"Boldly They Rode And Well", Or Why Japan Is Not America

Tyler Durden's picture

Submitted by Daniel Cloud

Boldly They Rode And Well

I believe that Shinzo Abe has made a very serious strategic miscalculation. I used to be confused in much the same way he now seems to be, but I was cured of my confusion by thinking about Chinese inflation.

For a long time, I was puzzled by the fact that America’s endless multi-stage QE program seemed to have no effect on measured inflation, on the CPI and the PPI. But then I realized that by only looking at the United States and their three hundred million-plus people, I was missing the big picture, missing the most important part of its aggregate impact on the Earth’s seven billion inhabitants.

QE may never have much of an effect on the inflation rate in the fifty states of the United States of America, because it is workers in the developing world, and in particular, in China, who are the marginal hires in our still-globalizing, still-offshoring world economy. There is no distinct American economy, now, there is no Chinese economy, there is only the world economy, and the Fed makes policy for large parts of it. China has the kinds of structural rigidities in its labor, goods, information, and asset markets that make inflationary psychology very probable. It already had an ongoing and stubborn problem with inflation before QE started, so the required psychology already existed. And, perhaps most importantly, much of the money the Fed is printing doesn’t actually end up in the United States. It ends up being added to the reserves, and therefore the domestic money supply, of countries like China, who want to keep their currencies pegged, or quasi-pegged, to the dollar.

Why? Simply letting their currency appreciate would do to the Chinese what it did to Japan in the late ‘80’s. But to keep the yuan from appreciating against the dollar as a result of the increased supply of dollars from QE, the government of China must buy all the dollars anyone shows up with, at the pegged exchange rate. To pay for them, China must issue yuan, and pay them out to the holders of those dollars. That makes the supply of yuan in circulation increase by the same amount – as the dollars are added to the country’s reserves, the domestic money supply has a matching increase. The authorities can try to “sterilize” this hot money, by selling treasury bills, but experience has shown that the flows are simply too large and long term for this to be very effective. 

Since this means the money supply in China is constantly increasing at what would otherwise be an undesirably rapid rate, the result, as readers of Zero Hedge already know, is a persistent problem with inflation. Inflation is a form of taxation; by printing money, the State funds itself by taking a little bit of wealth away from each holder of the currency. (Or in the case of the dollar, of all the various currencies pegged to it…)

In 2012, according to a recent post on ZH, citing the WSJ, nominal private sector wages in China were up 17.1 percent. This means wages are compounding at a rate much, much higher than GDP growth, and the process shows no signs of stopping. That endless increase feeds through into product prices – not the prices of exported products, since it’s necessary to stay competitive in dollar terms, but the prices of ones sold into the domestic market. The same effect is echoed all through the developing world, in any country that wants to participate in dollar-based world trade, and feels it has to keep its currency in a stable relationship with the dollar to do so without undue disruption. That increase in the cost of the goods and services available to them makes the middle class, and the many people who are still poor in those countries, worse off than they otherwise would have been. (It was rising food prices, tied to Chinese demand, that were the straw that finally broke the camels’ back in Egypt and Syria.) On the other hand, the American policy that ultimately causes it helps the Fed’s main constituency, developed-country banks, and helps developed-country governments keep spending, and allows developed-country political actors to maintain their patronage networks.

QE works, politically, because it is mostly a tax on consumers in the developing world. It keeps the banking system in Europe, and therefore the rest of the world, from collapsing, for the time being, it maintains the existing set of political arrangements, and the costs fall mainly on people who will never have a chance to vote in an OECD election. Ben Bernanke’s great triumph, as an ideologue, is to have come up with a Rawlsian, distributive justice argument in favor of what really amounts to taxing the poor to protect the assets of the rich. (To add insult to injury, in a country like China, where nobody ever gets to vote on anything, it’s taxation without any hint or whisper of representation. Egypt showed us what that can lead to, though as Americans we shouldn’t need reminding.) Given the actual goal, which is to maintain the status quo in world affairs as long as possible, it isn’t clear what other policy could have been chosen, but the justification offered in public is, of necessity, somewhat ironic.

