Saturday, December 27, 2008
a marshall plan for the united states?
Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.
The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.
“It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today. “Japan can help by extending debt cancellations.” ...
Japan should also invest in U.S. roads and bridges to support [american] personal spending and secure demand for its goods as a global recession crimps trade, Mikuni said. ... Combining debt waivers with infrastructure spending would be similar to the Marshall Plan that helped Europe rebuild after the destruction of World War II, Mikuni said.
Japan will also have to accept that a stronger yen is good for the country in order to reduce excessive trade surpluses and deficits, he said. The yen has appreciated 23 percent versus the dollar this year, the most since 1987, as the credit crisis prompted investors to flee riskier assets and repay loans in the Japanese currency.
“Japan’s economic model has been dependent on external demand since the Meiji Period” that began in 1868, Mikuni said. “The model where the U.S. relies on overseas borrowing to fuel its property market is over. A strong yen will spur Japanese domestic spending and reduce import prices, thereby increasing purchasing power.”
mikuni clearly accepts the logic many have found compelling, that trade surpluses are the result of currencies managed to support (with the complicity of both sides) mercantilist trade policies and are both damaging and unsustainable. but i find it curious that japan shouldn't use its war chest to bolster its own domestic demand -- after all, as he notes, the inevitable outcome must be a more powerful japanese consumer and a weaker american one. using japanese savings to grease the transition seems counterproductive -- particularly when japan's own export sector will be in great need of damage control.
as interesting as the main point is the assumption by mikuni that the united states government will not have the capacity to borrow from abroad in order to fund its dalliances. indeed his view is represented as
Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.
of course mikuni presumes quantitative easing in the form of central bank monetization of treasury issuance to prevent interest rates from rising even as treasury auctions fail. this in turn would drive the collapse of the dollar he envisions, indeed potentially risking a currency crisis amid a massive balance sheet recession and credit deflation.
UPDATE: adding to mikuni's line of thought, this piece via paul kedrosky from the asia news.
In 2007, public debt in the United States was 10.6 trillion dollars, compared to a GDP (gross domestic product) of 13.811 trillion dollars. Public debt in 2007 was therefore 76.75% of GDP. In just one year, direct and indirect public debt have grown to more than 100% of GDP, reaching 176.9% to 184.2%. These percentages exclude the debt guaranteed by policies underwritten by AIG, also nationalized, and liabilities for health spending (Medicaid and Medicare) and pensions (Social Security). By way of comparison, the Maastricht accords require member states of the European Union (EU) to reduce their public debt to no more than 60% of GDP. Again by way of comparison, in one of the EU countries with the largest public debt, Italy, public debt in 2007 was equal to 104% of GDP.
In 2007, 61.82%  of America's public debt was held by foreign investors, most of them Asian. So the U.S. public debt held by nonresident foreigners is equal to about 109.39% (113.86%) of GDP. According to a study by the International Monetary Fund, countries with more than 60% of their public debt held by nonresident foreigners run a high risk of currency crisis and insolvency, or debt default. On the historical level, there are no recent examples of countries with currencies valued at reserve status that have lapsed into public debt insolvency. There are also few or no precedents of such a vast and rapid expansion of public debt.
... In the early months of next year, when the official data are published, the United States will run a serious risk of insolvency. This would involve, in the first place, a valuation crisis for the dollar.
britain, as earlier noted though in terms of external-debt-to-GDP rather than in terms of the proportion of public debt held externally, is even further into this hole than the united states.