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Richard Koo: "Honeymoon For Abenomics Is Over"

Tyler Durden's picture




 

As we noted just two weeks ago - before the hope-and-change-driven exuberance in Japanese equities came crashing down - "those who believe in Abenomics are suffering from amnesia," and Nomura's Richard Koo clarifies just who is responsible for the exuberance and why things are about to shift dramatically. Reasons cited for the equity selloff include Fed Chairman Ben Bernanke’s remarks about ending QE and a weaker than expected (preliminary) Chinese PMI reading, but, simply put, Koo notes, more fundamental factor was also involved: stocks had risen far above the level justified by improvements in the real economy. It was overseas investors (particularly US hedge funds) that responded to Abe's comments late last year by closing out their positions in the euro (having been unable to profit from the Euro's collapse) and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher. Koo suspects that only a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible...

Had they understood this, they would not have behaved in the way they did.

Many domestic institutional investors understood that private-sector borrowing in Japan is negligible in spite of zero interest rates and that there was no reason why monetary accommodation—including the BOJ’s quantitative easing policies - should be effective. In that sense, the period from late last year until mid-April was a honeymoon for Abenomics in which everything that could go right, did. However, the honeymoon was based on the assumption that the bond market would remain firm. The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher.

 

Via Nomura's Richard Koo,

Divergence in investor behavior fueled virtuous cycle of lower yen and higher stocks

More specifically, the sharp rise in equities that lasted from late in 2012 until a few weeks ago and the several virtuous cycles that fueled this trend were themselves made possible by a special set of circumstances.

Whereas overseas investors responded to Abenomics by selling the yen and buying Japanese stocks, Japanese institutional investors initially refused to join in, choosing instead to stay in the bond market.

Because of that decision, long-term interest rates did not rise. That reassured investors inside and outside Japan who were selling the yen and buying Japanese equities, giving added impetus to the trend.

Japanese institutional investors understand private demand for funds is negligible

The next question is why domestic and overseas investors responded so differently to Abenomics. One answer is that many domestic institutional investors understood that private-sector borrowing in Japan is negligible in spite of zero interest rates and that there was no reason why monetary accommodation—including the BOJ’s quantitative easing policies—should be effective.

Short-term rates in Japan have been at or near zero since around 1995, some 18 years ago. The BOJ engaged in an aggressive quantitative easing initiative from 2001 to 2006, under which it supplied more than ¥30trn in excess reserves at a time when statutory reserves amounted to just ¥5trn. Yet neither the economy nor asset prices reacted meaningfully.

In the last few years, Japanese corporate balance sheets have grown much healthier and interest rates have remained at historic lows. Yet private demand for funds did not recover because 1) firms were still in the grip of a debt trauma and 2) there was a shortage of domestic investment opportunities.

Japan’s institutional investors were painfully aware of this reality, which had left them facing a lack of domestic investment opportunities for more than a decade. From their perspective, there was no reason to expect another foray into quantitative easing by the BOJ under pressure from the Abe administration to lift the economy, and therefore no reason to change their behavior.

But overseas investors bet on bold monetary easing

Meanwhile, overseas—and particularly US—hedge funds that had been betting on a worsening of the euro crisis until last autumn were ultimately unable to profit from those positions because the euro did not collapse.

Then in late last year, the Abe government announced that aggressive monetary accommodation would be one of the pillars of its three-pronged economic policy. Overseas investors responded by closing out their positions in the euro and redeploying those funds in Japan, where they drove the yen lower and pushed stocks higher. I suspect that only a handful of the overseas investors who led this shift from the euro into the yen understood there was no reason why quantitative easing should work when private demand for funds was negligible. Had they understood this, they would not have behaved in the way they did.

Bond and equity markets took very different views of Japan’s economy

The yen weakness and stock market appreciation brought about by this money began to buoy sentiment within Japan, paving the way for further gains in equities. They also prompted retail investors to enter the market, providing more fuel for the virtuous cycle. Japanese equities were up 80% from their lows at one point. However, this virtuous cycle was based on the key assumption that interest rates—and long-term interest rates in particular—would not rise.

This condition was satisfied as long as domestic institutional investors remained in the JGB market, but consequently the views of the Japanese economy held by equity and bond market participants diverged substantially.

Moreover, even though the moves in the equity and forex markets were led by overseas investors with little knowledge of Japan, the resulting improvement in sentiment and the extensive media coverage of inflation prospects forced domestic institutional investors to begin selling their bonds as a hedge.

Honeymoon for Abenomics finally ends

The result was a correction in the JGB market from mid-April onwards, with the ensuing turmoil prompting a correction in equities as well.

In that sense, the period from late last year until mid-April was a honeymoon for Abenomics in which everything that could go right, did. However, the honeymoon was based on the assumption that the bond market would remain firm. The recent upheaval in the JGB market signals an end to the virtuous cycle that pushed stock prices steadily higher. This means further gains in equities will require stronger corporate earnings and a recovery in the economy.

