Friday, August 31, 2012

Indian Banks Reduce Exposure on US Banks

More signs of anxiety in the global financial markets: Indian banks reportedly reduced deposits with US Banks

From Financial Chronicle (

India banks’ deposits with US banks dipped in June, reflecting heightened risk aversion. This showed up in a fall in custodial liabilities of American banks to counterparties in India, which shrank by over $2 billion in June.

According to the US treasury data released, custodial liabilities of American banks payable in US dollars in June was $13.059 billion. A year ago, the holdings were $15.288 billion.

The custodial liabilities included foreign currency deposits by Indian banks in American banks. Indian banks hold dollar deposits with US counterparts for settlement of international liabilities.

Andhra Bank currency trader Vikas Babu said, “There is some risk aversion on US banks. So, banks have shifted to short-term US treasuries for less than one year for liquidity purposes.”

The shift to US treasuries, however, was not necessarily driven by interest earnings. Short-term holdings in US treasuries earned barely 0.5 per cent. Correspondent account balances, that are technically current accounts, earned zero interest. But the shift was partly on account of the fact that foreign institution balances in US banks are not covered by the US federal deposit insurance company (FDIC). FDIC provides insurance cover for bank deposits only to US entities and residents.

The shift to US treasuries was also apparent from a steep $9.5 billion rise in holdings to $50.8 billion by Indian institutions, including the RBI. The increase in holdings was despite compression in India’s external reserves by $26.5 billion in June from the corresponding period of the previous year.

Aside from possible concerns over the health of the US banking sector, the shift to short term securities could also mean that Indian banks may be expecting a spike in US interest rates, perhaps in anticipation of another round of asset purchases by the US Federal Reserve.

Also Indian banks may be under pressure from the recent economic slowdown. Indian banks have been required to raise 1.75 trillion capital by 2018 in order to comply with Basel III capital adequacy standards (yahoo)

Stagflation Risk: Food Price Inflation is Worldwide

The surge in food price inflation has been worldwide, that’s according to the World Bank


World food prices jumped 10 percent in July as drought parched crop lands in the United States and Eastern Europe, the World Bank said in a statement urging governments to shore up programs that protect their most vulnerable populations.

From June to July, corn and wheat prices rose by 25 percent each, soybean prices by 17 percent, and only rice prices went down, by 4 percent, the World Bank said on Thursday.

Overall, the World Bank's Food Price Index, which tracks the price of internationally traded food commodities, was 6 percent higher than in July of last year, and 1 percent over the previous peak of February 2011.

However, World Bank officials impliedly prescribes statist “know it all” solutions that may even may exacerbate on such shortages, (bold added)

"We cannot allow these historic price hikes to turn into a lifetime of perils as families take their children out of school and eat less nutritious food to compensate for the high prices," World Bank Group President Jim Yong Kim said. "Countries must strengthen their targeted programs to ease the pressure on the most vulnerable population, and implement the right policies."…

"However, negative factors -- such as exporters pursuing panic policies, a severe El Nino, disappointing Southern hemisphere crops, or strong increases in energy prices -- could cause significant further grain prices hikes such as those experienced four years ago," the bank said

Well in reality, drought has only served as a catalyst to the economic imbalances caused by different global policies such as ethanol or biofuel subsidies, still elevated agricultural tariffs despite WTO (see chart below), agricultural subsidies, price controls and most importantly central bank credit easing policies…



The good thing is that other world officials recognize that protectionism will only amplify food price inflation that may unravel into a crisis.

Again from the same Reuters article,

Separately, finance ministers from the 21-member Asia Pacific Economic Cooperation (APEC) group issued a statement at their meeting on Thursday in Moscow urging countries "to avoid export bans" in response to food price concerns.

I have pointed out last week that high food prices will likely impact emerging market monetary policies,

High commodity prices are likely to influence emerging markets consumer price inflation more. Food makes up a large segment of consumption basket for emerging Asia including the Philippines. This would prompt for their respective central banks to reluctantly tighten. Monetary tightening will put pressure on the stock market.

Stagflation, thus, also represents both a contagion and internal (political and market) risk for the Philippines and for emerging Asia

In the Philippines, officials of the domestic central bank, the Bangko Sentral ng Pilipinas’ (BSP) have indicated that the bank’s likely direction of policy actions may be confirming my prognosis.

From the Philippine Star,

Strong second-quarter growth may prompt the Bangko Sentral ng Pilipinas (BSP) to pause on easing monetary policy, a central bank official said yesterday, stressing that inflation and global developments will also be considered in deciding policy rates.

“Robust growth means the economy may not need additional stimulus,” BSP Deputy Governor Diwa Guinigundo told The STAR in a text message.

As always, political agents intuitively resort to alibis in the form of euphemisms. In reality, higher food prices (food price inflation) will gnaw away at statistical “robust growth”. The real reason why the BSP has taken a neutral stance is that easing policies will lead to higher food crisis, through artificial stoking of demand, that eventually could risks a domestic food crisis.

