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"Boldly They Rode And Well", Or Why Japan Is Not America
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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? You can be unorthodox at times. We still like you. ;)
Row well and live
"We keep you alive to serve the Anglo-American banking cartel."
soros may own japan before this is over....
Yep, but I will enjoy Abe's reflationride a few more months. Then I'll go back to gold, at an even lower price than the current.
Tight, very well reasoned piece.
The rationale of this analysis is that the US economy is a world apart. Maybe.
Here is a reminder of an article I picked up from the ZH archives written by a guy who made me aware of this bubble economy in 2007/2008 : Eric Janszen from I tulip.
It makes interesting reading in retrospect. BTW I find the comments posted on ZH then, in 2011, were much more biting and relevant. We have lost that zip in the forum. Just saying. Maybe we have become saturated treating the same issues.
http://www.zerohedge.com/news/guest-post-eric-janszen-we-are-witnessing-...
I'd agree, in that we know the facts so well, having both heard and confirmed the same issues over and over again for what, five years running?
For me, this article was 'new', in that I did provide insight (for me anyway) on the devaluation game. It gets very confusing trying to understand inflation, deflation, in light of the intense manipulation that has been going on. Then you get the ENTIRE world economy involved.
We are so ******.
A rarely nice article, with some comment:
"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."
A small correction:
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, and has no world dominant military power.
And here it is the big difference, and although I would argue that the "allies" are more power gravitation countries than anything else, one can still argue that there a circle of common interests ( or at least interest the other not to fail, for the fall will come to us ), and this common interest/world order is ruled/protected by the $ in conjecture with military power (MP).
So what is this to say for the current order that is a function represented by the inverse relation between MP and $ liquidity ( MP/$ liquidity). As long as MP is not challenged (singularly) by other players, how much liquidity is there will not matter, but as the liquidity increases the players will start to group and regroup, because they will feel the weight of the unfair printing press. And at some point the increased liquidity will bring balance of the powers, witch will bring in the best case a new currency regime with consequently big problems for the former all powerful side. In the worst case, the may be a regional war. A global one is highly unlikely, but a regional one with main powers ($ backed and the rest ) backing the 2 different local fractions, will be a trigger as a start event for re-balancing the current hopelessly rotten system.
Not really, there are multiple ignitions source points, lots of issues, and massive young impatient populations like we have never experienced (not even close to it in fact). When one region becomes unzipped it draws in others, and this changes the balance and response that would normally occur, thus opportunism is heightened. They aren't all going to behave or remain neutral and peaceful, if regional war in East Asia, between the giant powers occurs, in fact, many will see opportunities to act.
Japan knows that the west needs it to weaken china, and that's its leverage. That's why G7 is willing to put up with them.
It would be interesting to see who gets harmed more by their QE,.. China or G7. Few years ago there was a thought that Japan was getting into China's orbit, now its obvious its not going to happen. Divide and conquer.
Japan thinks it has allies. Its just a tool.
Ok,I screw up some program at work,and lose a million or a billion. I go to the boss and put him in the picture.I get fired maybe.The Japanese on the other hand lose face when they admit to failure. Dishonored the family,corporation,etc. The reason they are where they are now,is because several decades ago they had a chance to close down shitty,criminal banks but did not do so for political reasons.The USA and Europe have followed this crappy methodology,punish the efficient and healthy,bailout the diseased and fraudulent,insolvent institutions. Bring back risk.Ban shadow banking.Worldwide ban on derivatives.No more off balance sheet stuff,Repos,etc...
In Japan, the leaders will commit suicide. In the US, the average joe is killing himself.
"Vengence is mine, says the Lord. I will repay." Sure wish he'd do it to banksters and dictators in THIS life, but we'll see.
1. Japan sits on... 1trln in forex reserves? They can hold the line allright, if they want to
2. Look at the move in usd/jpy; it's orderly. They just came, announced a huge devaluation and the move is... orderly for 9 months.
imho, they'll balk when their banks will start being insolvent(or, well, more insolvent than they currently are, as hard as it might look). Or when US will fed up.
Central banks - all devaluing, all buying each other's crap, all with infinite money vs "vigilantes" with limited money which is deluted more and more. Yeah, sure the vigilantes will win.... About the same chance people will wake up and start trying to fix the current society.
Article seems to suggest that Ben has had some success - flawed premise so I don't see the point in the rest of the discussion.
Ben has succeeded in propping up the status quo - which is inefficient, mismanaged companies and government and thier self serving management. He has prevented any creative distruction. I question to what extent unemployment has been reduced when factoring in underemployment and reduced participation. Standard of living continues to decline and we are moving in the direction of socialism - financed for the time being by Ben.
Article is just not realistic. The media is trying to portray this that we have accomplished a good deal and the worst is behind us. Its not true but one is forced to play the cards dealt.
