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Archive for the ‘Japan’ Category

2011 has already been the most memorable year in ages and we haven’t even reached April yet.  Revolutions have swept the Middle East, an unprecedented earthquake and tsunami have hit Japan, civil war has erupted in Libya, the price of oil has been soaring and the entire globe is teetering on the brink of economic collapse.  It seems like almost everything that can be shaken is being shaken.  Unfortunately, it does not appear that things are going to settle down any time soon.  The Japanese economy has been dealt a critical blow, the European sovereign debt crisis could flare up again at any moment and the U.S. economy could potentially plunge into another recession by the end of the year.  The global economy and world financial markets were really struggling to recover even when things were relatively stable.  If all of this global instability gets even worse it could literally rip world financial markets apart.

Yes, things really are that bad.  The mainstream media has been really busy downplaying the economic impact of the disaster in Japan and the chaos in the Middle East, but the truth is that these events have huge implications for the global economy.  Today our world is more interconnected than ever, so economic pain in one area of the planet is going to have a significant effect on other areas of the globe.

The following are 10 economic disasters which could potentially rip world financial markets to shreds….

#1 War In Libya

Do you think that the “international community” would be intervening in Libya if they did not have a lot of oil?  If you actually believe that, you might want to review the last few decades of African history.  Millions upon millions of Africans have been slaughtered by incredibly repressive regimes and the “international community” did next to nothing about it.

But Libya is different.

Libya is the largest producer of oil in Africa.

Apparently the revolution in Libya was not going the way it was supposed to, so the U.S. and Europe are stepping in.

Moammar Gadhafi is vowing that this will be a “long war”, but the truth is that his forces don’t stand a chance against NATO.

Initially we were told that NATO would just be setting up a “no fly zone”, but there have already been reports of Libyan tank columns being assaulted and there has even been an air strike on Moammar Gadhafi’s personal compound in Tripoli.

So since when did a “no fly zone” include an attempt to kill a foreign head of state?

Let there be no mistake – the moment that the first Tomahawk cruise missiles were launched the United States declared war on Libya.

Already the Arab League, India, China and Russia have all objected to how this operation is being carried out and they are alarmed about the reports of civilian casualties.

Tensions around the globe are rising once again, and that is not a good thing for the world economy.

On a side note, does anyone recall anyone in the Obama administration even stopping for a moment to consider whether or not they should consult the U.S. Congress before starting another war?

The U.S. Constitution specifically requires the approval of the Congress before we go to war.

But very few people seem to care too much about what the U.S. Constitution says these days.

In any event, the flow of oil out of Libya is likely to be reduced for an extended period of time now, and that is not going to be good for a deeply struggling global economy.

#2 Revolutions In The Middle East

Protests just seem to keep spreading to more countries in the Middle East.  On Friday, five Syrian protesters were killed by government forces in the city of Daraa.  Subsequently, over the weekend thousands of protesters reportedly stormed government buildings in that city and set them on fire.

Things in the region just seem to get wilder and wilder.

Even in countries where the revolutions are supposed to be “over” there is still a lot of chaos.

Have you seen what has been going on in Egypt lately?

The truth is that all of North Africa and nearly the entire Middle East is aflame with revolutionary fervor.

About the only place where revolution has not broken out is in Saudi Arabia.  Of course it probably helps that the United States and Europe don’t really want a revolution in Saudi Arabia and the Saudis have a brutally effective secret police force.

In any event, as long as the chaos in the Middle East continues the price of oil is likely to remain very high, and that is not good news for the world economy.

#3 The Japanese Earthquake And Tsunami

Japan is the third largest economy in the world.  When a major disaster happens in that nation it has global implications.

The tsunami that just hit Japan was absolutely unprecedented.  Vast stretches of Japan have been more thoroughly destroyed than if they had been bombed by a foreign military power.  It really was a nation changing event.

The Japanese economy is going to be crippled for an extended period of time.  But it is not just Japan’s economy that has been deeply affected by this tragedy.

According to the Wall Street Journal, the recent disaster in Japan has caused supply chain disruptions all over the globe….

A shortage of Japanese-built electronic parts will force GM to close a plant in Zaragoza, Spain, on Monday and cancel shifts at a factory in Eisenach, Germany, on Monday and Tuesday, the company said Friday.