Yen weakness likely to persist on trade deficits

The share price increases driven by the prospect of improved corporate earnings due to the weaker yen will probably persist going forward. Now that Japan is running trade deficits, the yen is unlikely to see the kind of appreciation observed in the past. Naturally, exchange rates are relative things, and the yen might well rise back into the 90–100 range against the US dollar depending on conditions in the US economy. But I do not expect USD/JPY to return to the area below the mid-80s.

The yen’s decline to around 100 against USD has definitely been a positive for the Japanese economy. But authorities will need to tread carefully when dealing with additional yen weakness, including the question of what might stop the yen from falling further. Excessive drops in the currency could spark a “sell Japan” movement like that seen in 1997, when investors simultaneously sold off the yen, Japanese stocks, and Japanese bonds.

In addition, the cheap imports represented by the proliferation of so-called ¥100 shops have played an important role in maintaining the living standards of ordinary Japanese consumers at a time of sluggish or falling incomes. Further declines in the yen might benefit a handful of exporters but could also lower living standards for the majority of people.

Virtuous cycle for Abenomics has reached turning point

Now that USD/JPY has fallen to what I see as a comfortable level and the Japanese bond market has broken its silence, I think the virtuous cycle for Abenomics in evidence since late last year is at a critical juncture.

That is not to say that current exchange rates or long-term bond yields are cause for concern. Compared to where they were before, current levels are both reasonable and comfortable.

But from this point on, the environment will be very different in the sense that there will be greater emphasis on 1) consistency between the bond and stock markets and 2) the negative implications of a weaker currency.

“Bad” rise in rates continues, fueled by inflation concerns

The Bank of Japan began buying longer-term JGBs on 4 April with the goal of pushing yields down across the curve. The outcome of those purchases, however, has been exactly the opposite of what Governor Haruhiko Kuroda intended, with long-term bond yields moving higher in response.

Domestic mortgage rates have increased for two consecutive months as a result. This is clearly an unfavorable rise in rates driven by concerns of inflation, as opposed to a favorable rise prompted by a recovery in the real economy and progress in achieving full employment.

The more the market senses the BOJ’s determination to generate inflation at any cost, the more interest rates—and particularly longer-term rates—will rise, adversely impacting not only Japan’s economy but also the financial positions of banks and the government.

Recovery can offset many negatives of rising rates

As I also noted in my last report, a recovery-driven rise in rates occurs when the economy rebounds and approaches full employment, fueling concerns about inflation and pushing interest rates higher.

Because the economy is in recovery, banks are lending more to the private sector and government tax revenues are expanding. Even if higher interest rates cause losses on banks’ bond portfolios or increase the cost of borrowing for the government, there is sufficient offsetting income. In other words, the government and banks are both capable of absorbing significant increases in interest rates as long as the economy is in recovery.

But higher rates before recovery weigh on economy

However, today’s BOJ is recklessly easing monetary policy to generate inflation expectations in the hope that those expectations will spark a recovery in the real economy. In this case, inflation expectations precede the recovery, creating the risk that rates will rise before the economy picks up.

Since there is no increase in bank earnings from additional lending activity and no increase in tax revenues from a recovering economy, the financial positions of banks and the government deteriorate in direct proportion to the rise in long-term interest rates. The resulting shrinkage of equity capital constrains banks’ ability to lend, while the government is forced to cut spending or increase taxes. Both of these outcomes will naturally weigh on the economy.

Of special concern is the risk that a rise in rates prior to a pick-up in private loan demand will force the government to engage in fiscal consolidation. The economy could quickly sink if the government stops borrowing and spending at a time when there are no private-sector borrowers.

Fiscal consolidation counterproductive if it precedes pick-up in private demand for funds

In this regard, it was shocking to note that BOJ Governor Kuroda, senior IMF official David Lipton, and even a handful of private-sector economists in Japan have over the last two weeks urged the government to engage in fiscal retrenchment to prevent a further rise in interest rates.

I would have no objection if they were making the argument because they had proof that private demand for funds was about to increase substantially. But without such evidence, they risk sending Japan’s economy back into the abyss.

If private demand for funds were actually on the rebound, the private sector would be able to borrow and spend the unborrowed private savings that have weighed on Japan’s economy for the last 20 years without any need for fiscal stimulus. That, in turn, would free up the government to put its finances in order and in fact would mean it was time for it to do so. But fiscal consolidation in any other circumstances could lead to a repetition of the Hashimoto government’s failed experiment in 1997.

Unfortunately, the lack of data for the period since Mr. Kuroda’s policies began makes it difficult to draw any certain conclusions at this time.