The answer to food price inflation should be for central banks to stop inflating, and importantly, for governments to allow markets to work

As Professor Steve Horwitz rightly explains,

globalization has nearly eradicated famines. All the market processes I have identified are even more effective when the area of trade expands. When commodity markets are global, countries facing droughts and bad harvests have a whole world from which they can attract new supplies. The United States is not limited to tapping farmers in Washington and Virginia. It can attract corn from around the world. In fact, Canadian farmers have had a much better year and are already seeing higher prices for their exports to the United States. Canadians will pay a bit more for their grains as a result, but prices in the United States will be significantly lower than they would be without the Canadian imports.

As Pierre Desrochers and Hiroko Shimizu point out in their wonderful new book, The Locavore’s Dilemma, the belief that making food production and distribution more local and less global will increase “food security” has it exactly backward. The most important thing we can do to ensure a secure food supply in the face of droughts and other threats to the harvest is to allow markets to work freely and extend that freedom globally.

We cannot control the weather, so the threat of drought is always present. But we can unleash the market and further globalize food production to avoid the human disaster of famines when harvests go bad. The conquering of famine is one of the great human accomplishments of the last century. That no one is starving because of the drought this summer is evidence of that victory. Let’s not let the forces of locavorism reverse those gains

Otherwise, agricultural protectionism will only magnify risks of global stagflation which may morph into a food crisis.

Quote of the Day: To Be Governed

To be GOVERNED is to be kept in sight, inspected, spied upon, directed, law-driven, numbered, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded, by creatures who have neither the right, nor the wisdom, nor the virtue to do so…

To be GOVERNED is to be at every operation, at every transaction noted, registered, enrolled, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, forbidden, reformed, corrected, punished.

It is, under pretext of public utility, and in the name of the general interest, to be placed under contribution, trained, ransomed, exploited, monopolized, extorted, squeezed, mystified, robbed; then, at the slightest resistance, the first word of complaint, to be repressed, fined, despised, harassed, tracked, abused, clubbed, disarmed, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored.

That is government; that is its justice; that is its morality.

This is from French mutualist philosopher Pierre-Joseph Proudhon in The General Idea of the Revolution in the 19th Century, 1851 p.294

Phisix: Another Fantastic Last Minute Upward Push

The stock market operators may have been at work again.


The Phisix down by about 95% of the session suddenly finds “enlightenment” during the last few minutes and soars by about 1.3% from the day's bottom. The Phisix closed .91% for the day.

The chart from tells it all—a spike at the session’s close.

Many may or will rationalize this as window dressing. Yet such peculiarities appear to have become more frequent.

If these have been meant to embellish the “More Fun in the Philippines” image, then this represents more signs of the politicization of the Philippine equity markets.

Distorted markets magnify boom-bust cycles.

Is Financial Knowledge Key to Successful Investing?

The public doesn’t know how to manage their finances, that’s according to a study commissioned by the US SEC.

From the Wall Street Journal Blog,

Good news for those intent on committing fraud. Bad news for most everyone else. American investors apparently don’t know much about anything financial.

According to a review released Thursday of years of surveys of individual investors, they are presumably ripe for the picking by fraudsters because they don’t have much knowledge to counteract any outlandish offerings.

Here’s the key and rather astonishing quote: “These studies have consistently found that American investors do not understand the most basic financial concepts, such as the time value of money, compound interest and inflation. Investors also lack essential knowledge about more sophisticated concepts, such as the meaning of stocks and bonds; the role of interest rates in the pricing of securities; the function of the stock market; and the value of portfolio diversification…”

That is from the Library of Congress, which conducted the review on behalf of the Securities and Exchange Commission. The SEC, for its part, needed to study Americans’ financial literacy and assess what investors wanted to know about investments and advisers and how they wanted to receive the information. The SEC had a mandate for all that from the 2010 Dodd-Frank Act.

This generalized lack of knowledge (there certainly are plenty of exceptions) is particularly worrisome since more and more people are responsible for their own investment decisions as part of defined-contribution retirement plans, usually 401(k)s.

The Library of Congress said: “If employees do not have the requisite knowledge, they will not be prepared to make informed decisions regarding the management of their financial affairs, including investing for a secure retirement.”

The public (not limited to Americans) may not be technically sophisticated in the realm of finances but to claim that they are “not be prepared to make informed decisions regarding the management of their financial affairs” looks outrageously untrue.

This misleading assertion presupposes that government should play a role to compel people to get educated "financially".

In reality, America’s standard of living has been higher than most of the world because of capital accumulation.

As the great Ludwig von Mises wrote,

The average standard of living is in this country higher than in any other country of the world, not because the American statesmen and politicians are superior to the foreign statesmen and politicians, but because the per-head quota of capital invested is in America higher than in other countries. Average output per man-hour is in this country higher than in other countries, whether England or India, because the American plants are equipped with more efficient tools and machines. Capital is more plentiful in America than it is in other countries because up to now the institutions and laws of the United States put fewer obstacles in the way of big-scale capital accumulation than did those foreign countries.