Not only that, GM has also suspended all “nonessential” spending globally as it evaluates the impact of this crisis.

The truth is that there are a whole host of industries that rely on parts from Japan.  Supply chains all over the world are going to have to be changed as a result of this crisis.  There are going to be some shortages of certain classes of products.

Japan is a nation that imports and exports tremendous quantities of goods.  At least for a while both imports and exports will be significantly down, and that is not good news for a world economy that was already having a really hard time recovering from the recent economic downturn.

#4 The Japan Nuclear Crisis

Even if the worst case scenario does not play out, the reality is that the crisis at the Fukushima Dai-ichi nuclear plant is going to have a long lasting impact on the global economy.

Already, nuclear power projects all over the world are being rethought.  The nuclear power industry was really starting to gain some momentum in many areas of the globe, but now that has totally changed.

But of much greater concern is the potential effect that all of this radiation will have on the Japanese people.  Radiation from the disaster at the Fukushima Dai-ichi nuclear plant is now showing up in food and tap water in Japan as an article on the website of USA Today recently described….

The government halted shipments of spinach from one area and raw milk from another near the nuclear plant after tests found iodine exceeded safety limits. But the contamination spread to spinach in three other prefectures and to more vegetables — canola and chrysanthemum greens. Tokyo’s tap water, where iodine turned up Friday, now has cesium.

Hopefully the authorities in Japan will be able to get this situation under control before Tokyo is affected too much.  The truth is that Tokyo is one of the most economically important cities on the planet.

But right now there is a lot of uncertainty surrounding Tokyo.  For example, one very large German real estate fund says that their holdings in Tokyo are now “impossible to value” and they have suspended all customer withdrawals from the fund.

Once again, let us hope that a worst case scenario does not happen.  But if we do get to the point where most of the population had to be evacuated from Tokyo for an extended period of time it would be absolutely devastating for the global economy.

#5 The Price Of Oil

Most people believe that the U.S. dollar is the currency of the world, but really it is oil.  Without oil, the global economy that we have constructed simply could not function.

That is why it was so alarming when the price of oil went above $100 a barrel earlier this year for the first time since 2008.  Virtually everyone agrees that if the price of oil stays high for an extended period of time it will have a highly negative impact on the world economy.

In particular, the U.S. economy is highly, highly dependent on cheap oil.  This country is really spread out and we transport goods and services over vast distances.  That is why the following facts are so alarming….

*The average price of a gallon of gasoline in the United States is now 75 cents higher than it was a year ago.

*In San Francisco, California, the average price of a gallon of gasoline is now $3.97.

*According to the Oil Price Information Service, U.S. drivers spent an average of $347 on gasoline during the month of February, which was 30 percent more than a year earlier.

*According to the U.S. Energy Department, the average U.S. household will spend approximately $700 more on gasoline in 2011 than it did during 2010.

#6 Food Inflation

Many people believe that the rapidly rising price of food has been a major factor in sparking the revolutions that we have seen in Africa and the Middle East.  When people cannot feed themselves or their families they tend to lose it.

According to the United Nations, the global price of food hit a new all-time high earlier this year, and the UN is expecting the price of food to continue to go up throughout the rest of this year.  Food supplies were already tight around the globe and this is certainly not going to help things.

The price of food has also been going up rapidly inside the United States.  Last month the price of food in the United States rose at the fastest rate in 36 years.

American families are really starting to feel their budgets stretched.  According to the U.S. Labor Department, the cost of living in the United States hit a brand new all-time record high in the month of February.

What this means is that U.S. families are going to have less discretionary income to spend at the stores and that is bad news for the world economy.

#7 The European Sovereign Debt Crisis

Several European governments have had their debt downgraded in the past several months.  Portugal, Spain, Greece and Ireland are all in big time trouble.  Several other European nations are not far behind them.

Right now Germany seems content to bail the “weak sisters” in Europe out, but if that changes at some point it is going to be an absolute nightmare for world financial markets.

#8 The Dying U.S. Dollar

Right now there is a lot of anxiety about the U.S. dollar.  Prior to the tsunami, Japan was one of the primary purchasers of U.S. government debt.  In fact, Japan was the second-largest foreign buyer of U.S. Treasuries last year.

But now as Japan rebuilds from this nightmare it is not going to have capital to invest overseas.  Someone else is going to have to step in and buy up all of the debt that the Japanese were buying.