Real estate purchases have no impact on unborrowed savings…

It should be noted that the sharp rise in share prices has refocused attention on the real estate market, prompting some investors and individuals to buy property now before inflation sends prices higher. Although the resulting demand for loans does increase the demand for funds, transactions like these that merely involve a transfer of ownership do little to resolve the problem of unborrowed savings that is at the heart of Japan’s economic malaise. A transfer of ownership only shifts savings around within the financial system—the buyer’s deposits decrease and the seller’s deposits increase, but the savings remain within the financial system. The money must be used for consumption or investment in order for the problem of unborrowed savings to be resolved.

But increased investment does

In addition to new demand for loans, the deployment of businesses’ retained earnings for new investments can also reduce unborrowed savings, since any reduction in retained earnings represents a decline in unborrowed savings languishing somewhere at financial institutions.

Increased investment demand therefore reduces the need for the government to borrow and spend, enabling it to pursue fiscal consolidation without adversely affecting the economy. In this regard, the claim in the 3 June issue of the Nikkei that large Japanese enterprises plan to invest 12.3% more in FY13 than they did in FY12 is a welcome development. This probably includes export-related firms and companies competing with imports that have decided to ramp up domestic production for the first time in many years in response to the weak yen.

“Bad” rise in rates renders two of three pillars of Abenomics powerless

We cannot be too complacent, however, because the size of the surplus private savings problem in Japan is huge. At the moment we only have data through 2012 Q4, and they show that private sector savings amounted to a seasonally adjusted 7.11% of GDP in spite of zero interest rates. This means the public sector must be borrowing and spending a comparable amount in order to keep the economy going.

If the level of savings is largely unchanged today, Japan’s economy could easily stall if the government were to stop borrowing and spending the private sector savings surplus. The second pillar of Abenomics—fiscal stimulus—was put in precisely to address this risk. If an unfavorable rise in interest rates not only prevented the government from borrowing and spending but actually forced it to raise taxes and cut back on expenditures, that would be putting the cart before the horse.

It would effectively mean that an excessive reliance on the first pillar—monetary accommodation—had prompted an unfavorable rise in rates, forcing the government to abandon the second pillar, which is essential when the private sector is saving so much at zero interest rates.

“Bad” rise in rates should be addressed with adjustments to monetary policy

In this regard, we need to watch out for the possibility of an increase in long-term rates driven by mounting inflation concerns without a recovery in private demand for funds. If, for example, people see inflation picking up before long—even if there is no inflation today—they will no longer be willing to hold 10-year government bonds yielding less than 1%. If they decide to convert their JGBs to cash and buy them back once prices have fallen, long-term rates will rise sharply. This kind of selling is already being observed in some quarters.

When facing this kind of unfavorable rise in rates fueled only by inflation concerns and not by a recovery in private demand for funds, the government should respond not with fiscal consolidation but rather with adjustments to the BOJ’s overly accommodative monetary policy.

If the BOJ refused to modify its policy and forced the government to engage in fiscal retrenchment, the Japanese economy will suffer badly given the weakness of private demand for funds.

On the other hand, when interest rates are rising because of a recovery in private demand for funds, the proper response for the government is to raise taxes and cut spending in order to keep upward pressure on interest rates in check. If the Japanese economy were actually in such a phase, the economy could probably continue making progress even after the consumption tax is hiked next April.

Unfavorable rise in rates must be dealt with carefully

Then-BOJ Governor Toshihiko Fukui, who understood all of this, said in 2005 that there was no problem with fiscal consolidation as long as its scale was consistent with the recovery in private demand for funds (see my report dated 8 March 2005 for details). But the officials now making a case for fiscal consolidation—Mr. Kuroda, Mr. Lipton, and private economists—give no sense of having confirmed that private demand for funds is actually picking up.

The implication is that they may respond to an unfavorable rise in rates by scaling back fiscal expenditures instead of making adjustments to monetary policy. We need to watch out for this risk very closely.

Only 22% of people surveyed by the Nikkei felt Japan’s economy is actually recovering (27 May 2013), suggesting relatively few have benefited from Abenomics’ honeymoon thus far.

Moreover, an increase in long-term rates at a time when 78% of the population is not personally experiencing a recovery is most likely a “bad” rise in rates, and the authorities need to address it very carefully, keeping a close eye on private demand for funds.

 

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Sat, 06/08/2013 - 21:59 | 3638278 lolmao500
lolmao500's picture

We can only hope. The Japanese bond market needs to wake the fuck up and face reality already. Japan is a BANKRUPT COUNTRY.

Sat, 06/08/2013 - 22:09 | 3638306 prains
prains's picture

Yes but we live in a relative world one countries bankrupt state is another's chance to enslave it, welcome to the new dark ages

Sat, 06/08/2013 - 22:19 | 3638339 Jayda1850
Jayda1850's picture

Out of the dark ages came the renassaince. Somedays the only thing that keeps me going is the belief that history repeats itself.

Sat, 06/08/2013 - 23:07 | 3638446 kchrisc
kchrisc's picture

"Out of the dark ages came the renassaince. Somedays the only thing that keeps me going is the belief that history repeats itself."