Americans not only knew but appropriately acted to manage their state of affairs through the productive balancing of savings and investments which resulted to such high levels of capital accumulation

Moreover, having financial knowledge does not necessarily translate to having the expertise for “investing for a secure retirement”

In reality, financial knowhow does not make one infallible from loses.

In debunking the idea that financial success comes out of high IQs, I recently wrote,

The landmark bankruptcy by Long Term Capital Management in 1998 had been a company headed by 2 Nobel Prize winners. The company’s failure has substantially been due to flawed trading models.

In 2008, the 5 largest US investment banks vanished. These companies had an army of economists, statisticians and quant modelers, accountants, lawyers and all sort of experts who we assume, because of their stratospheric salaries and perquisites, had high IQs.

When Queen Elizabeth asked why ‘no one foresaw’ the crisis coming, the reply by the London School of Economics (LSE)

"In summary, Your Majesty," they conclude, "the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole."

Imagination had been scarce because the same army of experts heavily relied on mathematical models in dealing with investments. They did not follow the common sense advise by the real experts.

These people had all the supposed “expertise” yet they all burned investor's money.

The failure of pseudo financial mastery explodes the idea that “generalized lack of knowledge” will not enable people “to make informed decisions”.

To add, if one looks at the list of the victims of fraud committed by scam artist Bernie Madoff, they had hardly been about financial ignorance

Again I wrote,

Thus, it is no different when Bernard Madoff bamboozled $50 billion off from the who’s who list which includes top rated financial institutions among them banks, (e.g. BNP Paribas,Banco Santander, Fortis Bank Netherlands, HSBC Holdings, Nomura Holdings, Royal Bank of Scotland and etc.) insurers (CNP Assurances, Clal Insurance, Harel Insurance) and Hedge funds (Tremont Group Holdings, Fairfield Greenwich).

To consider, these institutions account for as supposedly smart money outfits since they are backed by an army of “elite professionals”, e.g. economists, accountants, risk managers, quants etc…). Yet at the end of the day, smart money seemed like everybody else; they got what they deserved because they substituted prudence with fad

In reality, inflationist “bubble” policies, which obscures price signals and whets the speculative or gambling appetite, have been the principal influence to fraud.

As a side note: even the most successful stock market investor Warren Buffett admits of occasional investing mistakes.

In Manias, Panics and Crashes Charles Kindleberger’s insight has been highly relevant, (I quoted from my previous article)

Commercial and financial crisis are intimately bound up with transactions that overstep the confines of law and morality shadowy though these confines be. The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft embezzlement or fraud

Bottom line: having financial knowledge is necessary but not sufficient reason for securing financial success.

Relevant theory backed by quality information from the desire to profit (stakeholder's dilemma) has to be used as framework for such analysis.

Morris Cohen in his 1944 book, A Preface to Logic provides a useful insight (quoted by Professor Don Boudreaux)

There can be no doubt that statistics deals with actuality, and that knowledge of actualities is always empirical, i.e., that we cannot obtain knowledge by purely a priori methods. There is, however, no genuine progress in scientific insight through the Baconian method of accumulating empirical facts without hypotheses or anticipation of nature. Without some guiding idea we do not know what facts to gather. Without something to prove, we cannot determine what is relevant and what is irrelevant.

And this should be complimented by emotional intelligence and self-discipline.

Contagion Risk: Japan’s Industrial and Consumer Prices Falls

Yesterday, I noted that despite the interventions by the Bank of Japan, retail sales have fallen markedly. Apparently, like China, Japan’s economic deterioration has been intensifying and spreading.

From Bloomberg,

Japan’s industrial production unexpectedly fell in July, adding to signs that faltering global demand is undermining the economy’s recovery.

Production slid 1.2 percent in July from June, when it advanced 0.4 percent, the Trade Ministry said in Tokyo today. The median estimate of 27 economists surveyed by Bloomberg News was for a 1.7 percent increase.

A slowdown in exports and the winding down of subsidies for car purchases are dimming the outlook for manufacturing and growth in the world’s third-biggest economy. Bank of Japan (8301) Governor Masaaki Shirakawa said on Aug. 24 that demand related to reconstruction from last year’s earthquake and tsunami is “gradually gaining momentum” and may help to sustain growth.

“Looking ahead, Japan’s economy will probably lose steam,” Kohei Okazaki, an economist at Nomura Securities Co. in Tokyo, said before the report. “Overseas demand is slowing, affecting production and capital spending.”

It’s really not about the lack of demand which has been more a symptom than the cause, but rather that much of productive capital have been diverted into unproductive undertakings through political rescues of the banking and other politically favored zombie companies.

Thus the ensuing dearth of capital spending means less output, less jobs and less demand.

And as much as Japan’s political economy has been tainted or economically weighed by crony capitalism so goes with the Western peers, thus a transmission of a global slowdown which amplifies the contagion risks.