Not only that, but big bond funds such as PIMCO have announced that they are stepping away from U.S. Treasuries at least for now.

So if Japan is not buying U.S. Treasuries and bond funds such as PIMCO are not buying U.S. Treasuries, then who is going to be buying them?

The U.S. government needs to borrow trillions of dollars this year alone to roll over existing debt and to finance new debt.  All of that borrowing has got to come from somewhere.

#9 The U.S. Housing Market

The U.S. housing market could potentially be on the verge of another major crisis.  Just consider the following facts….

*In February, U.S. housing starts experienced their largest decline in 27 years.

*Deutsche Bank is projecting that 48 percent of all U.S. mortgages could have negative equity by the end of 2011.

*Two years ago, the average U.S. homeowner that was being foreclosed upon had not made a mortgage payment in 11 months.  Today, the average U.S. homeowner that is being foreclosed upon has not made a mortgage payment in 17 months.

*In September 2008, 33 percent of Americans knew someone who had been foreclosed upon or who was facing the threat of foreclosure.  Today that number has risen to 48 percent.

#10 The Derivatives Bubble

Most Americans do not even understand what derivatives are, but the truth is that they are one of the biggest threats to our financial system.  Some experts estimate that the worldwide derivatives bubble is somewhere in the neighborhood of a quadrillion dollars.  This bubble could burst at any time.  Right now we are watching the greatest financial casino in the history of the globe spin around and around and around and everyone is hoping that at some point it doesn’t stop.  Today, most money on Wall Street is not made by investing in good business ideas.  Rather, most money on Wall Street is now made by making shrewd bets.  Unfortunately, at some point the casino is going to come crashing down and the game will be over.

Most people simply do not realize how fragile the global economy is at this point.

The financial crash of 2008 was a devastating blow.  The next wave of the economic crisis could be even worse.

So what will the rest of 2011 bring?

Well, nobody knows for sure, but a lot of experts are not optimistic.

David Rosenberg, the chief economist at Gluskin Sheff and Associates, is warning that the second half of the year could be very rough for the global economy….

The Economic Collapse

From the BBC:

2226: The Yomiuri Shimbun newspaper, quoting a senior official of the ruling Democratic Party of Japan, said the US made the offer immediately after the disaster damaged Fukushima No 1 nuclear plant. According to the unnamed senior official, US support was based on dismantling the troubled reactors run by Tokyo Electric Power (TEPCO) some 250 km (155 miles) northeast of Tokyo. However, the government and TEPCO thought the cooling system could be restored by themselves, the report said.

Am I reading this right?

Our government demanded that the Japanese dismantle – that is, permanently remove – over five gigawatts of power in order to help them with a critical safety problem that had the potential to destroy 100 square miles of land and kill or injure thousands of people?

That as compensation for helping them we demanded that they cripple their electrical generating capacity on a permanent basis?

You have to be kidding me.

This is an extremely serious charge.  If it’s true it stands alone as grounds for impeachment and dismembering every single federal agency involved.

Perhaps this explains why the US Military and/or civilian authorities didn’t stick a couple of big-ass generators on a transport plane and get them over there, restoring power to the reactors within hours of the incident and avoiding all of the serious radiation and physical damage at the plant.

This allegation is ridiculously incendiary and demands an immediate and complete Congressional investigation.  Not only do the citizens of the United States deserve to know the truth (or falsity) of this charge (and who initiated it if it is false), but so do the Japanese people.

If this is how this man treats our friends – attempting to use a crisis threatening the lives of civilians to score a political point and advance his “green” agenda…..

The Market-Ticker

The authorities in Japan appear to be losing control of the situation at their crippled nuclear plant.

We know serious core-melt incidents have occurred in three of the reactors (1-3.)  These are bad and have economically destroyed the reactors, but none of that news is new, and my assessment of the issues and risks are unchanged on this basis.  Core melts, even catastrophic ones (and the two percentages of presumed damaged rods at the plants in question I’ve seen quoted fall into that category) are not sufficient to result in a generalized catastrophe in the environment.

However, it appears that there’s little evidence that TEPCO and other emergency responders are making any sort of progress in getting water feed back to the fuel pools stored near the reactors.  That’s an entirely different situation, and has now, in my opinion, escalated to an “all hands on deck” event.

