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The Daily Reckoning Weekend Edition Saturday, February 6, 2010 Tokyo, Japan --------------------------------------------------------------- Surrogate spending spurs faux demand in Japan, Dan Amoss on toxic Treasurys and other things to avoid, Plus, all this week's reckonings neatly archived for your perusal... Joel Bowman, with a few quick words from Tokyo, Japan... Hiroshi Ishiguro is a man. Geminoid is a tele-operated humanoid robot. At the Osaka University Intelligent Robotics Laboratory here in Japan, professor Ishiguro has created a surrogate robot to perform his lectures for him. Geminoid talks like Ishiguro. "He" looks like Ishiguro. "His" facial features and mannerisms were developed to mimic those of his owner-operator perfectly. For all intents and purposes, Geminoid is the ideal surrogate. Bruce Willis, eat your heart out. Impressive as the finished products are, the concept behind Ishiguro's androids is not entirely new. The Japanese government, after all, has embarked on one of the largest surrogate spending programs in history, using the government coffers as proxies for real world demand. But instead of birthing any honest, sustainable demand, Japan's policy wonks and central bankers created an economic Frankenstein, one that has kept the country in an on again-off again deflationary recession for two decades. Turns out prices can smell faux demand from a mile away. "Last August, it was reported that deflation in Japan had reached a new record," observed Reckoner-in-Chief, Bill Bonner, in yesterday's issue. "Prices were dropping at the fastest pace 38 years. By November, it was duration, rather than depth, that got the press's attention. Prices had been going down for 10 months in a row... "Prices fall in Japan. The yen rises," continued Bill. "And the government uses every trick in the book - and some as yet unpublished - to knock it down. If you are in a position to borrow money from the central bank, the bankers will give it to you at practically zero interest. And if your neighborhood wants a bridge or a community center, that too will be forthcoming from the Japanese government. No government has ever been so generous. At least, not without going broke. For every yen the government squeezes from its taxpayers, it returns more than 2 yen in public spending." The problem, of course, is that "surrogate spending" cannot provide sustainable price support indefinitely. In the long run, it can only slow the rate at which prices go where they want to go anyway: down. It stretches a short, sharp correction over a much longer timeframe...and erodes the national balance sheet in the process. Moreover, because it is so difficult to measure the real-world value of the goods and services that surrogate spending "demands," it tends to be immensely wasteful. People are put to work doing jobs that nobody would ordinarily pay for. Useless goods are produced at the expense of useful ones. And, as prices invariably drift lower, consumers employ the best defense against deflation yet known: they save, driving real demand down ever further. Your editor wandered around the über chic Ginza shopping district today in search of that illusive real world demand. The streets are lined with high-end retailers...but the crowds are mostly to be found on the sidewalk and in the relatively cheap, but equally trendy, cafés and yakitori houses. Many people carry briefcases. Few carry shopping bags. Consumer spending has been on a steady decline here since the government's last stimulus effort began wearing off. Now, in the face of falling wages and easing consumer demand, central planners find themselves forced to make their next move. What to do? A front-page story on this week's The Nikkei Weekly provides the answer: "In a bid to prevent the nascent recovery from giving way to another economic tumble, the government last week enacted a second fiscal 2009 supplementary budget. But with the first stimulus partially suspended and its successor not taking effect until April, the economy, for the time being, is fending for itself." It is important to remember that not all demand is created equal. There is the kind forged in the crucible of the free market, rooted in sound money and underpinned by the desires of real people. Then there is the surrogate, government-sponsored variety, masquerading behind a lookalike, skin-colored sheath of public spending boondoggles and debased currencies. Administrations around the world are guilty of exactly this kind of economic prestidigitation but, as usual, Japan is way ahead of the curve. Unfortunately, that learning curve has cost the Land of the Rising Sun nearly a generation worth of growth and economic progress and plunged her government into deeper debt than any other nation in the world. Central planners attempting to "imitate the imitators" with phony make- work programs and stimulus injections might like to ask themselves, therefore, "Will the real world demand, please stand up?" ALSO THIS WEEK in The Daily Reckoning... America 2030: Why We Must Act - Now By David Walker New York, New York Those of you who are parents (and I'm a parent) may want to reject out of hand the idea that we are in effect stealing from our children's future and bequeathing to them a far less prosperous life. But if we don't begin to address our fiscal challenges soon, it's only a matter of time before the consequences begin to show up, most likely starting with higher interest rates. As things get worse, our children will slowly see their living standards decline. We can still prevent these things from happening. The ultimate goal of cleaning up our fiscal policy is not to avoid a recession or even to balance the budget per se - it's to pass on the kind of healthy, vibrant nation that we inherited. REITs... A Thing to Avoid By Dan Amoss Jacobus, Pennsylvania The commercial real estate crisis may be the most anticipated crisis in history. But just because it's widely anticipated doesn't mean that the crisis won't be destructive for REIT shares. Since most REITs are richly valued, the slow-moving commercial real estate crisis will ensure that future returns disappoint. The Case for Higher Treasury Yields... And Lower REIT Prices By Dan Amoss Jacobus, Pennsylvania The prospect of rising Treasury yields will pressure REIT valuations. "Yield instruments" like REITs are priced to yield a "spread" over Treasuries. So prices of yield instruments usually fall when Treasury yields rise. I am anticipating this exact scenario. Become an Activist... For Your Money By Chris Mayer Gaithersburg, Maryland Ninety-seven percent of all stock mutual funds are down from where they stood at the beginning of 2008. If you are surprised by this not-so- trivial piece of trivia, you shouldn't be. Very few mutual fund managers actually manage their funds in a way that could produce meaningful outperformance. So if it's outperformance you want, you'll probably have to do it yourself. Everybody Off The Beach! By Bill Bonner Baltimore, Maryland Last August, it was reported that deflation in Japan had reached a new record. Prices were dropping at the fastest pace 38 years. By November, it was duration, rather than depth, that got the press's attention. Prices had been going down for 10 months in a row. Then, last week this update... --- Lifetime Income Report Presents... --- Enroll today and immediately start collecting "pension paychecks" every 15 days, for the rest of your life... Retirement, Plan B: Without doing a single moment's work, now you can legally sneak onto the "payroll" of nearly 1,000 of America's best companies... And collect a regular "Plan B Pension" check as often as every 15 days... At any age and for as long as you like, even after you've already retired... With nonstop annual incomes running as high as $120,000 or more... Details in this Step-by-Step Manual. --------------------------------------------------------------- The Weekly Endnote: We'll be back with more from this corner of the world next week but, for now, we feel obliged to make an ass of ourselves at the karaoke bars. Is "Turning Japanese" by The Vapors too clichéd? Until next time... Cheers, Joel Bowman Managing Editor, The Daily Reckoning   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.

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