The risk to world markets, at the moment, comes from the fact that the people who run the Fed and Treasury may actually be sincere in offering that justification, that the irony may be unintended. Their somewhat myopic focus on the developed world – which is, after all, where all the relevant political constituencies live – means that they may not actually understand that robbing the poor to pay the rich is what they’ve been doing. All they know, perhaps, is that the policy didn’t cause anyone who mattered to them any pain – so it seems possible that they have perceived it as actually costless, as a free lunch. It’s easy to be incurious about how migrant workers in Wuhan are doing, when the Chinese press can’t really cover their situation, and you never meet or talk to such people yourself. (Somehow they don’t get invited to G7 meetings…)

Certainly, the Japanese don’t seem to have been let in on the joke. We’ve been doing QE for years. It hasn’t had any of the predicted catastrophic effects. We kept obnoxiously pointing this out to everyone, and voicing our exasperation at their failure to emulate us. Eventually the political pressure for adopting such an apparently costless, and riskless, and kind-hearted policy became irresistible, and there was a coup at the Bank of Japan.

The mistake Abe is making, though, is to think the same trick that worked for the US will work for them. The problem, as Shirakawa no doubt realizes, is that the two country’s situations are not at all analogous, because the yen isn’t really a reserve currency in the same way the dollar is. There is no population of natural sovereign buyers who will be forced to print their own currency to mop up excess yen, as there is for the dollar. No sovereign is going to want to dramatically increase the allocations of their country’s reserves to the yen, not when it’s in the middle of being deliberately devalued, or really ever. Russia and China and Saudi Arabia don’t need any more yen, they have plenty. Oil isn’t priced in yen. Japan isn’t the world’s largest economy, or even its second largest. World trade isn’t conducted in yen. The emerging economies will just let it collapse. There is no natural sovereign sink for yen to drain into, as there is for the dollar, no group of buyers of last resort with bottomless pockets and no choice but to buy.

But that means nobody else is going to want to hold yen either. Why own a currency when the issuer publicly plans to make it worth less, and to raise the inflation rate well above the current long-bond yield at the same time? That isn’t a store of value; it’s a live grenade. People in the private sector, wishing to survive, will fling the grenade away. There is nothing to stop them, no natural buyer the other side, because the only player who could possibly defend the yen – the BoJ – is publicly committed, in a politically irrevocable way, to the opposite path. Because of the relative success of QE in the United States, policy-makers will be complacent about the risks. 

The mistake Abe is making is to generalize from the experience of the central bank of the world’s primary reserve currency to his own very different situation. Japan can’t tax its allies to support its insolvent State by printing money, because (aside from the US, which is also broke) it has no allies. Any liquidity it squirts at them will simply splash off. What will really happen is, therefore, exactly what you would expect to happen to a country with a convertible currency and a very large national debt which credibly announces that it plans to abruptly double its money supply – there will be a scramble to get out, and the yen will decline, or Japanese bond yields will rise, until one or the other reaches a level that offers some prospect of a positive return. Though of course, there will be overshooting.

That means a much, much lower yen, and/or much higher JGB yields, which would of course be instantly fatal. So, as George Soros has already warned, what we may actually get (unless Abe flinches, and reverses course, which is hard for him to do now he’s actually pulled his sword out, yelled “Banzai!”, and started the cavalry charge) is an uncontrolled devaluation of the yen, to some level that would seem wildly unrealistic to us now, with incalculable risks for the stability of world markets. And it’s all based on a mistake, an incorrect analogy with America’s situation. “Boldly they rode and well, into the jaws of Death, into the mouth of Hell…” The nobility of failure may, I suppose, be some consolation, for Abe, personally, at least.

The only really unusual thing about this particular case is the fact that the uncontrolled devaluation has been publicly announced, in advance, in a way that’s extremely credible. That makes it an unprecedented experiment – which could easily turn out to be the recipe for an unprecedented disaster.

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lolmao500's picture

Unlike Japan, some people in America have a spine and are armed.

