It may have looked, last Tuesday, like just one more Japanese fiscal and economic stimulation crisis. But in reality, it has revealed that the monetary toolbag is empty. From here on, faith in government bonds must decline. The game’s up for financialised globalist neoliberal economics: fiscal disaster and hyperinflation lie ahead unless commitment to this mad model ends right now.
With Japan’s Shinzo Abe going cold on bond-buying by the BoJ (and wheeling out more QE) there was a huge bond sell-off in Tokyo last week, in which yields spiked back to near-positive territory. With many investors now beginning to see the eurozone as a parallel hopeless case, this had a knock-on effect upon European interest rates.
A brief history of mad foreign debt investment motives
All over the world, increasing numbers of investors are holding debt that offers negative interest rates. Ergo, they are not really investors, because they are getting no return. In fact, the inability to capital to generate a lending return means that, officially, neoliberal globalism is no longer “capitalism” in any meaningful sense.
In some cases (notably Japan) the Zirp/Nirp bond investors are loyal domestic institutions doing what they perceive to be the right thing; in Japan, they hold about 29% in debt bonds. But in one additional case, ‘they’ are the Bank of Japan (BoJ) with a further 30% of the total bonds. So as well as hoovering up a whole pile of other dysfunctional ‘investment’ crap since the QE programme began in 2013, they account for almost a third of sovereign debt.
Thus, three-fifths of Japan’s ever-growing debt is owned by Japanese institutions. This – and the BoJ’s dominant role as a buyer in particular – is probably the cause of the policy failure. The idea was to drive yields lower to the point where investors left the market to invest in other assets that would more directly support growth and inflation – and reduce borrowing costs for business.
But even with negative rates, the bizarre view held (by investors who aren’t really investors, because they lose money on the deal) is that both the bonds and the currency are a safe haven…..because the BoJ is so heavily involved.
Now, Japan is left holding an expensive Yen that slows export demand….and borrowing costs that haven’t improved. And inflation going down, not up.
So Prime Minister Abe has returned to his favourite failure, QE. Last Tuesday, a new programme got under way. The markets were underwhelmed at first.
But then, when the more dingbatted traders finally caught on to the fact that Abenomics had gone full circle back to QE – effectively, from a newly failed policy to an old varietally failed policy – frenzied selling of Nipponese debt went viral.
This is what Abe had wanted them to do all along. But thus far (unless I’m missing something) what they haven’t done is invest elsewhere in Japan.
Effectively, Japan now has nowhere to go.
However, once you bring in the other major players, it gets a lot sillier. Because Japan also owns 7% of US sovereign debt bonds. Alongside China, it’s the biggest holder of US debt. These two buy US debt bonds in order to keep confidence in the US Dollar high, thus making their own currencies more export competitive. Except that (as we’ve already seen) the Japanese currency has strengthened since Nirp was introduced there.
The Chinese themselves are also covertly back down the rabbit hole of QE, with the Government lowering taxes, while continuing to spend freely on propping up the Shanghai index and improving the country’s infrastructure. But the relaxed bank lending there is heading out of control, with many banks now facing zero liquidity reserves in case of non-performing loans…..of which there are going to be a-plenty, because there always are.
So Beijing will have to print money in order to bail them out. That could reduce the Yuan’s value (a good thing) but also deter investors in the economy (a not so good thing).
In the US itself, both the national debt and the budget deficit continue to rise. Here too, the biggest buyers of debt bonds are domestically based: chiefly US government agencies, who use their excess income to buy US debt, and thus get a yield. But the yields are now close to zero. And the more China and Japan invest in the debt to benefit their currencies, the higher the demand and thus the lower those yields will be.
It all looks cosy for the US, until you consider that
- Almost half of US States are bankrupt
- Managing the US debt depends on infinite Zirp rates around the world
- Following the latest US jobs data, the Fed is now under pressure to raise rates
- Raising rates would put Emerging Nation holders of dollar denominated debt into trouble they don’t need.
- Recession among EMs cutting oil demand further would make the US oilcos’ financial position unsustainable, and increase the US trade deficit.
And so we turn to EM businesses with high dollar denominated debts. Because when US borrowing rates rise, so do the debt bills of struggling emergent companies.
Three months ago, Fitch Ratings showed that total private-sector business debt in big EMs rose to the equivalent of about 78% of gdp in 2015, up from 71% at the end of 2014. But just one tiny Fed rates rise was enough (said the Bank of International Settlements) to bring that lending to a halt in Q1 2016 among the seven Big EMs otuside China – Brazil, India, Indonesia, Mexico, Russia, South Africa and Turkey.
If EM business can’t borrow to invest and expand, then it can’t take on new staff. In the context of global recession (which is what we have, but it dare not speak its name) unemployment will almost certainly rise….and along with it, the cost of unemployment relief.
