The central planners are in a state of fear and panic. They are trying everything and anything to create market validation for their policies, watching with trepidation as their favored economic metrics fail to respond to all of their frenzied efforts.
They are so far over the tips of their skis right now that there’s nothing they won’t do. They’ve summarily thrown granny under the bus because they have this idea that negative real interest rates are the cure. The cure for what? The massive amounts of debts and imbalances their prior policies caused. So savers are punished in the pursuit of policy. You know, ‘for the greater good’ and all that.
They’ve spurred the greatest wealth gap ever in US history, greater even than at the extremes of the Great Depression, apparently without the slightest concerns for Plutarch’s ancient admonition that “An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”
They’ve even gone so far in Europe as to now force negative nominal interest rates on savers, dispensing with their usual slight-of-hand of letting inflation steal from each unit of currency in their system. When you’re panicking, there’s no time for subtlety.
They look the other way as “someone” dumps huge amounts of gold contracts into the wee hours of the night, seeking one thing and one thing only: lower prices. But that’s okay because the central banks destroyed price discovery a long, long time ago. First by invalidating the price of money itself (by driving interest rates to zero), and then in everything else — most importantly risk.
The Federal Reserve, the Bank of Japan (BOJ), and the ECB have decided that they want you to take your money out of your bank account and place it into the stock market. Apparently they have models that say this is a good thing. Or they just want you to spend it. And to be sure that you follow their wishes, they don’t leave you any better options — and so virtually every hard asset has been targeted for price suppression. Except real estate because, hey, you have to borrow a lot of money from the banks for that, so they encourage and cheer your participation there.
In short, everything the central planners have tried has failed to bring widespread prosperity and has instead concentrated it dangerously at the top. Whether by coincidence or conspiracy, every possible escape hatch for 99.5% of the people has been welded shut. We are all captives in a dysfunctional system of money, run by a few for the few, and it is headed for complete disaster.
To understand why, in all its terrible and fascinating glory, we need look no further than Japan.
A Black Swan Flaps Its Wings
Japan is really in no better or worse shape than the rest of the developed world. But is a few chapters further along in the story, which means it holds both explanatory and predictive power for most of the developed nations. This is why we should study it closely.
The mystery, as always, is how so many participants are willing to pretend all is normal with Japan; merrily buying and holding Japanese yen and government debt instruments.
In a nutshell, every single monetary, economic, fiscal and demographic trend is working against the very goals that the Bank of Japan, in cahoots with the Japanese government, is trying to attain.
To make this clear, first, we’re going to sketch the outlines of predicament and then, next, examine what will happen when it all finally breaks down.
The Halloween Massacre
On Friday, October 31 2014 the Bank of Japan (BOJ) made a surprise announcement of a major new policy move that was specifically targeted to have maximum impact on the markets.
The announcement specifically was that the BOJ would increase its purchases of Japanese government bonds to 80 trillion yen (up from 60 – 70 trillion) and triple its purchases of stock funds to 3 trillion yen annually.
You have to love the coded phrase used in the above article — “gave a lift to its fight against deflation” — which decoded means “they partially wrecked the yen which makes import prices go up (and which is not the same thing as the inflation they seek).” When you wreck your currency, all you do is steal purchasing power from savers and transfer it somewhere else, in this case to those most indebted and/or leveraged — the biggest of these beneficiaries being the Japanese government and large speculators.
While some still question whether the US Federal Reserve is monkeying about directly in US equity markets, there is no such uncertainty with the BOJ: it openly buys equities under the pretense that a rising equity market is somehow good for the Japanese economy. This is a rather indefensible view, because the relative elevation of the Nikkei has nothing to do with how the economy will perform, as it’s a derivative of the economy (or is supposed to be) not a driver of the economy.
The virtual lockstep nature of the falling yen and rising Nikkei tell us that we are living in an age of massive and rampant speculation where financial markets react in concert to the newly-unleashed liquidity floods.
What This Really Means
Okay, it’s time to face some unpleasant facts. Ignoring the market gyrations because those have pretty much lost all of their true signaling capabilities, the most recent move by BOJ governor Kuroda smacks of sheer desperation.
It’s important for all of us frogs sitting in this nice pot to recall that even five years ago such a move by the BOJ would have been utterly shocking. It would have commanded our thoughts and actions for weeks to come. But today, like the rest of the world, I’ll bet you’ve already lost it into the din of other accelerating events barely a week later.
That Kuroda, just one man, can bet so much on an untested and radical experiment is mind-boggling. If he succeeds, he gets to claim honor and success. If he fails he ruins the 3rd largest sovereign economy in the world, along with its inhabitants’ future dreams, for a very long time. How can such power be entrusted to a single person?
Yes, my fellow frogs who share this increasingly warm bath with me, Kuroda’s move is pure madness. The BOJ has jumped the monetary shark and we need to keep that firmly in view as we make our decisions about where all of this is headed, and how likely it is to create a future financial accident of global and unprecedented proportions.
Whether we call this the largest bond bubble in history, “reckless”, “mad” or “insane”, Japan has truly jumped the monetary shark. There’s no way back and no way forwards that will be pain-free and this terrifies the BOJ. The best advice I have is that when you see your central bank panic, you should panic too and avoid the rush.
In Part 2: What Will Happen When Japan Breaks, we delve into the only questions that really matter: When will it happen? And how deeply painful will it be?
And last, but certainly not least: How much of the rest of the world’s financial system will come crashing down with Japan’s because they are all so interlinked now?
Full article: Central Planners Are In A State of Panic (Peak Prosperity)