Vlad Tepid's picture

Do you mean North America?  I think there are some pretty tough, armed,cartel-ish hombres south of the Rio Grande...north of that, not so much.  Not after the Twinkie delivery anyway.

CrashisOptimistic's picture


This guy is just wrong.

Toyota is not going to be allowed to destroy Obama's showcase General Motors by winding up with $9000 Camrys.

The Fed will buy yen.  That will be that.

AssFire's picture

They drive Fiat, not Mercedes.

jekyll island's picture

The dance will have to end sometime, and most likely the fuse will be lit by a politician who makes a huge mistake, errr, miscalculation.  Sure is putting a lot of faith in the fed riding to their rescue, that would be one hell of a currency swap line.  On the other hand, perhaps both Japan and US realize they are fucked and are working in tandem.  Sure will be interesting to see who craters first.  

ISEEIT's picture

Maybe. Maybe not. Depends on what they're up to really. The degree and sophistication of their attempts to centrally control us is admittably impressive. I know as a fact it will go off the rails at some point though. And I mean entirely as in epic crash off the rails, not the hobble along broken sort of off the rails we see today. (FORWARD?)

Japan is expendable from a globalist perspective. We are all expendable from a globalist perspective. In fact we all must be eliminated entirely in the sense meaningful to us..From the globalist perspective.

Round and round we go.

Been here. Done this.

The difference is that this time 'it' is going for the whole enchilada.

Why not though huh?

The definition of insanity is what?

noless's picture

Believing or acting in a way outside of the dominant paradigm or belief structure, to the point of actions which lead to personal alienation from the parent culture; generally exemplified by repeated actions which are sponsored on the belief in evidence not deemed suitable or within the realm of acceptable reason of said culture.

One extreme is that of the mentally defective, who truly cannot live without but still rejects innately the will or understanding of the majority, but this principle can also be applied to those who can in fact live within the enforced system, but based on their varied experiences reject certain central ethos of the predominant culture which in turn leads their lives to be painted in the same light as the truly deranged, those in the latter group are generally politely referred to as eccentrics in times of peace, or invariably; terrorist, anarchists, or just plain criminals in times of war.

Lost My Shorts's picture

The guy is just wrong, but for different reasons, I think.  You would never see $9,000 Camrys because some of the inputs are commodities at world prices and simply devaluing the yen doesn't help.  They can only trim the labor and some overhead charges in dollar terms.  Yes, that is what they intend -- to make Japanese goods much more competitive in export markets and/or to bring some manufacturing back to Japan (where they have also been exporting good jobs to China and SE Asia just like the US has done.)

What all these wise guys talking their books fail to mention is:  Japan was on a totally unsustainable path down a financial black hole already prior to Abenomics.  They never had a choice of black hole or no black hole.  Their only choice ever was which hole.  What they are doing is forcing a 50% devaluation of their otherwise totally unpayable debt, and bringing jobs back onshore, and making the Japanese economy much more competitive.  Of course it will wipe out domestic savers who hold the debt, but Japan is a much more cohesive society which has the wherewithal to tear up and rewrite their social contract.  All those Mrs. Watanabes who hold the domestic debt lived through a charmed time where taxes were artificially low, and they were very wealthy by world standards, and they could travel cheaply around the globe on a wildly over-valued yen.  They were living the high life on an illusion of borrowed money.  Now it's payback time, and they will understand.  What Abe is really thinking is:  how can the government keep the old folks from starving on the streets after their savings are hacked in half.  Answer:  start generating a lot more real wealth domestically by bringing jobs back onshore and making Japanese industry more competitive and having the country live within its means.  To say that is in any way comparable to US Fed policy is nonsense.  US Fed policy is all about keeping TBTF insolvent banks rolling in profits, and they don't give a sheet about the real economy or real wealth.

Japan is doing the obvious sensible thing in their situation.  No option would be painless, but Abenomics actually has a foundation in reality and would be the least painful.  Much better than riding their debt to 300%, 500%, 1,000% of GDP on the crest of a wildly overvalued yen.

css1971's picture

Korea devalued a while back. Which is why Samsung is all over the place.

