Fudging the growth curve will build one Fujiyama of a debt, and a full-on Asian depression
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.
Unfortunately, it’s a bad news day today, and that rhymes with J, and that stands for Japan.
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.