The puzzling factor for the last couple of days has been that there have been no real response in getting water sources to the buildings – specifically, to those fuel pools.  There is no pressure (beyond the lift to the height of the pool) required to feed these as they’re open pools but the ability to replace water that boils off is absolutely essential in the absence of the normal heat exchange mechanism.

Actual facts on the ground have been difficult to come by, but one news flash came across late last night that implied what may be going on: TEPCO was reported to be deploying a maximum effort in building (!) a road to get fire engines to the plant.

Remember, this area got hit by a tsunami.  That’s bad.  Apparently, it is much worse in terms of access to the plant that has been let on.  While authorities have not said this, the destruction of three of the four fire engines at the plant by the explosion in Building 3 may have destroyed three of the only four fire engines that could reach the plant.

Rescue and recovery are important.  But unless the Japanese are prepared to abandon a 25-mile or so diameter area of land around this plant permanently (which incidentally means abandoning not only the stricken four units but six more that are undamaged and will be needed for recovery of the nation from this disaster they need to get this situation under control – right now.

Reports yesterday of radiation rate spikes at the plant were very troubling.  If you remember my missive from yesterday I said that the “gold standard” for a reason to get very nervous as to forward expectations were lethal-level radiation readings at the plant.  We’re now seeing them, albeit on an intermittent basis.  Thus far it appears they’re related to the release of steam from the shut down but hot reactors, specifically unit #3.

This will not be the case for a whole lot longer, however, if there is not meaningful progress on getting whatever infrastructure is necessary to provide water to the fuel pools restored and secured.  Again, this is a matter of being able to provide water in volume, but there is no pressure requirement (other than the pressure necessary to lift the water to the height where the pool is) as there is with providing a water feed into a containment building or primary reactor pressure vessel.

I give this situation about another 48 hours before it becomes essentially impossible to manage.  At this point it is likely that some people will have to sacrifice themselves intentionally in order to get the water feeds that are necessary in place and operating.  That number may be significant and the longer it takes before this task is accomplished the higher the count is going to go.

I believe it is time for TEPCO to be relieved of their management of this situation and for civil defense and/or the military to step in and take control of the response.  Irrespective of how or with what, including whatever loss of life may occur in establishing and maintaining water flow, cooling water must be secured on an immediate and continuing basis for the fuel pools.

For those who are in the United States there remains no reason to be alarmed by the events on the ground in terms of effects on human health here.  Scare-mongers are now peddling Potassium Iodide tablets on eBAY for over two hundred dollars for a package of tablets – more than 10x the usual price - and some people are selling expired lots.  This is utterly ridiculous; while there’s a reason to keep some of this substance around in the US in the event of a local nuclear incident there is no reason to buy it as a US resident in response to what is going on in Japan. 

This is not true, however, if you are in Japan.  The impact in that nation, should the authorities fail to get fuel pool water levels under control, is entirely determined by the direction of the wind.  So far it has been cooperative in that most of the radioactive products have been blown out to sea, and will be diluted in the Pacific.  This cannot be assured on an ongoing basis and, in my opinion, if you live within 100 miles of the plant it would be prudent to determine if you can increase that distance on an expedited basis should it become necessary.

The humanitarian problems for those within the tsunami impact zone are extremely serious; large swaths of land were inundated by the flood..  Nonetheless the priority focus at the present time must be to get water supplies secured for the fuel pools at all six plants.

Here in the United States the political debate is, of course, once again heating up.  We have not built a new nuclear plant since Three Mile Island.  Our existing plants are aging and will have to be eventually replaced.  At the same time we must deal with a need to improve our economic security through energy security.  We continue to stick our heads in the sand when it comes to a coherent energy policy for America, relying instead of a patchwork that involves far too many foreign entanglements. 

This must stop right here and now.

Nuclear power is not without risk.  It is, however, the only viable alternative we have at the present time, and the only one we’re likely to have for the foreseeable future, for base-load electrical generation.  There are, in my opinion, better alternatives than the present boiling-water reactor designs that are in common use, but we have been unwilling to have a clean debate on the alternatives and put forward the necessary expenditures and efforts.

