16 Comments
Aug 17, 2023Liked by Peter Farac

Fantastic read yet again!

Japan's economic development could be worth it's own full read. Boom, bust and lost decades. Would make a great read I'm sure!

Cheers!

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I've covered bits and pieces in different articles but you're right, it would be good.

It's interesting that Japan is always left out of "empire" analysis (like Ray Dalio's) highlighting the rise and fall of global powers. The countries that rise and fall before dominance are never mentioned.

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Nov 13, 2023Liked by Peter Farac

I've been fan of Michael Pettis work! And you're now my 2nd favourite writer in economics...I love to read your work...

One suggestion...It would be great if you can publish your work in a book...I don't think there is any book out there which talks about Economic identities (like accounting identities)...

Would be great to read such a work!

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Thanks! Yeah MP is the best on this, and a lot of these ideas were from his body of work which made a lot of sense to me. I've expanded it a little more into the quantitative region by constructing models from it.

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Aug 19, 2023Liked by Peter Farac

Great thread too Peter. I'm also reminded of the Druckenmiller Deutschmark reunification trade 1989ish, where the Bundesbank afraid of inflation kept rates high, while the fiscal spending was turned up to an 11. The result was massive appreciation of the Mark. Something similar is happening now with USD, but a strengthening USD will have massive implications (negative) on risk assets.

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That's interesting. I haven't studied that closely but I will definitely now

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Aug 18, 2023Liked by Peter Farac

Hi Peter. Excellent post. I have followed Michael Pettis' work for a while as well. You mentioned the ASX and as an Australian I have watched the ASX basically go nowhere for 15 years. However, as you would be aware our property market is very bubbly and I think much of it is explained by Michael's work and your post. Most people I talk to still seek the answer elsewhere - immigration, planning laws etc. I would be interested to know your thoughts as I can clearly make a link between the surplus countries and Australia's property bubble. Thanks Steve

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Australia was (until recently) a deficit country. The banks would raise capital (through wholesale debt) which supported bank balance sheet size and lending into property.

Australia's predicament is one of suppressed volatility imo. There hasn't been any notable event (since 1992) that has put housing into question, allowing leverage to increase.

I don't think immigration is a reason supply couldn't be expanded, I would place the blame on planning, which is no longer a problem at the state level but very much a problem at the local government level. Democracy at work...councillors get elected based on their protection of existing property values (and extraction of "fees" from developers). Add to that natural geographic limitations (Sydney especially) and it all mixes together into a bad situation for affordability.

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Aug 18, 2023Liked by Peter Farac

I think we are seeing some of the imbalance related stress show up in Japan. With a smaller current accout surpluses than in previous years, the need to keep stimulus going is clear and it of course help in keeping the Yen depreciating to support exports.

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Yes, this was a real concern over and after the pandemic with the trade balance falling quite negative and only just now recovering (the reason for the big 6% GDP print the other day).

https://tradingeconomics.com/japan/balance-of-trade

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Aug 18, 2023Liked by Peter Farac

“Perhaps one of the 3 surplus countries, either Germany, Japan or China, may be able to switch to being a deficit country. “ - why did you word it that way? Why not switch to balanced country? Or does balance simply not exist, and all we can hope for is less imbalance?

Do you have recommended reading list on this topic?

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I was looking at from the point of view of partially taking over the role of the US as the world's deficit country.

Balance all around would be more stable.

If you want to read about these trends (and other things relating the imbalances and debt accumulation) there is 10 years worth of material here which is excellent.

https://carnegieendowment.org/chinafinancialmarkets/

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Aug 18, 2023Liked by Peter Farac

The system seems very stable. Consider the absorption by the West of the resources of the ex-Soviet block, and then the change in Russia to autarky, and at the same time the mammoth increase in Chinese manufacturing, and everything seems to trundle along. And yet people like Ray Dalio think that it will come undone at a certain point. Do you have a comment on this?

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This is worth a follow-up post in itself. In short though I think your observations are correct, especially around the rise and fall of Russia. Add to that the rise and fall of Japan - it was once meant to be the next superpower (Ray Dalio conveniently ignores these 2 examples in his empires piece).

I believe the US is much more able to get back to balance than China or Japan could achieve the same. It would be painful but is 100% possible. The only reason I would say it is necessary this time is that the quantum of debt growth suggests severe imbalance.

The issue as it stands is that there is a symbiotic relationship between exporters and importers. They both "need" each other to suit their own purposes, but the US could break-up without an existential threat to itself where I don't think China could. There would be reverberations between the 2 that would be hard to forecast though.

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Aug 19, 2023Liked by Peter Farac

if US get back to trade surplus that would mean it has to lose its reserve currency status and one has to replace it for US and I don't think there is any country that has an enormous market as US to absorb other countries' surpluses

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You're publications are fire! Great work.

What's your thoughts on Canada - the reliance on Real-estate to boost GDP has dominated. In part to blame is the political games that increased the supply/demand imbalances in houses we see today- igniting the ramifications of unaffordability. With more reliance now seemingly to come from importation of labor, since post GFC, the surplus of cash to boost levered retail and commercial players seems to have cushioned the markets resilience. That's my quick thought, would love to hear yours, and you're insight in the potential fate of Canada's economy (if you have an outlook on it).

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