Wolf Richter, Testosterone Pit

“Pauperization,” the word, became infamous when three executives of huge consumer products companies voiced it as the new challenge in Europe.

To market their products successfully, they changed their commercial strategies and applied what worked in poor countries [The “Pauperization of Europe”].

In Japan, a similar process has hounded the economy, but for much longer. And nothing shows this better than the plight of the ubiquitous but hapless “salaryman.”

He is a cultural phenomenon. He enters the formidable corporate hierarchy upon graduation and struggles within it till retirement. Most of the time, the career trajectory flattens sooner or later. Often enough the aging salaryman is shuffled aside to a “window job” where he might not even have the tools to work, such as a phone.

His life is defined by commutes in packed trains and long hours at work. After work, at restaurants and bars, the informal part of work begins with clients or coworkers to hash out inter-office issues, price differences, design problems, or product failures under the influence of alcohol—the official excuse to be direct in a culture that prizes vagueness.  

In return for his labors, the salaryman hands his paycheck to his wife. She manages the household budget, pays the bills, buys what is needed, and makes investment decisions. Stories abound of the Japanese housewife who blew the couple’s lifesavings on leveraged investments that no one understood. And she’s known for her impeccably wrong timing [The Japanese Are Dumping Their Gold].

She also gives her husband a monthly allowance, kozukai, to buy lunch, dinner, drinks, etc., though regular visits to “soapland,” due to their higher costs, would have to be covered by special company cash bonuses. Now a lot of these structures are loosening up, and lifetime employment is no longer the ground rule, nor is marriage, but for those who end up married, especially if the wife stays at home, the allowance still applies.

In 1979, Shinsei Bank started one of the most insightful polls into consumer spending habits, or rather into male consumer spending ability—the Salaryman Pocket Money Survey. Back then, the average salaryman’s allowance was ¥47,175 ($590) per month. By 1990, the peak of the bubble when money grew on trees, wives indulged their husbands with an allowance of ¥77,725 ($971) per month. Then it crashed. By 2004, it landed on the ¥40,000 mark.

This year? ¥39,756.

And those with kids receive ¥15,000 less than those without kids.

The bursting of the Japanese bubble, now in its third decade, has ravaged salaries, bonuses, household budgets, and thus allowances—and spending. The zero-interest-rate policy that the Bank of Japan has perfected, extensive quantitative easing, and two decades of stimulus budgets that have left Japan saddled with the worst debt-to-GDP ratio in the world … all conspired against the hapless salaryman. He works harder and longer than ever before, for less pay, and even his lunch money is getting cut.

In 1992, the average salaryman spent ¥746 ($9.32) on lunch; this year, ¥510 ($6.38). Back then, when everybody was still assuming that this was just a temporary lull in the excitement, the average salaryman took an almost leisurely 27.6 minutes to eat lunch; this year, he inhaled it in 19.6 minutes. After-work drinking took the biggest hit: in 2001, the average salaryman forked over ¥6,160 ($77) when he went out to drink. That’s a serious amount of beer. Hence the image of a midnight train stuffed with drunken and barfing guys. This year, he spent only ¥2,860 ($35) per drinking excursion.

The beer industry caught the brunt of it. Beer shipments, a closely watched index based on data from the five major brewers, dropped by 3.7% in 2011, the seventh straight year of declines. Only 442.39 million cases were shipped, the lowest EVER in recorded Japanese beer history. But this August, a miracle occurred. For the first time in years, there was an uptick in beer shipments for the month of 2.8%.Where there is beer, there is hope.

Or maybe not. Eating out got slammed. Again. In 2010, 22.6% of the salarymen said they didn’t eat out at all; in 2011, 35.8% weren’t eating out; and this year, 37.9%. If this trend keeps going, it will destroy the core of Japanese social life. (But those are the lucky ones. The number of welfare recipients set a new record: 2.115 million individuals and 1.543 million households, according to the Ministry of Health, Labor, and Welfare.)

This has got to be the icing on the Japanese cake. The website of the Japanese Ministry of Finance, more specifically the FAQ page on government bonds, has been catapulted to stardom on Facebook and Twitter. It posted the question: “In case Japan becomes insolvent, what will happen to government bonds?” Incredibly, it answers with a terse action plan for when the Big S hits the fan. Read…. Japanese Ministry of Finance To Japanese Bondholders: You’re Screwed!

Read more: http://www.testosteronepit.com/home/2012/9/28/the-pauperization-of-japan.html#ixzz27qTdNS76

By:  Peter Schiff 
Friday, September 14, 2012

With yesterday’s Fed decision and press conference, Chairman Ben Bernanke finally and decisively laid his cards on the table. And confirming what I have been saying for many years, all he was holding was more of the same snake oil and bluster. Going further than he has ever gone before, he made it clear that he will be permanently binding the American economy to a losing strategy. As a result, September 13, 2012 may one day be regarded as the day America finally threw in the economic towel.