The level of screaming from the “anti-nuke” camp has, as expected, increased markedly in volume over the last week.  False claims are being made, including raw acts of fraud such as the widely-distributed “map” that allegedly shows the entire population of the west coast being wiped out by a deadly radioactive cloud.  We must not, as a nation, allow hype and fear to form the basis on which we make decisions for our energy future.  The spent fuel problems at the Japanese plants, and those here in the United States, are largely of our own making as a direct and proximate consequence of our unwillingness to embrace and support reprocessing and re-use of nuclear fuel materials.  We are being treated to a demonstration of what refusal to acknowledge and deal with those risks, instead hiding them away in pools of water, can bring to a nation when things go horribly wrong, exactly as we got a demonstration of how hiding financial risks with “credit default swaps” and other similar games can blow up in your face during the economic crash of 2008. 

Incidentally, despite that lesson being taught in 2008 we have failed to learn from and act on it, and it will return with a vengeance much sooner than anyone (other than a few, like myself, who continue to see the deteriorating mathematical reality) expects.

We cannot make decisions predicated on irrational fear and exploitation of events to score political points.  No economy can survive and prosper without secure energy sources.  We have the technological ability to provide energy security but doing so will always involve the acceptance of risk.  Those who claim that the risks are unacceptable must be charged with producing an alternative that is defensible both economically and on a thermodynamic and physical level, and if they are unable to do so, their opinions, no matter how well-constructed, must be discarded and ignored.

As with so many matters in the economic realm in which children waving the “Armageddon” card have managed to literally rob the public of trillions of dollars, we must, on the energy front, put the howling children in their playpens, close the door behind them, and allow the adults to have a reasoned and logical conversation on the alternatives, including a robust debate on both risk and reward.

The Market-Ticker

The entire world is in a state of mourning today as details regarding the horrific damage caused by the massive tsunami in Japan continue to trickle in.  The magnitude 8.9 earthquake that caused the tsunami was the largest earthquake that Japan has ever experienced in modern times.  Waves as high as 30 feet swept over northern Japan.  The tsunami waters reached as far as 6 miles inland, and authorities have already recovered hundreds of dead bodies.  Those of us that have seen footage of this disaster on television will never forget it.  But this nightmare is not over yet.  There have been dozens of aftershocks, and many of them have been quite large.  In fact, there have been 19 earthquakes of at least magnitude 6.0 in the area over the last 24 hours.  So what is this disaster going to do to the 3rd largest economy in the world?  Japan already had a national debt that was well over 200 percent of GDP.  Could this be the “tipping point” that pushes the Japanese economy over the edge and into oblivion?

It is hard to assess the full scope of the damage to Japan at this point, but virtually everyone agrees that much of northern Japan is a complete and total disaster area at this point.  Many towns have essentially been destroyed.  Some are estimating that the economic damage from this disaster will be in the hundreds of billions of dollars.  Others believe that the final total will be in the trillions of dollars.

Fortunately, major cities such as Tokyo came through this event relatively unscathed and most of the major manufacturing facilities are not in the areas that were most directly affected by the earthquake and the tsunami.

But let there be no doubt, this was a nation-changing event.  Japan will never quite be the same again.

Also, it isn’t just Japan that will be affected by this.  The truth is that economic ripples from this event will be felt all over the world.

An economist from High Frequency Economics, Carl Weinberg, told AFP the following about the economic consequences of this disaster….

“There is no way to assess even the direct damage to Japan’s economy or to the global economy. This is a sad day for Japan, and economic aftershocks could affect the whole world’s economy.”

It is literally going to take months to figure out exactly how much damage has been done.  Let us just hope that we don’t see any more major earthquakes in the area.

The Japanese are a very resilient people and the Bank of Japan is already vowing that it will be doing whatever is necessary to ensure the stability of the financial markets.  The Bank of Japan has announced that it is going to provide as much liquidity as necessary to keep the Japanese economy functioning normally.

But the truth is that the Bank of Japan has already been printing money like crazy….

Is a tsunami of new yen really going to solve the economic damage that has been done by the earthquake and the tsunami?

Of course not.

The truth is that the economy of Japan was already deeply struggling before this disaster.

The national debt of Japan is now well over 200% of GDP and there seems to be no doubt that they will need to borrow massive amounts of money to deal with the aftermath of this crisis.

