The Land of the Setting Sun Comes to the Forefront

January 27, 2012


It’s relatively easy to make an accurate global macro forecast once you identify the driving metrics; however, timing is extremely difficult. This stems from the dissonance between the height that man’s hubris can reach and the depths to which it can fall.

Kyle Bass’ letter to investors on Japan, combined with Dylan Grice’s hyperinflation thesis is all you need. Gavekal’s research is useful as a check, since they are thorough, well-reasoned, and statistically grounded, but I often find myself on the opposite side of their arguments. Attenuated benefits for seniors, an inheritance tax, combined with inflation would solve Japan’s debt problem, says Gavekal. However, they neither mentioned nor anticipated a sales tax, failed to acknowledge that higher interest rates accompany higher inflation, and thus, fail to address the tipping point at which Japan will pass the Rubicon, currently estimated to be 2%.

This aforementioned reason is in one scenario of mine for the US, which I have not heard anyone else say yet, Bernanke pledges to purchase all securities in excess of a certain interest rate, before inflation inevitably gets out of control, which it will. On a side note, this past week, some research showed a 5-year lag between monetary policy and inflation, for the real economy. The ramifications of this are enormous. It suggests we have seen none of the inflationary effects of the Fed’s 2.5 trillion dollar asset purchase programs.

The most fascinating aspect: Mervyn King is the author. Critics, like Carnegie Mellon’s Alan Meltzer, frequently chide the Fed’s inability to make this link, but it was good to see it quantified. It’s noteworthy that in the case of Japan, it will be a domestic debt default. This may dictate the type of crises they will experience: inflation, traditional default, etc.

A few links:

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