Yet a substantial part of the economic adjustments brought about by the previous artificially inflated boom, has been liquidations of misallocated capital. Combined with lack of capital spending, the slowdown in economic activities has resulted to reduced consumer prices.

From another Bloomberg article,

Japan’s consumer prices fell for a third month in July, underscoring concern that the central bank is too optimistic about the outlook for achieving its 1 percent inflation goal.

Consumer prices excluding fresh food dropped 0.3 percent from a year earlier, the statistics bureau said in Tokyo today. That matched the median estimate in a Bloomberg News survey of economists. The jobless rate stayed at 4.3 percent, a government report showed.

Today’s data may reinforce doubts over the central bank’s efforts to reverse more than a decade of deflation as the European debt crisis hurts Japan’s economy by dragging down exports. Central bank Governor Masaaki Shirakawa last week said that it’s likely the inflation goal will be realized after the end of fiscal 2013.

“Japan is still in a deflationary phase,” Masayuki Kichikawa, Tokyo-based chief economist at Bank of America Merrill Lynch, said before today’s release. “The bad news is that the global slowdown has been prolonged so the BOJ will probably have to delay its time line to achieve the inflation goal.”


Despite bouts of negative consumer prices, which in a free economy means higher purchasing power of money out of more production, Japan’s supposed “deflation”, which has misled mainstream, has truly been about disinflation.

Notice that since the bubble bust in 1990, the Japan’s CPI index has wavered, and in times when it turned negative, the index hardly breached 1% except in 2009 to early 2010 which came in the aftermath of a global recession. (chart from

This is hardly “deflation” in the context of the US Great Depression which many try to erroneously correlate.

(From the Economist’s View).

The above is an example of the CPI "deflation" of the US Great Depression whose conditions are immensely dissimilar from Japan and today.

Instead, the vacillating inflation-deflation signifies as stagnation out of Japan’s sustained policies to prop up unsound and unprofitable but politically connected enterprises which has prompted for the “lost decades”, as I previously discussed.

Nonetheless the negative CPI will give the Bank of Japan (BoJ), whom will be pressured by Japan’s politicians, more excuses to expand monetary intervention via asset purchases.

So far, most of global equity markets have not factored in the intensification of a global economic slowdown which has become evident in China and Japan. Recession in the Eurozone compounds the dire global economic conditions. The US seems likely to follow.

Yet the simultaneous economic deterioration extrapolates to increasing risks of a world economic recession.

Global equity markets have artificially bolstered by the charm offensive made by central bankers on promises of rescue. But until now they have refrained from making any major moves.

If the current dynamic will worsen, and without or with less than expected central bank interventions, market expectations may shift swiftly and dramatically to incorporate the real risk environment.

Be careful out there.

Thursday, August 30, 2012

Mary Meeker on Global Internet Trends: Re-Imagination of Nearly Everything

KPCB's Mary Meeker shows us in the following deck of slides, the incredible developments and potentials of the internet and other technology trends.
KPCB Internet Trends 2012

Will Urbanization Save China’s Capital Spending Bubble?

Mr. Stephen Roach, Chairman of Morgan Stanley Asia, writing at the Project Syndicate thinks so,

Reports of ghost cities, bridges to nowhere, and empty new airports are fueling concern among Western analysts that an unbalanced Chinese economy cannot rebound as it did in the second half of 2009. With fixed investment nearing the unprecedented threshold of 50% of GDP, they fear that another investment-led fiscal stimulus will only hasten the inevitable China-collapse scenario.

But the pessimists’ hype overlooks one of the most important drivers of China’s modernization: the greatest urbanization story the world has ever seen. In 2011, the urban share of the Chinese population surpassed 50% for the first time, reaching 51.3%, compared to less than 20% in 1980. Moreover, according to OECD projections, China’s already burgeoning urban population should expand by more than 300 million by 2030 – an increment almost equal to the current population of the United States. With rural-to-urban migration averaging 15 to 20 million people per year, today’s so-called ghost cities quickly become tomorrow’s thriving metropolitan areas.

Shanghai Pudong is the classic example of how an “empty” urban construction project in the late 1990’s quickly became a fully occupied urban center, with a population today of roughly 5.5 million. A McKinsey study estimates that by 2025 China will have more than 220 cities with populations in excess of one million, versus 125 in 2010, and that 23 mega-cities will have a population of at least five million.

China cannot afford to wait to build its new cities. Instead, investment and construction must be aligned with the future influx of urban dwellers. The “ghost city” critique misses this point entirely.

All of this is part of China’s grand plan. The producer model, which worked brilliantly for 30 years, cannot take China to the promised land of prosperity. The Chinese leadership has long known this, as Premier Wen Jiabao signaled with his famous 2007 “Four ‘Uns’” critique – warning of an “unstable, unbalanced, uncoordinated, and ultimately unsustainable” economy.