Up until now the Japanese government has been able to borrow money at ultra-low interest rates of around 1.30 percent for 10-year bonds, drawing on a huge pool of savings from its own citizens.

But in light of what has just happened, will the citizens of Japan still have enough resources to continue to fund the rampant spending of the Japanese government?

At this point, it is estimated that this gigantic mountain of debt breaks down to 7.5 million yen for every single citizen of Japan.

Politicians in Japan have been pledging for years to do something about all of this debt, but nobody has been able to make much progress.

Even before this disaster, the major credit rating agencies were warning that they may have to downgrade Japanese government debt.  The earthquake and the tsunami are certainly not going to make the Japanese even more credit-worthy.

Hideo Kumano, the chief economist at Dai-ichi Life Research Institute, has said that a “tipping point” will come when world financial markets finally recognize that the government of Japan simply cannot afford to service its debt any longer….

“It’s hard to predict when the bond market might collapse, but it would happen when the market judges that Japan’s ability to finance its debt is not sustainable anymore.”

Is the massive tsunami that just hit Japan such a tipping point?

Other countries such as Greece and Ireland would have already collapsed if it had not been for the massive international bailouts that they received.

So who is going to bail Japan out?

This could potentially be one of the greatest economic disasters that the world has seen since World War 2.

With the world already on the verge of a major financial collapse, this is the last thing that world financial markets needed.

In fact, much of the rest of the world had been hoping that an influx of capital from Japan would help to stabilize things.

For example, Japanese insurance companies had recently announced that they were planning on buying up lots of European sovereign debt, but now obviously those plans are on hold.  As a result of this disaster, Japanese insurance companies will be forced to sell off assets like crazy in order to pay settlements.  But as Zero Hedge is correctly pointing out, without Japanese financial institutions stepping in to soak up Eurozone bonds this is going to make the European sovereign debt crisis even worse.

But right now the focus in on the devastation in Japan.  At the moment it is unclear how much of the economic infrastructure of Japan has survived.

For example, as USA Today is reporting, some factories cannot even be reached by phone at this point….

Toyota’s phone calls to its plants in affected areas were not being answered, said Shiori Hashimoto, a spokeswoman in Tokyo. The Toyota City-based carmaker began production at a new plant in Miyagi this year that makes Yaris compact cars and has capacity to make 120,000 vehicles a year.

What is clear is that the cost of recovering and rebuilding after this disaster is going to put extraordinary financial stress on the Japanese government.

Julian Jessop of Capital Economics certainly does not sound optimistic about what this is going to mean for the Japanese economy….

“Japan’s economic recovery has lost momentum and a large part of the reconstruction costs will add to the government’s significant debt burden.”

Hopefully the full extent of the damage is not as bad as many are now fearing.

But the truth is that this is a huge, huge event for a world economy that was already on the verge of collapse.

May our thoughts and our prayers be with the Japanese people at this time.

This is truly one of the biggest disasters that any of us have ever seen, and Japan will never be the same again.

The Economic Collapse

Reader Jed writes ….

Hello Mish,
Here is a humorous image of a sign I took yesterday at the Southdale Mall in Edina.

Jed

Thanks Jed but that store has a long, long way to compete with stores in Japan that sell things for $10 Yen (about 12 cents by current calculation).

Here is a Forex Currency Conversion Link.

¥10 Shops in Japan

Mike in Tokyo Rogers reports ¥10 Yen Shops in Japan! Proof of Deflation!

The Asia Times Online shows what 20 years of Japan’s economic policies have brought us: Severe deflation.

We have ¥10 yen shops selling daily items and doing brisk business in Japan.

The ¥10 yen shops sell loss leader items to attract the customers but the other items sell for about ¥88 each, so they even beat out the ¥100 yen shops.

The store that accomplishes all of this is called the Recycle Garden.

Deflation Dilemma

The article Mike Rogers referred to is Ten-yen stores capture deflation dilemma

With many worrying that the United States economy headed towards a painful Japanese-style deflation, the concept of “Japanization” is increasingly being bandied around the world. But what is “Japanization”?

One answer is found in Kawasaki City, about 20 kilometers southwest of downtown Tokyo. There, a 10 yen-shop called Recycle Garden (equivalent to a 10 cent store in the US) is attracting large numbers of customers by word of mouth. The outlet is one of nine Recycle Garden branches operated in the Kanto region centered on Tokyo and including Yokohama, Kawasaki and Atsugi.