Actually it is not financed by Ben. It is financed by savers whose wealth (ie claims to real goods and services) is being progressively confiscated through transfers to government and financsters, courtesy of the low real interest rates and fradulent dollars engineered by Ben. This will continue until there are no real savings of the middle class left to confiscate, at which point low real interest rates are totally unsustainable and inflation explodes.
Who do you think has been directing and advising Japan? Bubble Bernanke and the Fed.
The US isn't far behind. The US thinks it has the right to laugh at Japan?
There are many countries that will laugh at the US when it hits them. Nobody saw it comming.
The primary difference is Japan was able to expand trade and also maintain actual full-employment, or close enough, even through the worst of the past getting on towards 25 years now.
The US and Europe are not even close to that situation, and they are not even in the worst of it yet, and China also will be an epic mess (that will remain at best translucent and misunderstood in real-time).
Wow, the most educational article I have read in months. Many tell what I already know; lying politicitans, countries failing, currencies and economies manipulated to death (literally), metals raped and controlled, etc.
You helped me understand why the US has not yet imploded, though it is clear the entire economy (keys being housing and all jobs and services paid for by the Feds) is also a time bomb.
Being out of control just sucks, and that is why people get angry and defiant. Filthy politicians provide it over and over and over, every time they get into control, take over a healthy country (i.e. a free country), lie constantly to the people, spend with zero control, are held to zero accountability, focus only on doing what will give themselves the most power and money, and then call anyone who fights back a 'terrorist' and 'anarchist'. Or in our case, a "patriot" (now the liberal's favorite curse word). Ironic, I'd say. The British dictator hated patriots as well.
You just had to go tribal, didn't you? Fifty percent of Americans are just like a British dictator. I'd say that is a winning argument and surely will move our democracy forward.
As long as you continue with the political labeling shit, you are a tool of the oligarchs. You are part of the problem.
It's a matter of when, not if, the petrodollar will lose it's reserve status. Japan is a U.S. protectorate. Everythinggate's immense gravity is pulling down Obama. Gun control is a dead issue and 1/10th of the bolt action hunting caliber rifles currently in existence are alone more than enough to arm a successful American insurgency. The NWO is on the ropes and will soon go down for the count. One stock market crash, EMP, New Madrid earthquake, or American spring an the freedom will really some rushing in. The future's so bright. I've gotta wear shades.
The "7 Samurai" was a classic. The "Magnificent 7" was a copy.
Yep, and it’s happening here in the US just as much as it’s happening elsewhere. These currency wars and massive printing aren’t about winning a game for the American economy. They’re not really about economic battles across sovereign boundaries anywhere. They’re about transferring more wealth to the already rich, wherever in the world they happen to reside. These are the clients the big banks cater to most. They are all that matters in the world today, especially in the eyes of the Fed and the banking system. It’s really about the wealthy using their power to steal a bigger piece of a shrinking pie for themselves. No one will be on the receiving end of this biggest robbery in the history of mankind who isn’t wealthy enough already. The common Japanese people are just going to get effed by it all a little more than the common Americans.
Superb article.
It cannot be sufficiently emphasized that monetary expansion in the developed countries has caused inflation in the parts of the developing world which have become bound together in a globalized trade and financial system.
But I still see the MMT types preaching the merits of unlimited sovereign privilege, the whole time crowing about tepid official inflation levels in the USA.
"Any liquidity it squirts at them will simply splash off."
Love it. What an excellent analysis. Abe has put himself in quite the spot. It will be interesting to watch.
I feel this may be behind some portion of the recent drop in the price of gold. $USD/$JPY is looking dead obvious, and the Euro can't be far behind, whether through its outright collapse or through rampant monetization of bad debt throughout the European banks. There will be a demand for USD, and that spells trouble for precious metals and for equities. I hate to say that about gold, but the technical picture is also bleak. Important support has been taken out, and there is some air below. I'm short gold here, and I think gold is leading equities. The Fed can only do so much.
Good luck to all.
edit: on that exported inflation thing, it's notable that China is becoming more aggressive here. Among other things, they could be making a point about the US Fed and its policy of rapid USD inflation.
- Japan is an island.
- Their mindset is the most insular I have experienced anywhere in the world.
- They believe that if they try hard enough (and crank up the 'hope' factor to maximum), they can somehow just pull through.
- I don't believe there is ANY real confidence in the experiment they have undertaken, even inside the Government or the BoJ. They are just hoping that nobody calls their bluff so they can continue to live in relative affluence for a little bit longer - or at least until the end of the electoral cycle....
Bra-nomics will win out in japan. The answer to "flat growth"
hahahahaha
http://www.reuters.com/video/2099/01/01/reuters-tv-video?videoId=242684162
jb
"So, as George Soros has already warned" So has Kyle Bass.
A beautiful analysis on your part that I completely agree with. Japan is toast within the next few years.