I have deep respect for Mr. Stephen Roach but I think his “urbanization” argument hardly distinguishes from the other public work projects such as infrastructure and transportation. They are all anchored on justifications of centrally planned interventions that presupposes omniscience or the superiority of knowledge of political authorities, as well as, the incontrovertibility of such trends (which for me accounts as the folly of reading past trends into the future; or “fighting the last war”).

In short, urbanization, based on government design, seems like a lipstick on a pig.

Urbanization according to Wikipedia is closely linked to modernization, industrialization, and the sociological process of rationalization.

Urbanization is characterized by, again

Cities are known to be places where money, services and wealth are centralized. Many rural inhabitants come to the city for reasons of seeking fortunes and social mobility. Businesses, which provide jobs and exchange capital are more concentrated in urban areas. Whether the source is trade or tourism, it is also through the ports or banking systems that foreign money flows into a country, commonly located in cities.

Urbanization in reality are symptoms of the 20th century model of intertwined centralized social activities based on mass production, mass media and markets which drew development and population to urban areas that paved way for the age of urbanization.

But are we still in the industrial age or are we shifting to the information age?

While Urbanization has still been an ongoing phenomenon, signs are that current centralized trends have been shifting.

For instance in China, demographic trends show that population and development has been moving inland. This may be partly due to government projects, China’s spontaneous economic response to the unfolding events around the world and the alleged reshaping or “rebalancing” of China’s economy (The Economist)

But what mainstream seem to ignore is that mass production has been transitioning towards specialization, which is why Asia became a supply chain network.

Moreover, future trends points to home based production for simple products (3-D printing anyone?)


Chart from KPCB’s Mary Meeker

Decentralized social media via the internet has also been challenging mass media. In terms of advertising, mobile and internet have been dramatically gaining at the expense of Radio and Print. Even revenue growth from ads on TV has been stagnating.

Also, mass markets are being turned into niche or specialty markets.

Specialization of production and niche markets has led to grassroots development.


The expansion of the booming Business Process Outsourcing has not only been within cities but to secondary cities and to rural areas as well. This applies both to India and the Philippines.

As I previously wrote,

Also business focus will increasingly be directed to specific needs (niche marketing) rather than mass production and also on where the consumers and markets are.

In the Philippines, shopping malls have sprouted not only in major cities but also in capitals of provinces or secondary cities. Take for example the largest shopping mall chain the SM Group which has 43 malls nationwide and growing. This is a noteworthy example of the deepening dispersion trends, where facilities have been mushrooming outside of mega cities.

I might add that SM has reportedly been targeting rural or provincial areas for expansion due to a booming agricultural economy and has been on a land-buying binge in Bacolod, Tacloban, Baguio, Bulacan, and Laguna, Quezon and Pangasingan.

Of course the agriculture economy has been part of the boom, but as noted above, even BPOs are headed towards rural areas. There may also be other telecommuters or home based technology businesses, aside from the large informal economy and remittance based income.

What the point?

Decentralization is bound to upend centralized based social activities of the 20th century

As the prescient Alvin Toffler wrote in Third Wave (p. 298-299)

The Third wave alters our spatial experience by dispersing rather than concentrating population. While millions of people continue to pour into urban areas in the still industrializing parts of the world, all the high technology countries are already experiencing a reversal of this flow. Tokyo, London, Zurich, Glasgow, and dozens of other major cities are all losing population while middle-sized or smaller cities are showing gains…

This redistribution of and de-concentration of population will, in due time, alter our assumption and expectations about personal as well as social space about commuting distances, about housing density and many other things.

This has gradually been happening today.

Bottom line: Urbanization will unlikely save China’s Keynesian centrally planned capital spending boom from turning into a bust.

Quote of the Day: Marginal Utility: The Essence of Life is Some Volatility

Consider that all the wealth of the world can't buy a liquid more pleasurable than water after intense thirst. Few objects bring more thrill than a recovered wallet (or laptop) lost on a train.

The essence of life is some volatility.

This is from Black Swan author Nassim Nicholas Taleb (Facebook page link)

Ayn Rand’s Atlas Shrugged: What Critics said in 1957

The LA Times makes a compilation of the critics of Ayn Rand’s magnum opus (fourth and last novel) “Atlas Shrugged” when it was first published in 1957. [italics mine]

Robert R. Kirsch, Los Angeles Times:

It is probably the worst piece of large fiction written since Miss Rand's equally weighty "The Fountainhead." Miss Rand writes in the breathless hyperbole of soap opera. Her characters are of billboard size; her situations incredible and illogical; her story is feverishly imaginative. It would be hard to find such a display of grotesque eccentricity outside an asylum.

Granville Hicks, New York Times

Not in any literary sense a serious novel, it is an earnest one, belligerent and unremitting in its earnestness. It howls in the reader's ear and beats him about the head in order to secure his attention, and then, when it has him subdued, harangues him for page upon page. It has only two moods, the melodramatic and the didactic, and in both it knows no bounds.