At Recycle Garden, 10 yen buys the customer everyday items such as chopsticks, kitchen goods, nail-scissors, hand sanitizers, or air fresheners. A colored plastic hair clasp is also 10 yen. In the Kawasaki shop alone, the product lineup consists of about 1,000 items at 10 yen, with the number of goods totaling around 30,000. It’s all there.

Surprisingly, most of those products are made in Japan, not in China, Vietnam or Cambodia, from where usually cheaper and lower-quality goods flow into Japan.

“Everything is incredibly cheap,” said Kyoko Yamada, 52, a careworker, who lives in Tsurumi Ward adjoining Kawasaki, who on a recent visit to Recycle Garden bought 10 items such bath agents.

How is such unprecedented price-slashing possible?

The mechanism is this: amid an increasingly fierce pricing war among neighborhood retail shops such as 100-yen convenience stores, Recycle Garden makes bulk purchases of those goods from bankrupt shops and firms as from deceased manufacturing and wholesale merchants. In most cases, on hearing the news about a bankruptcy, Recycle Garden workers dash to the failed firms with large dump trucks, and buy up and take away immediately to their chain store a vast amount of goods.

“We are cutting prices to the bone,” said Tadafumi Fukuda, 41, manager at Recycle Garden’s Kawasaki outlet. “Since we also sell other items at 88 yen and above, 10-yen goods serve as a crowd puller.” The number of customers visiting the shop has increased 20% from a year ago, when the shop started to sell 10-yen goods, he said.

Can this happen in the US? I think it can, no matter what Bernanke thinks.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Albert Edwards: At 500% Net Liabilities To GDP, It Is Too Late To Prevent The Collapse Of The G-7; Greece Is Irrelevant, We Are All Now Insolvent

Submitted by Tyler Durden

For Greece, with on and off balance sheet liabilities at over 800%, it’s game over. For the Eurozone, with the same ratio at about 500%, it is also game over. For the US, at 500%+, it is, you guessed it (sorry Joseph Stiglitz), game over, but since we have the printers, it will simply take a little longer. Following up on yesterday’s popular post on prevailing delusions as captured by Albert Edwards’ colleague Dylan Grice, we present Albert’s latest outlook. Please don’t read this if you want to keep believing there is any hope left for the (developed) world.

But first some aeral photography from Dylan Grice, indicating just how far the US government is willing to go to get the population stoked about owning fixed (shouldn’t it be called broken really?) income. With British QE over, and the country still to implement the same criminal annuitizing of 401(k)s that Uncle Sam is contempltating in order to make “Buy Bonds” a “voluntary” option one can’t really decline, maybe letters on modern architecture building blocks is all that would works. As Edwards says: “I’m not sure leaving man-sized building blocks around the City of London is really going to make an awful lot of difference, but I suppose when your public sector deficit is around 13% of GDP, every little bit helps!”

So back to Greece, the Eurozone, and policy response in general, Edwards places the causes (and “solutions”) of the escalating problem precisely where it belongs: at the core of the Keynesian systemic outlook flaw.

A major divergence of views in the market at the moment concerns what governments should be doing with their outsized fiscal deficits. Economists seem to be polarised between those who think governments should be rapidly cutting fiscal deficits to avoid impending insolvency and/or a surge in bond yields, and those who believe this will be totally counterproductive and that deficits should stay very large. Behind this controversy probably lies the key to the economic outlook.

To Edwards, and to ever more hedge fund investors judging by the jump back in Greece Bund spreads which just broke the most recent technical resistance level of 300 bps, Greece is nothing more than Russia and LTCM (or Bear Stearns as the case may be).

The situation in Greece following hard on the heels of similar solvency issues in Dubai feels to me very much like the Russian default and LTCM blow-up in 1998. For the blow-ups that year were a direct follow-on from the Asian crisis a year earlier a different chapter in the same book. There will be more crises to follow Greece, both inside and outside of the eurozone.

The outcome of broken Keynesian policy (by definition) will be ugly, and will destroy the eurozone. We said it some time ago, and SocGen has now also confirmed this bearish perspective.