Well, yeah, after a 1,000 years and they didn't have nukes then either.

Our coming age will be called the "glowing ages."

Sun, 06/09/2013 - 00:58 | 3638578 markmotive
markmotive's picture

The honeymoon for Japan is over as QE loses its grip over the markets. What happens to the global financial market when it realizes QE no longer works.

Marc Faber says the market is vulnerable right now.

http://www.planbeconomics.com/2013/06/marc-faber-market-is-actually-quit...

Sun, 06/09/2013 - 02:33 | 3638650 disabledvet
disabledvet's picture

I agree with this....although I think monetary authorities "losing it" is not done by choice. Most important is the USA itself. Hard to tell what will/would happen if QE is shut down entirely...but the term Total Chaos does come to mind.

Sun, 06/09/2013 - 07:52 | 3638770 GetZeeGold
GetZeeGold's picture

 

 

All roads lead to Cyprus......the precedent is set......the die is cast.

 

We congratulate you on your success......now prepare to lose everything.

Sat, 06/08/2013 - 22:18 | 3638336 zorba THE GREEK
zorba THE GREEK's picture

When the Japenese bonds goes, and it looks like it is on the verge, it is going to take a lot of s#*t with it.

Sat, 06/08/2013 - 23:37 | 3638489 MajorWoody
MajorWoody's picture

Abe is just changing the diameter of his liquidity hose.

When he cranks the pumper on the next dose of QE watch out, he's going to have to go full throttle, it will be quite a sight.

Sat, 06/08/2013 - 22:24 | 3638358 smlbizman
smlbizman's picture

i have a  question that may be considered stupid to some and a question that i would guess a few of us would like to know....

how do you sell currency? or is it just phrased in that way by wall street? for instance if you "sell" your yen, you really bought something else? or are you just transfering one currency for another? so its not really a sell but a trade..... any "dummies" info would be appreciated

Sun, 06/09/2013 - 01:05 | 3638588 lasvegaspersona
lasvegaspersona's picture

The FOREX (foreign exchange) market is used to trade currencies (always in pairs). It is the largest trading arena....bigger than stocks or bonds.

Sun, 06/09/2013 - 08:43 | 3638817 GetZeeGold
GetZeeGold's picture

 

 

Welcome to the rabbit hole smlbizman.

Sun, 06/09/2013 - 10:54 | 3638990 Bohm Squad
Bohm Squad's picture

smbizman

 

You can always try "school".  :)

Sun, 06/09/2013 - 11:09 | 3639010 Marco
Marco's picture

Japan has a bankrupt government ... but compared to the real bankrupt countries (Greece, India, US etc) it's external debt position is hardly worth speaking about.

Sat, 06/08/2013 - 22:08 | 3638303 fonzannoon
fonzannoon's picture

How exactly do they "address" a bad rise in rates when printing money, which was the only thing keeping rates down, now causes rates to go up?

Sat, 06/08/2013 - 22:18 | 3638334 Truther
Truther's picture

It's called toilet paper.

Sun, 06/09/2013 - 03:49 | 3638675 Spitzer
Spitzer's picture

Because if you print fast enough, rates will stay down. You just print faster then the sellers can sell.

That is how the Fed became the biggest holder of US treasury debt

Sun, 06/09/2013 - 11:33 | 3639070 spine001
spine001's picture

Monetization rate. It's a momemtum question. First you increase your rate or first derivative, then you are forced to accelerate faster and forthat you increase your second derivative then your rate of acceleartion or third derivative and so on so forth. The only limit you face is system stability or financial stability... This are usually called first, second, third momemtums respectively...

When you monetize and the system goes the other way younare already in unstable territory aand they know it.

Sun, 06/09/2013 - 08:40 | 3638811 RSloane
RSloane's picture

Schrodingerbonds. Just like Schrodingemployment or Schrodinflation. They are steadily improving and steadily deteriorating simultaneously. You nailed it a couple of days ago, Fonz. The Fed is now overwhelmed. They will ultimately destroy the very thing they are protecting, and they know it. No wonder Bernanke is retiring. 

Sun, 06/09/2013 - 10:22 | 3638940 NihilistZero
NihilistZero's picture

"They will ultimately destroy the very thing they are protecting, and they know it."

Unlikely.  The FED is no doubt disappointed they are stuck in the current liquidity trap, pushing on a string, before they could unload as much of the toxicity off the banks balance sheets as they wanted.  But there is no reason to think they are going to give up there power, that of petro-dollar hegemony.  We went to war in Iraq to protect it, raising interest rates will be much easier.  Once the FED has enough Treasury debt (where interest is zero as it's all returned to the Treasury) rates WILL rise and the safe haven of a relatively strong dollar will maintain the petro-dollar reserve status.

The idea that the FED and the TBTFs would destroy the very base of their power doesn't make sense to me.