Here is the outline of the Fed’s plan: buy hundreds of billions of home mortgages annually in order to push down mortgage rates and push up home prices, thereby encouraging people to build and buy homes and spend the extracted equity on consumer goods. Furthermore, the Fed hopes that ultra-cheap money will push up stock prices so that Wall Street and stock investors feel wealthier and begin to spend more freely. He won’t admit this directly, but rather than building an economy on increased productivity, production, and wealth accumulation, he is trying to build one on confidence, increased leverage, and rising asset prices. In other words, the Fed prefers the illusion of growth to the restructuring needed to allow for real growth.

The problem that went unnoticed by the reporters at the Fed’s press conference (and those who have written about it subsequently) is that we already tried this strategy and it ended in disaster. Loose monetary policy created the housing and stock bubbles of the last decade, the bursting of which almost blew up the economy. Apparently for Bernanke and his cohorts, almost isn’t good enough. They are coming back to finish the job. But this time, they are packing weaponry of a much higher caliber. Not only are they pushing mortgage rates down to historical lows but now they are buying all the loans!

Last year, the Fed launched the so-called “Operation Twist,” which was designed to lower long-term interest rates and flatten the yield curve. Without creating any real benefits for the economy, the move exposed US taxpayers and holders of dollar-based assets to the dangers of shortening the maturity on $16 trillion of outstanding government debt. Such a repositioning exposes the Treasury to much faster and more painful consequences if interest rates rise. Still, the set of policies announced yesterday will do so much more damage than “Operation Twist,” they should be dubbed “Operation Screw.” Because make no mistake, anyone holding US dollars, Treasury bonds, or living on a fixed income will have their purchasing power stolen by these actions.

Prior injections of quantitative easing have done little to revive our economy or set us on a path for real recovery. We are now in more debt, have more people out of work, and have deeper fiscal problems than we had before the Fed began down this path. All the supporters can say is things would have been worse absent the stimulus. While counterfactual arguments are hard to prove, I do not doubt that things would have been worse in the short-term if we had simply allowed the imbalances of the old economy to work themselves out. But in exchange for that pain, I believe that we would be on the road to a real recovery. Instead, we have artificially sustained a borrow-and-spend model that puts us farther away from solid ground.

Because the initials of quantitative easing - QE - have brought to mind the famous Queen Elizabeth cruise ships, many have likened these Fed moves as giant vessels that are loaded up and sent out to sea. But based on their newly announced plans, the analogy no longer applies. As the new commitments are open-ended, quantitative easing will now be delivered via a non-stop conveyor belt that dumps cheap money on the economy. The only variable is how fast the belt moves.

Fortunately, the crude limitations of the Fed’s only policy tool have become more apparent to the markets. If you must stick with the nautical metaphors, QE3 has sunk before it has even left port. The move was explicitly designed to push down long-term interest rates, but interest rates spiked significantly in the immediate aftermath of the announcement. Traders realize that an open-ended commitment to buying bonds means that inflation and dollar weakness will likely destroy any nominal gains in the bonds themselves. To underscore this point, the Fed announcement also caused a sharp selloff in Treasuries and the dollar and a strong rally in commodities, especially precious metals.

Given that 30-year fixed mortgages are already at historic lows, there can be little confidence that the new plan will succeed in pushing them much lower, especially given the upward spike that occurred in the immediate aftermath of the announcement. Instead, Bernanke is likely trying to provide the confidence home owners need to exchange fixed-rate mortgages for lower adjustable rate loans - which would free up more cash for current consumer spending. He is looking for homeowners to do their own twist. If he succeeds, more homeowners will be vulnerable to increasing rates, which will further limit the Fed’s future ability to increase rates to fight rising prices.

The goal of the plan is to create consumer purchasing power by raising home and stock prices. No one seems to be considering the likelihood that unending QE will fail to lift bond, stock, or home prices, but will instead bleed straight through to higher prices for food, energy, and other consumer staples. If that occurs, consumers will have less purchasing power as a result of Bernanke’s efforts, not more.

The Fed decision comes at the same time as the situation in Europe is finally moving out of urgent crisis mode. While I do not think the ECB’s decision to underwrite more sovereign debt from troubled EU members will work out well in the long term, at least those moves have come with some German strings attached [For more on this, see John Browne’s article from earlier this week]. As a result, I feel that the attention of currency traders may now shift to the poor fundamentals of the US dollar, rather than the potential for a breakup of the euro.

In the meantime, the implications for American investors should be clear. The Fed will try to conjure a recovery on the backs of currency debasement. It will not stop or alter from this course. If the economy fails to respond to the drugs, Bernanke will simply up the dosage. In fact, he is so convinced we will remain dependent on quantitative easing that he explicitly said he won’t turn off the spigots even if things noticeably improve. In other words, the dollar is screwed.

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