My own view of developments, for what it is worth, is that any “help” given to Greece merely delays the inevitable break-up of the eurozone. But, for me, the problem is not the size of the government deficit and the solvency or otherwise of the governments in the PIGS (Portugal, Ireland, Greece and Spain – we deliberately exclude Italy).
The problem for the PIGS is that years of inappropriately low interest rates resulted in overheating and rapid inflation, even though interest rates might well have been appropriate for the eurozone as a whole. Rapid inflation has led to overvalued bilateral real exchange rates (they do still notionally exist) for the PIGS and in most cases yawning double-digit current account deficits. With most trade done with other eurozone countries, the root problem for the PIGS is lack of competitiveness within the eurozone – an inevitable consequence of the one size fits all interest rate policy. Even if the PIGS governments could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Hence the PIGS public sector deficit will inevitably remain large as a direct consequence of this weak growth outlook.

As noted earlier on Zero Hedge, in Europe the population is a little less brainwashed by the moronic happenings on prime time TV, so while in America the destruction of the economic system, as trillions are transferred to the kleptocracy which knows fully well the end game is nigh, results in some sighs of desperation at best, in Europe the outcome will be somewhat more violent.

In my opinion this will not be tolerated by the electorates in these countries. Unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain. Consigning the PIGS to a prolonged period of deflation is most likely to impose too severe a test on these nations. And the political “consensus” within the PIGS to remain in the eurozone could falter in the face of another of Europe’s unfortunate tendencies -the emergence of small extreme parties to take advantage of any unrest. My own view is that there is little “help” that can be offered by the other eurozone nations other than temporary confidence-giving “sticking plasters” before the ultimate denouement: the break-up of the eurozone.

And in case you were wondering why all European leaders are powerless to provide a bailout proposal that actually has a snowball’s chance in hell of doing something/anything to help Greece, read on. Alternatively, if you want to find out why any plan suggested on Monday will be thoroughly useless and once digested by the market will cause another major crash, read on as well.

The pressure to tighten fiscal policy from current nose-bleed levels of deficits is not just an issue for crisis hit Greece. It is an issue for virtually all economies. It is a particular issue for the US and UK with structural (cyclically adjusted) general government deficits of almost 10% of GDP (according to the OECD)! There is a ferocious debate ongoing between those who believe there needs to be a rapid reduction in these deficits to avoid some combination of insolvency/default/rapid inflation and those who believe that there should be even more fiscal stimulus. The debate is loud and opinions are tending to be polarised.
My own view on this is that obviously we should never have got into this wholly avoidable mess in the first place. But having got here, there really is no way out that does not trigger a major market-moving upheaval. Ultimately economic prosperity over the past decade has been a sham: a totally unsustainable Ponzi scheme built on a mountain of private sector debt.GDP has simply been brought forward from the future and now it’s payback time. The trouble is that, as the private sector debt unwinds, there is no political appetite to allow GDP to decline to its “correct” level as this would involve a depression. So burgeoning public sector deficits and Quantitative Easing are required to maintain the fig-leaf of continued prosperity.

And here is the topic that will dominate over all pundit round table discussions in the next weeks: the entire world is insolvent, although some are more insolvent than others. Greek total net liabilities (on and off balance sheet) to GDP are 800%! EU: at 470%, the US, at over 500%. There is no way out but default.

Edwards’ poignant summation.

I am persuaded by my colleague Dylan Grice’s analysis that, including unfunded liabilities, most governments are already insolvent with debt to GDP ratios closer to 500% of GDP instead of around 100% for most G7 countries . It is too late.
Nor were Dylan and I persuaded by recent comments from Nobel Prize Winner Joseph Stiglitz that it is absurd to suggest that the US and UK governments might default on their debts as they could just print money. Indeed. But a client pointed out to us that Weimar Germany did not default on its debts during its hyper-inflation. How reassuring!
I am persuaded though by Richard Koo’s book about the lessons from Japan’s balance sheet recession. The crux of his analysis is that governments have no option but to stimulate aggressively all the while the private sector is de-leveraging. ANY attempt at fiscal cuts simply results in renewed recession and a further loss of confidence, thus making it even harder and more costly to sustain any subsequent recovery – and hence the budget deficit ends up bigger than before (e.g. see chart below). This is exactly the outcome I expect.

The take home is very, very simple: we can delude ourselves that the game can be won (it can’t), or we can prepare for the imminent collapse when delusion finally fails.