Sun, 06/09/2013 - 14:08 | 3639378 tenpanhandle
tenpanhandle's picture

While we went to war in Iraq to protect (enforce) dollar hegemony, it appears these days that we are gonna hafta go to war with the whole rest of the world to do same.  Meaningful raising of interest rates would probably be tougher and more damaging to US Central and its stranglehold on power than said war.

Sun, 06/09/2013 - 15:15 | 3639516 NihilistZero
NihilistZero's picture

"Meaningful raising of interest rates would probably be tougher and more damaging to US Central and its stranglehold on power than said war."

How???  Higher interest rates would afford the banks immense profits once the toxic assets they've dumped are sold by the specuvestors to thew sheeple.  Rotation complete.  I know the picture is bigger than what I'm summarizing but I haev a feeling they're going to do what's need to protect the reserve status to the extent they can.

Sat, 06/08/2013 - 22:22 | 3638349 Stoploss
Stoploss's picture

" stocks had risen far above the level justified by improvements in the real economy. "

 

*****Stocks Had Risen Far Above The Level Justified By Improvements In The Real Economy*****

 

Simply copy and paste, for your next US headline...

Sat, 06/08/2013 - 22:27 | 3638362 Truther
Truther's picture

Charles Bronson....Death Wish come true, if you insist.

Sat, 06/08/2013 - 22:48 | 3638410 suteibu
suteibu's picture

As Japan's most quoted private economist (at least on ZH), he must be an outcast in Japan among the elite classes as no one there seems to pay any attention to him at all.  Of course, he is most noted for reporting on the calamity after the fact while his proactive advice has always been for the government to borrow even more money and up the stimulus given to politically-favored construction companies, REITS, banks, and the all-important exporters.  In other words, his suggestions have been to add steroids to the failed policies of the past two lost decades.  He is still a Keynesian, only of a different stripe.  As for this article, he is merely repeating what most ZH commenters have been saying since Abenomics brought the global spotlight back on Japan.

Sat, 06/08/2013 - 23:22 | 3638469 BigInJapan
BigInJapan's picture

Actually, NOMURA is a bit of a fucking joke over here.

Sun, 06/09/2013 - 03:52 | 3638677 Spitzer
Spitzer's picture

Yep.

Just another Fed primary dealer like MF Global....

Sat, 06/08/2013 - 23:43 | 3638500 MajorWoody
MajorWoody's picture

Note that most of the more dramatic Japan bashing comes from hedge fund managers who want nothing more than to scare people out of stocks and into their funds.  Not that I don't dissagree with what they are saying though on the contrary.  These are desperate acts in desperate times, people really don't seem to understand the gravity in Japan.

Sun, 06/09/2013 - 00:03 | 3638527 suteibu
suteibu's picture

Indeed, the average Sato is miserably under-represented and largely ignored by the political, financial, and academic classes.  Well....except when the government needs a new policy "for the children" who are debt slaves the instant they emerge from their mother's womb. 

It is inappropriate to bash the Japanese people who are what they are.  However, the government deserves all that can be offered up and more.

Sun, 06/09/2013 - 09:44 | 3638887 NotApplicable
NotApplicable's picture

Same holds true for any captive population.

Sun, 06/09/2013 - 14:10 | 3639390 tenpanhandle
tenpanhandle's picture

Which is to say everyone on the planet.

Sun, 06/09/2013 - 08:00 | 3638787 Ox
Ox's picture

Monetary policy failed in Japan over the last 2 decades, which Koo has been right about for a long time in the face of fools like Bernanke screaming for more. Fiscal policy (which hasn't failed) has been the only thing keeping Japan from imploding as its private sector pays off debt, Koo goes over this very clearly in his books.

You can argue about ethics of having such a large debt, but Koo is just describing the reality of what Japan has (and has to do) in the wake of its asset bubble. I think he's actually one of the better economists, and was quick to point out how retarded Abenomics was as soon as it was announced.

Sun, 06/09/2013 - 10:30 | 3638960 suteibu
suteibu's picture

"...as the private sector pays off debt..."  Are you referring to the over-leveraged banks, manufacturers, construction, and real estate industries who, in league with the bureaucrats and politicians, caused the mess and which fiscal policy was little more than direct subsidies to these zombie corporations?  Many are still living off subsidies, none have been held accountable, and few have reformed.  Also, it is a stretch to call these politically-connected/politically integrated organizations "private sector."  Meanwhile, the real private sector has been on a two decade decline in opportunities, income, and lifestyle.  Koo's argument is that the government did not subsidize these failed industries enough.  But to what end?  To make them more irresponsible?  To heap additional reward on failure?  To reinforce the notion that taxpayers will always be be available to cover their ineptitude and criminality (too-big-to-fail)? 

You can not conveniently eliminate the ethical argument from economics simply because you see the economy as little more than a mathematical equation, an equation which, in Koo's mind, is flawed only because the (+) symbol was used instead of the (x) symbol. 