Edward Wagenknecht, Chicago Daily Tribune

There is much good sense in this book and it deserves more careful consideration than it is likely to get. For all that, Miss Rand is not quite the Moses to lead us out of the wilderness…. The worst thing in her book is her denunciation of what she calls mysticism, her ideas of which seem derived from Hitler rather than Meister Eckhardt or Rufus Jones. For her a mystic is a parasite in spirit and in matter, "a man who surrendered his mind at its first encounter with the minds of others." No, Miss Rand, a mystic is a man who insists upon using those areas of his mind which you block off.

Helen Beal Woodward, Saturday Review

Miss Rand … throws away her considerable gifts for writing by fixing her reader with a glittering eye and remorselessly impressing upon him her convictions. These range from a hatred of Robin Hood as "the most immoral and the most contemptible" of all human symbols to a belief in a kind of chrome-plated laissez faire. Much of it is persuasive…. But Miss Rand is undone by her prolixity and her incontinence. She sets up one of the finest assortments of straw men ever demolished in print, and she cannot refrain from making her points over and over…. Altogether this is a strange, overwrought book.


Gigantic, relentless, often fantastic, this book is definitely not one to be swallowed whole. Throughout its 1,168 pages, Miss Rand never cracks a smile. Conversations deteriorate into monologues as one character after another laboriously declaims his set of values. One speech, the core of the book, spreads across 60 closely written pages. Yet once the reader enters this stark, strange world, he will likely stay with it, borne along by its story and its eloquent flow of ideas.

Paul Jordan-Smith, Los Angeles Times

A neighbor of mine who occasionally reviews books for an eastern magazine dropped in and, seeing the massive volume on my desk, asked what I thought of it. "Challenging and readable and quick with suspense," I replied…. "a book every businessman should hug to his breast, and the first novel I recall to glorify the dollar mark and the virtue in profit…." But how the shabby little left-wingers are going to hate it!

Donald Malcolm, the New Yorker

Apparently Miss Rand set out to write a novel of social prophecy, something like "Nineteen Eighty-Four." But while Orwell based his predictions upon the nature of the police state, the lady who gave us "The Fountainhead" has based hers upon — well, it is hard to say. Miss Rand's villains resemble no one I have ever encountered, and I finally decided to call them "liberals," chiefly because I can't imagine whom else she might have in mind. In her vision of the future, then, the liberals have brought the world to a sorry plight. America is plunged into a catastrophic depression, caused by the government's infernal meddling with the economy, and most of the other nations of the world have become People's States, whose inhabitants are actually grubbing up roots to keep themselves alive. The last sparks of industrial competence are concentrated in the minds of two dozen — at most — American businessmen, who manage to hold the globe aloft in spite of the best efforts of governments everywhere to bring it down.

Hedda Hopper, in her syndicated column

Ayn Rand, although born in Europe is one of the finest American citizens I know. She worked with John Wayne, Gary Cooper, Clark Gable, Adolphe Menjou, Lela Rogers, Charles Coburn and a bunch of us when we formed the Motion Picture Alliance anti-commie group. She's author of "The Fountainhead," and has written a blockbuster of a book titled "Atlas Shrugged." It runs 1,168 pages, and you won't want to miss one word. I couldn't put it down, neither will you be able to once you've started reading. You'll say it can't happen here — but it's happening every day and we sit still while watching our rights as humans being whittled away.

Whittaker Chambers, National Review

"Atlas Shrugged" can be called a novel only by devaluing the term. It is a massive tract for the times. Its story merely serves Miss Rand to get the customers inside the tent, and as a soapbox for delivering her Message. The Message is the thing. It is, in sum, a forthright philosophic materialism. Upperclassmen might incline to sniff and say that the author has, with vast effort, contrived a simple materialist system, one, intellectually, at about the stage of the oxcart, though without mastering the principle of the wheel. Like any consistent materialism, this one begins by rejecting God, religion, original sin, etc. etc. (This book's aggressive atheism and rather unbuttoned "higher morality," which chiefly outrage some readers, are, in fact, secondary ripples, and result inevitably from its underpinning premises.) Thus, Randian Man, like Marxian Man, is made the center of a godless world…. Out of a lifetime of reading, I can recall no other book in which a tone of overriding arrogance was so implacably sustained. Its shrillness is without reprieve. Its dogmatism is without appeal.

Markets have validated Ms Rand rather than from most of these preachy critics—Atlas Shrugged sold over 7 million copies from 1957-2009 (hat tip Bob Wenzel)

Shows why mainstream 'expert' opinion should be taken with a grain of salt.

US Debt at $16 Trillion, a Precarious Confidence Game

Great stuff from Sovereign Man’s Simon Black,

If you haven’t heard yet, the United States of America just hit $16 trillion in debt yesterday. On a gross, nominal basis, this makes the US, by far, the greatest debtor in the history of the world.

