Fudging the growth curve will build one Fujiyama of a debt, and a full-on Asian depression
The Slog: You often hear older hacks saying, “It’s a slow news day today”. As a blog-commentator, I long
for slow news days. Slow news days are the ones where you actually
stand a chance of getting to the bottom of something. Today is a very
big and fast news day, so although it’s already 11.30 am here in France,
I’ve got nothing of any value done at all.
You may recall some time ago
I said I doubted the MoUs’ ability to control interest rates forever.
With that in mind, there’s interesting stuff going on in Japan at the
moment. The inability of the BoJ to ‘control’ Japanese interest rates
(Japanese Government Bond rates spike crazily from day to day) has got
that good ol’ banking system heading for trouble. As Tyler Durden points out at ZH,
Nipponese banks appeared to initially ‘hedge’ their huge JGB positions,
but the sheer unpredictability has now started a stampede out of the
game altogether. Those left in it for too long will lose money on a
massive scale. We therefore have the possibility of the all-time big
need for a bank bailout….with no money to do the bailing out, as it
were.
And there’s more, sadly. You may have spotted that the G7 didn’t have
a lot to say about Japan last weekend, so busy was it coordinating the
globalisation of grand larceny. The one thing we can see pretty clearly
is that the weaker Yen has turbo-charged Japan’s economy into a whopping
3.5% growth curve in just one Quarter. But the radical BoJ approach
forced on it by the new government in Tokyo always looked to me like a
facile idea: beggar-thy-neighbour currency manipulation can only ever
have one result: retaliation. As Ambrose Evans-Pritchard correctly observes
in today’s Telegraph, ‘Stephanie Kretz from Lombard Odier said the
falling yen looks like a replay of the mid-1990s before the onset of the
East Asian crisis, when external funding dried up in a “sudden
stop”….It poses a direct threat to Malaysia, Vietnam, Thailand, Korea
and others with a high trade gearing, as well as for China. She warned
that the trade surpluses of these countries could evaporate, “silently
planting the seeds for the next Asian crisis down the road”.’ In short,
the retaliation will be whole-scale withdrawal of investment, given that
the near-entire success factor for all those economies has been cheap
cost of production…which Japan is now aping. And of course, recessions
for all of them unless they exercise that retaliation soon.
If you think things might be looking black at this point, you might
want to reach for the Imodium before reading this next bit. You see, on
our wonderfully, logically and apparently irreversibly globalised
econo-fiscal planet Earth, every dramatic policy switch gets exported
sooner or later. In the dash for stimulation alongside currency
devluation, the BOJ is quantitatively easing on a scale to make
Bernanke’s efforts look like a tickling contest: the central bank has
mopped up $1.4 trillion of bonds – more than the US, in an economy
roughly 30% of the American one. The spectre of what AEP calls a “wall
of money” flooding global markets, with up to $1 trillion leaking out in
a revival of the yen “carry trade”, is now back in play bigtime.
And don’t put the bum-concrete away just yet: no major Sovereign has
ever before run up such a high public debt in such a short time. As we
saw earlier, the bond spikes are heart-stoppingly fast, but they’re also
high. Yields on 10-year JGBs have doubled, at one point spiking over
0.9% last week. Now, the plummeting cost of CDSs used to insure against
Japanese sovereign default suggests that the shovers and makers in the
Bond markets think things are still hunky-dory. But then, they did in
ClubMed at first as well. And look where that got us, Stanley. The
problem for the Japanese is going to come if events in, say, Europe
continue to turn global sentiment away from bonds. For if you have
neighbours who don’t like being buggered sorry beggared (so they take their ball back home) and
you have debt-capital generally becoming more and more expensive, you
suddenly find yourself with a full-grown Everest of debt that’s
impossible to service.
I do have some exposure to Japanese shares which have done very
nicely thank you – up 55-60% since the policy started – but this may not
be the time to get greedy. It won’t be a healthy place to be if, a year
from now, internal banks are insolvent, the country’s on the verge of
default, an alliance of neighbours stand ready to invade, and the G7 is
hopping up and down because yet more of their lenders have piled in with
too much too quickly.
I do realise I’ve been banging on about this for years now, but what
we’re seeing once again here is just how insane it is to have a
globalised banking system, and a wealth-creation model based on global
mercantilist trade. At best the result is bound to be banking domino
effects and trade wars; at worst, a complete banking collapse and
nuclear war.
Japan is making a terrible mistake that is exactly the same as
everyone else’s terrible mistake: applying worn old ideas invented in
the pre-globalist world to the world we have today…which is sorely in
need of a new idea. This will end in tears.
One final point: I did mention two weeks ago that when Fred Carney’s
Circus takes over in Threadneedle Street next month, the new Governor
intends to do exactly with Sterling what Tokyo has done with the Yen.
Let’s hope this burgeoning mess in Asia alters his outlook. Either way,
stay long in Imodium, Effexor, and Valium.
Large hat-tip to Butch in New Mexico for drawing the ZH piece to my attention.
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