As for monetary policy failing for two decades, the BOJ did not enter the fray in a major way until Koizumi forced it on the reticent BOJ governor Hayami in 2001.  The first lost decade was mostly failed fiscal policy.

As for Koo calling out Abenoimics as soon as it was announced, big deal...so did everybody on this site. 

Sun, 06/09/2013 - 11:20 | 3639032 Marco
Marco's picture

That's the blinders most economists have ... protecting little people from losses directly is bad since we are too sensitive to moral hazard, protecting the big players from losses is good because being the towering monoliths of ethical behaviour as all rich people are makes them entirely immune to moral hazard and they will in turn ensure that the losses on the little people won't be too bad since they are so magnanimous.

Sun, 06/09/2013 - 17:55 | 3640089 Ox
Ox's picture

So, are you saying they should have implemented austerity/fiscal consolidation? I don't understand what alternative you are suggesting, no alternative will be ethical for everyone. If it is to avoid fiscal policy response in order to avoid some inevitable corruption, then you are really condeming people to a different torture - a full blown depression as the money supply contracts and a loss of living standards similar to Greece... Surely you can't believe that this is better?

 

It's clear that the government needs to offset private sector saving, it isn't so much a choice as a consequence. In a perfect world, no opportunistic bastards would hijack the policy for their own ends, but parasites will always find a way.

Sun, 06/09/2013 - 19:14 | 3640339 suteibu
suteibu's picture

I am suggesting that any policy that abrogates the laws (bankruptcy laws, for instance) in order to prop up the politically connected at the expense of the average family is not only immoral but economically flawed.  The entire defense offered for these failed and wasteful policies has been limited to, "it would have been much worse if the government had not interfered."  This is merely propaganda for hoi polloi because it can not be tested.

Japan had two choices when the asset bubble burst, a) allow the collapse and inspire the people to rebuild quickly much like they did at the end of the war (the Japanese society being unique in its ability to accomplish such things) or b) the choice they made which was has not been as politically popular as they thought given the revolving door of PMs but which has spawned a generation of Japanese who have reached adulthood never knowing anything but economic decline and who are facing a bleak future as tax slaves to the entitled classes. 

The social decline over the past two decades has been well documented in marriage, birthrate, divorce, poverty, homelessness, suicide, single-parent and single resident households, and other social data.  The government has wasted even more borrowed money trying to resolve these problems, never understanding that the remedy for them all is a stable economy, one that is not manipulated by a government dependent on corruption and graft (Fukushima, anyone?).

The choice was between sharp pain in the beginning (especially for the corporate, banking, and political elite) followed by a real recovery or a slow weakening (current phase) followed by much more pain when the whole thing finally goes under. 

Only the weak-willed would have borrowed so much from their children to maintain their current lifestyle.  Would you personally do that?

Sat, 06/08/2013 - 22:49 | 3638412 Crash Overide
Crash Overide's picture

Timmmmmmberrrrrrrrrrr!  look out!

Sat, 06/08/2013 - 23:05 | 3638444 Seasmoke
Seasmoke's picture

And tell me again why Gold is not reaching new all time highs daily.

Sun, 06/09/2013 - 05:58 | 3638697 Going Loco
Going Loco's picture

I think that gold is not reaching new all time highs for two reasons:

1. There have been substantial sellers of GLD (the ETF) and futures contracts - whether this is "manipulation" or genuine trading activity with a view to making a profit we can only guess. This selling seems to have overwhelmed the demand from central banks, other investors, and consumers;

2. In most western countries, and possibly now in China too, there has been a decline in credit creation of money which has not been matched by government borrowing financed by QE. Four years ago a good explanation of why this matters was given by Steve Keen. 'Mea­sured on this scale, Bernanke’s increase in Base Money goes from being heroic to triv­ial. Not only does the scale of credit-created money greatly exceed government-created money, but debt in turn greatly exceeds even the broad­est mea­sure of the money stock—the M3 series that the Fed some years ago decided to discontinue.' And the following from the same source is vital if you want to understand why QE is not blasting gold to the moon: 'But in real­ity, Holmes pointed out, banks cre­ate loans first, which simul­ta­ne­ously cre­ates deposits. If the level of loans and deposits then means that banks have insuf­fi­cient reserves, then they get them afterwards—and they have a two week period in which to do so. In con­trast to the Money Mul­ti­plier fan­tasy of bank man­agers who are unable to lend until they receive more deposits, the real world prac­ti­cal­ity of bank­ing was that the time delay between deposits and reserves meant that the direc­tion of cau­sa­tion flows, not from reserves to loans, but from loans to reserves.' If this is correct (I think it is) then this much more recent statement makes a lot of sense:' "The Federal Reserve (Fed) is not, and has not been, 'printing money'…", and 'it turns out that not only can the Fed [and any other bank practising QE] not control the money supply, it can't control the velocity of money either. And that means the Fed can't create rising aggregate demand. As in, Ben's shooting blanks.' Koo refers to this right here in this quote from the post above: 'The next question is why domestic and overseas investors responded so differently to Abenomics. One answer is that many domestic institutional investors understood that private-sector borrowing in Japan is negligible in spite of zero interest rates and that there was no reason why monetary accommodation—including the BOJ’s quantitative easing policies—should be effective.' He also says (and this is absoultely crucial if you really do want to understand what is going on in the world): 'It should be noted that the sharp rise in share prices has refocused attention on the real estate market, prompting some investors and individuals to buy property now before inflation sends prices higher. Although the resulting demand for loans does increase the demand for funds, transactions like these that merely involve a transfer of ownership do little to resolve the problem of unborrowed savings that is at the heart of Japan’s economic malaise. A transfer of ownership only shifts savings around within the financial system—the buyer’s deposits decrease and the seller’s deposits increase, but the savings remain within the financial system. The money must be used for consumption or investment in order for the problem of unborrowed savings to be resolved.' But it's far worse than that, because every time a Japanese saver or (more likely) a Russian oligarch or Chinese trader uses a cash deposit to buy real estate from a mortgagee, who then repays their debt, money in the system is actually destroyed.