As Britain, France, ClubMed and now some Arab nations have rapidly reduced (or even abolished) certain dimensions of welfare, that will lead in turn to desperation among the poor. Desperation breeds anti-systemic radicalisation.
But desperation also applies to investors looking for yield.
And so – as Q2 came to an end – by early July, a whopping $11.5 trillion in bonds were trading at negative rates, with 58% of the Barclays US Aggregate Bond Index trading below 1%. So the dried-up EM investment returned to being a flow, and then a boiling river thundering through the valleys.
This was partly due to the Japanese move, plus copycat reductions – the latest being Carney at the Bank of England. Ironically, having now abandoned bond buying and gone back to QE, however, Abe set off a selling spree there….I’d lay money that most of it went into EMs.
Apart from the bewildering chop-and-change mayhem, there are three problems with this:
- Given the economic state of the issuers, EM bonds are higher risk
- It leaves Japan with nowhere to go, and means yet more faith in monetary solutions has been lost
- As The Slog has been saying since 2011, if needs must, the devil will drive up rates/yields.
What the news really means for neoliberal globalism and you
As I posted last week, there are at least 14 trends that could turn global slump into catastrophic meltdown in the coming months. But the one that most obviously ran our of road last week was Abenomics in general, and negative rates in particular.
What we are looking at here is a systemic flaw in neoliberal globalism. The pressure is on to get borrowing rates back to normal, and by so doing get – among many other things – better interest rates on their capital for older, debt-free consumers, and better margins for banks.
The risks of raising rates for world (especially EM) business are nevertheless myriad. The longer the rate dithering goes on, the more risk-positive financial advisors and their clients get for increased yield on the investment. And the more entrenched the global slowdown becomes – and alongside that, EM fiscal blows become more pressing – the more sovereigns desperate to plug the gap by borrowing will offer higher yields to attract the lenders.
For just over five years now, I have been saying that – with no World Central Bank to regulate all world economies – globally linked mercantilism (which can never be perfectly “in step”) must always lead to what we have today: a growing number of countries mulling higher rates – in effect, breaking ranks on Zirp.
Those countries, it has always been clear to me, are likely to be Brics and other rapidly emerging economies: that is, Sovereigns facing a fall-off in First World demand for EM products and services.These adolescent economies need money to keep workers happy and investment to raise their game when it comes to competing globally.
The pressure to chase higher rates comes from insurance and pension institutions – plus the vast proportion of the world now over 55 who have lost billions in rates income since 2009.
As and when Janet Yellen at the US Fed raises rates again, she’ll continue to be between two stools: not enough of a rise to produce economy-stimulating increases in pdi, but enough to make the EM position more desperate still.
At best, what she does will make no economic difference; at worst, she will make fiscal positions worse globally, and thus enhance the likelihood of further rate rises there.
We are very close now to the potential for Russia, China, Japan, Mexico, Brazil and Turkey to start competing for economic investment and fiscal ‘management’ borrowing. There are already signs that the four-decade Bull market in bonds is finally running out of steam.
The domino-effect that will impact upon all of us isn’t hard to foresee:
- Rising Japanese yields exacerbate ECB/ClubMed fiscal crises
- EM rate rises produce further drying up of eurozone investment
- End of oil rally makes Russian fiscal position worse, spikes bond rates
- US/UK flow of cheap borrowing reduced
- South American EM economics worsen, increasing exposure of central/southern EU countries to non-performing loans – notably France and Spain
- Likely eurobank collapses: Deutsche Bank, at least three Italian banks. Produces inter-bank liquidity freeze – exacerbating already parlous eurozone situation, in turn likely to make Spanish cajas unsustainable
- US/UK deficits and Nat Debts increase at an accelerating pace, creating new unemployment and further reducing market for Asian goods
- Chinese fiscal crisis, huge slowdown in raw material imports
- Australian mining shares panic produces huge stock and property market corrections alongside complete collapse of Shanghai index
- Global stocks selloff begins in US, UK and Europe
- Too big to fail becomes too big to bail.
Neoliberal economics can only work if the mass consumers it needs become poorer.
They have to be rendered poorer because the connected, globalised market demands fierce mercantile price competition.
That competition between infected debtors is the direct result of globalist connectedness.
The poorer mass consumers become, the harder it is for them to consume.
The more the economic growth cycle thus fails, the fewer the welfare benefits the poor can be given. Even welfare rights – like State pensions – come under attack.
Neoliberal globalism has only lasted this long as a dysfunctional model because every company, institution, bank and citizen has been showered with cheap money. That vast ocean of debt has been funded by the electronic creation of unreal money, and the maintenance of zero rates that simply exacerbate the growing penury of the rapidly ageing older generation.
One day, the very increased rates that attract yield-starved investors will render those business and sovereigns who offer them too big a risk.
This is now a vicious circle heading inexorably towards hyperinflation.
Enjoy your Sunday lunch.