GM Korea:


GM Chevrolet Malibu vs Toyota Camry

BigInJapan's picture


Japanese cars pretty much never come from Japan:

"Toyota Motor Manufacturing Kentucky, Inc., (TMMK) is located in Georgetown. Engine manufacture - 2GR-FE and 2AR-FE. Vehicle manufacture and assembly - Camry, Hybrid Camry, Avalon and Venza."

asteroids's picture

The Chinese should dump all their US bonds. Boom! Game over. Any other paths has them as partners to the FED.

Money 4 Nothing's picture

They would rather use them to purchase Gold... sshh.. don't tell anyone.

Boeing Boy's picture

The Fed will simply print and buy.  No Problema

Lost My Shorts's picture

That's brilliant !!  You must run the Bank of China.

Step one:  dump all the bonds so the Fed can by them back with printed money at 30 cents on the dollar.  That results in a 70% paper loss for China, but well worth it to show Mr. Big Nose who is boss.

Step two:  now you have a bunch of dollars, which are a different type of US paper that pays no interest.  Bleep, what do we do with those?  Buying US goods is out of the question.  Mr. Big Nose would like that, and we can't do anything Mr. Big Nose would like.

Step three:  dump the dollars on the currency market.  Sends the yuan-dollar cross to the sky, undoing a decade of hard work manipulating the yuan downward.  Is that Mr. Big Nose laughing ??  Bleep bleep bleep !!!  Always trying to deny China the glory it is due !!

GMadScientist's picture

Not to mention that pile of dollars would be worth significantly less by the time Ben got done buying paper with both grubby mits, but they'd still be good for buying gold, oil, and soon-to-be-ex US companies, all of which will make Mr. Big Nose frown just a little bit.

BigInJapan's picture




And sell their shit to whom, exactly? Ze Churmanss?

greatbeard's picture

>> some people in America have a spine and are armed.

Can you mention anything they have stood up for, these spine and gun owning folks?  Our rights have been trashed, policians are fully bought and paid for, with corporations running America soley for the good of the already obscenely wealthy.  Just what have these so called gun toughies done to stop the progression?

Harbanger's picture

"Just what have these so called gun toughies done to stop the progression?"

Key word is progression, decades of slow progression.  Many individuals have stood up in the past and were singled out and targeted.  The real question is who will survive.

greatbeard's picture

>> Many individuals have stood up in the past and were singled out and targeted.

Name something recent, who, and what they were standing up for.  Ruby Ridge is ancient history.

noless's picture

Are you calling for or inciting armed rebellion?

How do you feel about suicide reports made by those who gain advantage by a persons voice disappearing?

He pulled the trigger twice, directly in the back of his head, strait shot , both times.

There is a reason why the term "suicided" exists, the power cannot be confronted except through their own hypocrisy, so as to encourage them to fight against themselves, instead of using your children like pawns.

What is your argument?

greatbeard's picture

>> Are you calling for or inciting armed rebellion?

Kindly point out the part of my post that is confusing you into thinking I'm calling for armed rebellion and I'll explain what I really meant.  If anything, it was the previous poster who was going in that direction.  I've just had my fill of these chest pounding, do nothing, gun folks.  Yeah, they've got ther guns, lots of them.  And yes, they make noise, lot's of it.  But they don't as claimed, use said guns for any good purposes.  Yes, they kill friends and family and loved ones, mostly.  Occasionally one wanna be Rambo goes off the deep end and takes out a whole bunch of innocent, harmless people.  I bet I can name 100 idiotic gun actions for every productive gun action the OP could muster.

And I'm not particularly anti-gun.  I own guns, I have a CCP and I responsibly target shoot.  Unfortunately, there is a minority of gun owners who's mouths are much bigger than their intellect, and they give guns a bad rap, much like the minority of the Muslims population.  If you have a gun, fine, just keep your mouth shut, your gun safe, and use it for what it's intended for, whatever that happens to be.

GMadScientist's picture

Don't blame the puppets for their Pavlovian tendencies...they're just doing as they're told.