I think the genuine demand for gold in India is due to the special circumstances of the Rupee, which is losing its value fast for reasons specific to India [perhaps demographics - see the chart by Andrew Cates of UBS]. I just don't see the drivers for a sustained and substantial upsurge in gold demand elsewhere at the moment, particularly if the Chinese are about to enter a period of reduced credit money creation. Renewed strong demand for gold will come when central banks and governments realise that the logical next step for them is to give money directly to their populations - a genuine Friedmenesque helicopter drop. However Friedman's original "helicopter" quote included an important proviso: 'Let us sup­pose fur­ther that every­one is con­vinced that this is a unique event which will never be repeated.' If that proviso does not apply then people will fear that their paper money will become literally valueless, and that is when gold will be in great demand.

Caveat: on 19 May I predicted here that gold would reach $1302 within 2 weeks so clearly anything I say is of doubtful value.

Edited at 09:55 UTC

Sun, 06/09/2013 - 06:15 | 3638723 Non Passaran
Non Passaran's picture

There are explanations why the selling of GLD is good for gold fundamentals (but obvioisly maybe not the price).

Sun, 06/09/2013 - 09:08 | 3638849 Going Loco
Going Loco's picture

The really interesting question for goldbugs and traders is which prices lead which other prices. Off the top of my head I think the gold Conga Line at the moment looks like this:

1.     At the head of the Conga line are the central banks and the bullion banks, side-by-side with arms linked by the gold leasing shenanigans - they can influence the price of gold directly, and this is reflected in...

2.   ...the futures markets (see Kitco), which are mostly driven by speculative interest, and they influence...

3.   ...the London Fix, which influences...

4(a) ...the cost of hedging long positions which directly affects dancers 5 and 6(b), and

4(b) ...both the offer and the bid on the new bullion exchanges (GoldMoney, BullionVault, Shanghai, etc.), and...

4(c) ...the offer on the ETF GLD, and...

4(d) ...the proceeds of forward sales by mining companies (which affects the future supply of new gold); These four dancers influence...

5.   ...the offer price of investment bullion (bars, bullion coins, bullion jewellery, etc.) from wholesalers and major dealers, and the offer price of melt stock, which influences...

6(a) ...the secondary "consumer" market, from new costume jewellery to scrap sales, right down to sales of single coins on ebay, and...

6(b) ...the cost of industrial supplies (and the value of scrap consumer electronics), and...

6(c) ...the share prices of the mining companies. 

I have put the HUI at the end of the line. Dan Norcini has said that 'The shares led the metal lower and more than likely they will lead the turn in the metal higher' but I think that is more to do with the HUI being a signal of future p.o.g. rises, rather than a direct cause of such a rise.

I could be wrong about any part of the line (for example I don't really understand how much influence the London fix has nowadays), and the order of dancers does shift sometimes. Some commenters have suggested that drawdowns from GLD have directly affected the Comex price.

I think we can safely assume that dancers 4(d) to 6(c) are, at the moment, price takers, not price setters. I just do not see any evidence that demand for physical gold is big enough to have an immediate influence on dancers higher up the line.

However in the long run if there is sustained demand for physical at the same time as prices are rising then the head of the conga line might have to grab the tail, and the line would then either break somewhere else or it would turn into a positive feedback loop and we would see another parabolic rise in the p.o.g. I wonder - if the amount of physical gold left in the hands of the dancers at the head of the line is now truly miniscule, could the whole thing flip one weekend? That is of course the goldbugs dream - is it a fantasy or a premonition?

