look at the amount of money which is flowing straight to corporations' bottom lines... Corporate profits now account for significantly more than 10% of GDP: that's never happened before.

To spell this out: high corporate profits and low levels of job growth are two sides of the same coin. If things were working properly right now, companies would take their excess revenues and use them to hire more people. Instead, they're basically just letting those excess revenues sit on their balance sheets as cash because they're scared to invest in themselves.
Oh boy...Mr. Salmon was on such solid ground.

But then, he too, has a plan.

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*** Poor Mr. Salmon. Poor us. He wants the US to follow Japan :
The government can borrow at 1.45%: it should do so, in vast quantities, and invest that money back into the economy itself. Take a few hundred billion dollars and use it to fix our broken infrastructure, to re-hire all those laid-off teachers and firefighters, to provide some kind of safety net for the millions of Americans who have been out of work for more than a year. Even if the real long-term return on any stimulus package was zero, the nominal long-term return would be well over 1.45%, making the investment worthwhile.
And here's Paul Krugman. He's got a solution. The same solution! More borrowing...more spending...more trash in the basement!

"Open ended financing and macroeconomic expansion..." is his formula for both Europe and America.

As to Japan, he is full of admiration.

"When people ask: might we become Japan? I say: 'I wish we could become Japan.'

From our vantage point here at the Daily Reckoning, it looks like Mr. Krugman will get his wish. The world's tectonic plates are loose. Every day, both Europe and America drift closer to Tokyo.

We've got nothing against Japan. But what puzzles us is why anybody would want to be like Japan. The Japanese economy has gone essentially nowhere in the last 22 years. Now, it has the largest pile of debt in the entire world - rivaled only by Britain. How did it get all that debt? Following Paul Krugman's advice!

So let's see...you run up debt equal to 4.5 times your GDP...you don't increase the number of jobs. Your assets get cut in half...and then cut in half again.

With debt equal to 450% of GDP, you are forced to use a big part of next year's output just to pay for things you already put out last year...and consumed! At 5% interest rate, the equivalent of one day a week must be spent merely supporting your debt. That doesn't leave you much to spend on things you want to consume today...or tomorrow.

And if interest rates were to go to 10%, nearly half your GDP would be required for debt service.

You would be like a galley slave...chained to your oar...forced to row in order to keep up with your debt. And pray the ship doesn't sink!

What kind of success is that?

We don't know, but we tend to agree with Mr. Krugman, in a few years ago we may be happy to take a place beside Japan on the galley slave bench. At least the SS Japan is still afloat.