It took the United States government over 200 years to accumulate its first trillion dollars of debt. It took only 286 days to accumulate the most recent trillion dollars of debt. 200 years vs. 286 days. This portends two key points:

1. Anyone who thinks that inflation doesn’t exist is a complete idiot;

2. To say that the trend is unsustainable is a massive understatement.

At an average interest rate of 2.130%, Uncle Sam will shuffle $340 billion out the door just in interest payments this year… and it’s a number that’s only going up. To put it in context, China owns so much US debt that the INTEREST INCOME they receive from the Treasury Department is nearly enough to fund their entire military budget.

It’s rather disgusting when you think about it.

Many mainstream observers (who largely are apologists of the government) argue that because US debt is denominated in the domestic currency, this has been nothing to worry about, as the US Federal Reserve can do the bidding.

Well they are to be proven eventually wrong, because economic reality will prevail. Again Simon Black

History is full of examples of superpowers bucking under the weight of their debt. This is not the first time that it’s happened, and it won’t be the last.

Sovereign debt is a giant confidence game. Investors buy bonds on the belief that governments can (and will) pay. When that confidence is chipped away, the cost of capital becomes debilitating. And people tend to notice a $16 trillion debt burden.

This is banana republic stuff, plain and simple… and smart, thinking people ought to be planning on capital controls, wage and price controls, pension confiscation, and selective default. Because the next trillion will be here before you know it.

Include political and other social controls, banana republic stuff…like totally.

Despite BoJ’s Interventions, Japan’s Retail Sales Slump

A sharp economic retrenchment has not only been visible in China but in Japan as well

From Bloomberg,

Japan’s retail sales fell more than economists forecast in July as a winding down of government subsidies for car purchases threatens to further damp consumer spending in coming months.

The 0.8 percent decline from a year earlier was the first drop in eight months and compared with the median estimate of a 0.1 percent fall in a Bloomberg News survey of 13 economists. From a month earlier, sales slid 1.5 percent, according to data released by the trade ministry in Tokyo today. Cooler weather played a role, the government said.

Weakness in consumer demand and declining exports may make it harder for the government to prevent the economic contraction forecast for this quarter by Bank of America Merrill Lynch and Credit Suisse Group AG. Most of 274.7 billion yen ($3.5 billion) of subsidies for purchases of fuel-efficient cars is spent, with RBS Securities Japan Ltd. saying the program may run out of money next month.

“We can expect a plunge in spending in the fourth quarter because of the end of eco-car subsidies,” said Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo and a former central bank official…

Television purchases declined after a boost a year earlier from digital broadcasting replacing analog, while beer sales slipped because of cooler weather, the ministry said. Fast Retailing Co. (9983), the seller of Uniqlo brand apparel, says lower temperatures have crimped demand for summer clothing. Car sales, meanwhile, gained 32.5 percent from a year earlier.

“The government should try to boost growth momentum through immediate fiscal stimulus,” said Takahiro Sekido, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo and a formerBank of Japan (8301) official. “In the second half, we will see a further slowdown in private consumption as a reflection of global uncertainty.”

Private consumption accounts for about 60 percent of Japan’s gross domestic product.

In today’s world, mainstream's logic has been emblematic of the theatre of the absurd.


The Bank of Japan (BoJ) has implemented serial expansion of her balance sheet in line with her Western contemporaries since 2008.

The BoJ lately upped her asset purchasing program to 45 trillion yen ($564 billion) from 40 trillion yen, which included massive purchases of stock market ETFs, yet all these stimulus has barely exhibited any positive effects at all.

Instead the compounded effect of such policies have only propped up the banking system and Japan’s zombie companies. (Chart above from Danske Bank)


Japan’s massive fiscal expansion in the 90s to stimulate the economy from a bubble bust have only led to a sharp deterioration in her fiscal conditions; the opposite effect of policy goals.

Japan has accrued debt to the tune of more than 200% of her GDP! This makes her a prime candidate for a default (direct or indirectly through inflation) in the face of declining population, diminishing savings and deepening crony (zombie) capitalism, as well as, competition for capital with her equally debt laden Western peers (chart above from Zero Hedge).

And this is why Japan’s intensifying political and economic predicament may prompt for a rampant exodus of capital that may find shelter in ASEAN markets which may accelerate the latter’s boom bust cycle.


And yet all these landmark money printing has done so far has been to give the Nikkei, Japan's major equity bellwether, a petty boost of nearly 7% gains year-to-date gain so far.

But the costs of these temporary gains will be much larger in the fullness of time.

Yet, after all these string of failures, the proposed solution by the mainstream has been more of the same: to have more steroids—doing things over and over again and expecting different results. Incredible.

Wednesday, August 29, 2012

Investing Tip: John Bogle’s 10 Rules of Investing

Investing guru John Bogle founder and retired CEO of the Vanguard group enumerates his 10 rules of investing (source

1. Remember reversion to the mean. What's hot today isn't likely to be hot tomorrow. The stock market reverts to fundamental returns over the long run. Don't follow the herd.

2. Time is your friend, impulse is your enemy. Take advantage of compound interest and don't be captivated by the siren song of the market. That only seduces you into buying after stocks have soared and selling after they plunge.