Sun, 06/09/2013 - 10:38 | 3638973 NihilistZero
NihilistZero's picture

Spectacular dissection of QE in your first post Loco!  Pushing on a string is one of my favorite memes but "Ben's shooting blanks" is even more apropo.  The only way QE could stimulate demand is if they really did "Throw money from helicopters" via a partial income tax holiday (similar to the rebates of 2009) or some other direct increase of consumer liquidity.  Velocity of money is nowhere near what we need to escape the recession.

Sat, 06/08/2013 - 23:21 | 3638467 BigInJapan
BigInJapan's picture

Me Abenomikkusu supah biggu rikey!

Sat, 06/08/2013 - 23:38 | 3638493 q99x2
q99x2's picture

Time for a dose of I-Ching after that.

Sat, 06/08/2013 - 23:58 | 3638523 AuEagleNest
AuEagleNest's picture

NEW YORK (Jiji Press)--Billionaire investor George Soros’ hedge fund has resumed buying Japanese stocks, according to the online version of The Wall Street Journal.

 

Soros Fund Management LLC “sold much of its Japanese-stock position in May, before the recent, steep sell-off,” the business daily said Friday, citing a source close to the matter.

http://the-japan-news.com/news/article/0000292170

So Soros knows to sell before the fucking dip, then buy back in. It's getting depressing to set on the sidelines watching PMs tank and the stocks ratchet up so these guys can rake in the cream. When's the shoe going to drop?
Sun, 06/09/2013 - 11:35 | 3639072 Marco
Marco's picture

When they own defacto everything (no worries, you can keep your little pile of gold and plot of farmland).

Sun, 06/09/2013 - 06:15 | 3638709 NipponMarketBlog
NipponMarketBlog's picture

 

 

The problem for Japan now is that it is already too late to abort.

Japan has put everything on the line to try to achieve 'take-off', and Abe and Kuroda simply can't turn back now.

 

They are at 'V1':

http://nipponmarketblog.wordpress.com/2013/05/30/japan-has-now-reached-v1/

Sun, 06/09/2013 - 07:53 | 3638778 MythicalFish
MythicalFish's picture

Mission accomplished - hilarious!

 

http://www.bbc.co.uk/news/business-22832471

 

Euro crisis is over, says France's Francois Hollande
Sun, 06/09/2013 - 08:41 | 3638815 Son of Loki
Son of Loki's picture
Billionaires Dumping Stocks, Economist Knows Why

 

 

Despite the 6.5% stock market rally over the last three months, a handful of billionaires are quietly dumping their American stocks . . . and fast.

Warren Buffett, who has been a cheerleader for U.S. stocks for quite some time, is dumping shares at an alarming rate. He recently complained of “disappointing performance” in dyed-in-the-wool American companies like Johnson & Johnson, Procter & Gamble, and Kraft Foods.


Read Latest Breaking News from Newsmax.com http://www.moneynews.com/MKTNews/billionaires-dump-economist-stock/2012/08/29/id/450265?PROMO_CODE=110D8-1&utm_source=taboola#ixzz2ViqQsa4u
Sun, 06/09/2013 - 09:09 | 3638850 WhiteNight123129
WhiteNight123129's picture

Koo misunderstands inflation coming from money and price rise coming from credit overheating. He can not see the later and he is right, but he concludes mistakenly that it means no inflation, he only knows credit and currency, and confuses currency issued in connection with new credit with new base money. He is fixated with demands for funds which is the creation of new credit and new currency by banks, whereas what the BOJ is doing is not to stimulate the demand for ~funds~ i.e. stimulate demand for credit. What the BOJ is supplying money and letting it in the system, no new credit is needed to have inflation with base money, you just need the base money to end up in the economy.

Sun, 06/09/2013 - 10:40 | 3638975 Going Loco
Going Loco's picture

"you just need the base money to end up in the economy."

And how exactly do you see that happening?

Sun, 06/09/2013 - 10:24 | 3638949 Yancey Ward
Yancey Ward's picture

This all seems terribly confused to to me.  How does people moving out the the Euro into the Yen weaken the Yen?

Sun, 06/09/2013 - 11:50 | 3639111 spine001
spine001's picture

When they suddenly sell it at a faster rate than they bought it at when the trade they bought it for starts going sideways or looses momemtum. At thatbpoint they start dragging all the late comers whonloose money big time....

Sun, 06/09/2013 - 12:26 | 3639179 Tombstone
Tombstone's picture

Wasn't much of a honeymoon. Our central planners are in year 5 of theirs. 

Sun, 06/09/2013 - 12:59 | 3639236 Yen Cross
Yen Cross's picture

      You can tell Abe and Co. are running scared now. First he wanted to raise wages and taxes, thinking the increased revenue would stimulate more spending, and hence moar yen to buy moar JGBs with. Then he realized any wage increases would stiffle Japans export advantage through higher input costs, but still wanted to raise taxes. Now, we get his latest hairbrain idea.

 Japanese Prime Minister Shinzo Abe said on Sunday the government would decide on tax cuts in autumn, when parliament reconvenes after an upper house election on July 21. (If Japan doesn't implode first)

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