Marigold's picture

Yeh , just look how you Pussies behaved in Boston ... USA USA

Yen Cross's picture

   Z/Hers will love this link. http://www.japanaddiction.com/

  I've enclosed the google translate link for you, {Non Frog} speaking citizenism.  http://translate.google.com/

rosiescenario's picture

"...and they rode on."  From Blood Meridian.....the Judge's gang bears many similarities to our Feds....Tarantino really needs to make that book into a movie.

css1971's picture


I think Ben and the FOMC know exactly what they're doing. The talk of tapering only started after the CNY appreciated a tiny bit against the USD over the last month or so. Ben knows fine well that all the inflation is getting exported and also that when the asian pegs lift, it's coming right back.

If you take a look at the CNY vs USD over the longer term, the crashes in the US occurred when the CNY was appreciating fastest and inflation on chinese goods was highest in the US. i.e. The marginal buyers in the US are completely dependant on Chinese goods.

p.s. Spot on on Japan. Toast.

Imminent Crucible's picture

Yes, except for one thing. The author makes a deadly error here: "QE may never have much of an effect on the inflation rate in the fifty states of the United States of America,"

As other posters have noted, QE is not a new policy. The process of targeting interest rates has always been accompanied by targeting an increase in money supply, although the Fed has never been anxious to draw attention to this. And that's why gasoline doesn't cost 33 cents a gallon any more, as it did when I got out of school.

And while it's true that the great majority of inflation generated by the Fed has been exported, that process is coming to an end. The Chinese, Russians and pretty much everyone else are sick of absorbing our excesses in order to access our markets. They're tired of the petrodollar standard, and tired of the endless economic bullying.

So they're executing their own cross-currency arrangements to avoid the expense of going to the dollar markets every time they need oil or want to settle international transactions. Iran insisted two years ago they would not accept dollars from Japan for their oil, only yen. China and Australia will conduct business in RMB and AUD directly. That means a huge supply of dollars that are no longer needed in world trade are coming home. They will be here long before the Fed has figured out how to sop them up.

defencev's picture

Yes, except for one thing. The author makes a deadly error here: "QE may never have much of an effect on the inflation rate in the fifty states of the United States of America,"


While it may be true, you are the one who are making a deadly error. The facts are that everybody from Europe to Australia and from Korea to India are cutting interest rates. They cannot get rid of USA and dollar for now and therefore the music will go on. The one key number to watch is the US share in World trade. While it is slowly declining, it is still pretty high and for now it will be difficult to undermine the status of Dollar as world reserve currency.

  The author, however, is deadly wrong in a different respect. Money printing is nothing new in Japan. In fact, they are the ones who started printing in 80 s and they still cannot reach any kind of inflation. By some estimates, to reach 2 percent inflation , the exchange rate should be 120 yen to Dollar and they still have some way to go.

Some other factors are also working in US direction as growing production of oil and gas in US and reduction in spending.

 Tyler and co will prove to be fundamentally wrong about everything:stock market, prices of PM , bitcoins....

Do not forget while stupid libertarians rely on their failed ideology in the empty hope of total collapse, people like myself make real money precisely on US and Japanese stock markets.

noless's picture

Why do countries mask blatant protectionism of industry through means of fiscal and monetary policy? Why don't the Nipponese just openly nationalise companies with export potential and fully fund operations through fiat printing?

Oh wait..

Imminent Crucible's picture

Sorry, defencev. You just made the commonest and deadliest error of all: Imagining that the USD's value is measured by the USDX. That's the error the Fed wants you to make, and you took the bait. As long as the USD stays above DX 80 or so, you think "it's a strong dollar". The dollar's value is not a function of interest rates or debasement rates in other worthless paper currencies. It's called a Race To The Top, right? Um, no. It's a race to the bottom. He who has the most worthless currency wins the international trade game. That's why Japan, Inc. is doubling the yen supply; they're desperate to see the JPY crushed, to get exports up, to reduce real debt levels, and to raise asset prices.

In the meantime, all fiat currencies can sink together at the same rate and the USD keeps its DX82 level, even as gasoline goes to $20, a Big Mac costs $25, and no one will sell you an ounce of gold at any dollar price.

