Turning Japanese – the Eurozone & the World

Peter Tasker – 16th January 2012

Japan Syndrome

• Bubble burst - size counts• De-leveraging - (Koo – “balance sheet recession”)• Government MUST go into deficit• Yet government bond yields fall to “absurd” level• Presaging very low growth in nominal GDP• Policy appears to have no traction• Deteroriating credit quality / banking crisis• Expectations self-reinforcing – negative bubble• Everyone gets older

Japanese 10 year Bond Yield

Japan Nominal GDP

Similarities & differences

• Bubble – scale and timing, inclusiveness• Precedent - learn from hanmen kyoshi • Policy response – speed, efficacy, focus• One country, many countries, every country • Commodity prices - high or low• Bank capital – sound or not• Policy orientation – growth or austerity• Social cohesion - immigration, blame game

US Bond Yield

Global Bond Yields

Risk & Uncertainty

• Keynes, Friedman, Austrians?• Policy effectiveness – limited or not?• Super-cycle – real or not?• Bond yields say what? Is deflation “good”?• Imbalances – international, eurozone• Euro – a deliberately disastrous idea• Politics – back to nationalism?• Half world in double digit inflation

Summary

• Real risk of crisis of growth, jobs

• Eurozone most vulnerable • Centrality of banks, lack of capital - Dexia• Expectations, policy settings • Many countries far less social capital than

Japan• Checklist – bond yields, stock markets