Bill Gross: 'bond markets are turning Japanese'

Bloomberg reported that Pimco's Bill Gross sees the bond markets becoming just like the Japanese bond market.

Regular readers already know this is happening as it is a direct result of the EU, UK and US policymakers and financial regulators adopting the Japanese model for handling a bank solvency led financial crisis.

The Japanese model places a huge burden on the real economy.  Rather than reduce the outstanding debt to a level that borrowers can afford to repay, the Japanese model attempts to socialize repayment of this debt.

This burden includes the cost of carrying this excess debt, the related costs of pretending this debt is performing, the cost of the economic distortion caused by not recycling the collateral and the cost of shutting out creditworthy borrowers in favor of zombie borrowers.

Everywhere the Japanese model has been adopted, the economy is in a downward spiral even in the face of significant monetary and fiscal stimulus policies to stop the decline.

The slowdown matches the prediction by El-Erian of Pimco in 2009 for a “new normal” in global economies characterized by a slower pace of expansion, higher unemployment and a greater role for governments in private markets following the worst financial crisis since the Great Depression.

Your humble blogger predicted in 2008 this economic slowdown.  Furthermore, I described what would cause it (adoption of the Japanese model) and what it would take to end the slowdown (adoption of the Swedish model with ultra transparency).

Pimco officials point to Japan, which has been in and out of recession since the mid-1990s, as what the new normal would look like. Even though it has the world’s largest debt load at more than $11 trillion, Japan has some of the world’s lowest bond yields because of years of below-average growth. 

In essence, the new normal is life under the Japanese model.

This economic life is completely optional.  Policymakers could chose the Swedish model with ultra transparency and instead have an economy that is growing and low unemployment.

Japanese 10-year yields fell to 2 percent in late 1997 from about 5.7 percent eight years earlier when the country’s stock and real estate markets collapsed. They haven’t closed at or above 2 percent since 2006. The U.S. 10-year yield tumbled below that level about four years after rising to 5.29 percent in June 2007. 

Japan missed out on the tremendous growth in the global economy that occurred after it adopted the Japanese model in response to its bank solvency led financial crisis.

Global “bond markets are turning Japanese,” Bill Gross, who manages the world’s biggest bond fund as co-chief investment officer with El-Erian at Newport Beach, California-based Pimco, said in a June 4 Twitter posting.

“In many ways, we are replicating the Japanese experience,” George Magnus, senior economic adviser in London at UBS AG, said in a June 5 telephone interview.