Tyler will be wrong about everything? That's quite a crystal ball you have there, Saruman. I'm not too impressed. I bought silver when it was $4 an ounce. Now it's only $22 or so--on paper. But try to buy an ounce, and you'll find that the real price is anywhere from $26 to $50 and higher, depending on the form and the venue.

I don't think you know much about Libertarians, either. Or Austrians. I'm not hoping for "total collapse", I'm hoping we avoid it. But even partial collapse will be hellish, and your stocks and paper money aren't likely to hold up well when the markets finally realize that "“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

g speed's picture



The fed has it figured.      channel the money into US equities-- and lose it all in a bear market--many many zeros will be lost--bank cash will go to cover derivitives/hedges. many more zeros will be lost. Oh I almost forgot --cash will be king---you heard it here ---By the way in 2008 or so the bernake told member banks to get cash-- its in the minuites some where( I remember he said it but not the time or place)

before you down arrow recall the last "depression" and the one before that and the one before that----cash was king-- its the plan of course. inflate the bubbles into a deression-- assets are "pennies on the dollar" all assets. As for foriegn trade --in a world wide depression there is none-so the currency of the country you're in is the boss-and maybe the dollar ????

A country needs a huge stock market to lose inflated zeros in-- we have that for sure--

Stares straight ahead's picture

Yes. China is dependent upon American consumerism and cheap production of goods exported, US sells bonds to China (and sponges up the occasional low demand by POMO), printing money like mad, China is locked into more bond purchases to maintain cheap exports.
Japan has no foreign demand for a weak Yen until they up the ante by massively devaluing it. Now it essentially a game of " chicken" as the US is forced to buy japanese bonds, to maintain Yen in the same way China is buying US bonds, to maintain a stronger dollar.

Essentially, China is indirectly forced to buy yen. exporting inflation to China.

Japan gets to ride the tailcoats of a reserve currency.

What's the next step as Chinese labor and goods inflate? More US bond purchases?

This will go on for a decade because the US taxpayer ain't aware that he is selling off his kids and grand kids. (Or doesn't care)

Stares straight ahead's picture

@ aurora ex:
my psy op supervisor approved this message! ; )

fourchan's picture

sink to drain into into...so far.

Joe A's picture

WilliamBanzai, your take on this......?

Yen Cross's picture

    Japan isn't even close to Americanisms.   America has dressed the pig of stagflation, in stars and stripes.

   Oil is $95 a bbl, and a can of beer costs almost $2. WINNING


    Cheech and Chong swimming pool clip.

Atomizer's picture

Let’s see who wears the pants after the Yen Carry Trade is phased out.. once again. The USD will soon be an overheated flight for safety.


The Return Of The 'Yen Carry Trade' Benefits The Currency Harvest ETF

Yen Cross's picture

   The $ is going to get pounded(no pun intended), im short cable next week. You were warned.

Atomizer's picture

Go right ahead and short the USD.  Look forward to hear your ZH update on the missed opportunity in getting squeezed.

Yen Cross's picture

     It takes two sides to make a trade. good luck

Atomizer's picture

You’re on the wrong side

Yen Cross's picture

   Yer right. I'm on the wrong side.

                                                                                                I took 1/2 profit on my usd/jpy proceeds to short the$.

   Here's the real time chart Atomizer. [IMG]http://imageshack.us/a/img825/1797/update5182013uj.png[/IMG]
 I still have 1/2 of the trade open.

fonzannoon's picture

What the author is missing here is that if the Yen blows up the long end of the US curve will blow up as well.  That means Ben will end up having to print his ass off to buy that stock being dumped while trying to convince everyone he is "tapering".

Yen Cross's picture

  Fonz, I'm reaching out 5 trading days. I apologise if you're confused.

fonzannoon's picture

Oh I did not mean to weigh in on what you are doing. I am thinking out loud in general. I did not see what your trade is? You going short the $?

If I had to take a shot, and I don't have your acumen, I would go short dollar here and long Yen. Abe has to try to talk it down for a bit. That is just my guess.