3. Buy right and hold tight. Once you set your asset allocation, stick to it no matter how greedy or scared you become.

4. Have realistic expectations. You are unlikely to get rich quickly. Bogle thinks a 7.5 percent annual return for stocks and a 3.5 percent annual return for bonds is reasonable in the long-run.

5. Forget the needle, buy the haystack. Buy the whole market and you can eliminate stock risk, style risk, and manager risk. Your odds of finding the next Apple are low.

6. Minimize the "croupier's" take. Beating the stock market and the casino are both zero-sum games, before costs. You get what you don't pay for.

7. There's no escaping risk. I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it. And a money market may be the ultimate risk because it will likely lag inflation.

8. Beware of fighting the last war. What worked in the recent past is not likely to work going forward. Investments that worked well in the first market plunge of the century failed miserably in the second plunge.

9. Hedgehog beats the fox. Foxes represent the financial institutions that charge far too much for their artful, complicated advice. The hedgehog, which when threatened simply curls up into an impregnable spiny ball, represents the index fund with its "price-less" concept.

10. Stay the course. The secret to investing is there is no secret. When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy. Discipline is best summed up by staying the course.

Corrupt Indian Politicians Loot $14.5 billion in Food

From Bloomberg,

as much as $14.5 billion in food was looted by corrupt politicians and their criminal syndicates over the past decade in Kishen’s home state of Uttar Pradesh alone, according to data compiled by Bloomberg. The theft blunted the country’s only weapon against widespread starvation -- a five-decade-old public distribution system that has failed to deliver record harvests to the plates of India’s hungriest.

“This is the most mean-spirited, ruthlessly executed corruption because it hits the poorest and most vulnerable in society,” said Naresh Saxena, who, as a commissioner to the nation’s Supreme Court, monitors hunger-based programs across the country. “What I find even more shocking is the lack of willingness in trying to stop it.”

In every instance of corruption, the public’s attention have mechanically been directed at the immorality of the culpable political leaders. Yet media fails to investigate or even attempt to understand the incentives that encourages such nefarious acts. Thus the easy implied solution has always been to seek the appointment of persons of supposed “virtue”. But in reality, politics has never been about virtue but of the preservation of power.

Looking at the symptom than the disease won’t really lead to comprehensive solution.

More from the same article

This scam, like many others involving politicians in India, remains unpunished. A state police force beholden to corrupt lawmakers, an underfunded federal anti-graft agency and a sluggish court system have resulted in five overlapping investigations over seven years -- and zero convictions.

India has run the world’s largest public food distribution system for the poor since the failure of two successive monsoons led to the creation of the Food Corporation of India in 1965. The government last year spent a record $13 billion buying and storing commodities such as wheat and rice, and expects that figure to grow this year.

Yet 21 percent of all adults and almost half of India’s children under 5 years old are still malnourished. About 900 million Indians already eat less than government-recommended minimums. As local food prices climbed more than 70 percent over the past five years, dependence on subsidies has grown.

In reality, political distribution of resources tends to create two classes of people: particularly the powerful politicians—bureaucrats and the helpless public. With God like powers from legal mandates to determine the beneficiaries (winners and losers), many will try to influence or win the favor of the political class through various means, including bribery or through coopting or gaming the system.

On the other hand, the political class will always act in accordance to their self interest, particularly personal values and preferences, ideology, personal networks (family friends and etc..), career, social status and even financial interests. After all, political class are humans too.

As the great Professor Ludwig von Mises wrote in his magnum opus Human Action,

Unfortunately the office-holders and their staffs are not angelic. They learn very soon that their decisions mean for the businessmen either considerable losses or—sometimes—considerable gains. Certainly there are also bureaucrats who do not take bribes; but there are others who are anxious to take advantage of any “safe” opportunity of “sharing” with those whom their decisions favor.

In many fields of the administration of interventionist measures, favoritism simply cannot be avoided. Take, for example, the case of export or import licenses. Such a license has for the licensee a definite cash value. To whom ought the government grant a license and to whom should it be denied? There is no neutral or objective yardstick available to make the decision free from bias and favoritism. Whether or not money changes hands in the affair does not matter. The scandal is the same when the license is given to people who have rendered or are expected to render other kinds of valuable services (e.g., in casting their votes) to the people upon whom the decision depends.

Corruption is a regular effect of interventionism. It may be left to the historians and to the lawyers to deal with the problems involved.

Since interventionism are coursed through laws, laws create corruption and corruption engenders laws.

This striking quote from the same Bloomberg article is very much revealing of the true nature of the state and of the importance or of the superiority of the market: (bold highlights mine)

“If you can buy a Pepsi in every village in India, why can’t the government get us our rations?” asked Vaish, who lives in Satnapur. “The reason we don’t is because the government doesn’t want us to -- they all get a cut.”

Signs of China’s Hard Landing: Retail Sales Drop

Add falling retail sales to mounting inventories, hot money outflows, deteriorating manufacturing activities and many other signs that China’s economic decline has been spreading and worsening.

From Bloomberg,

China’s retailers from clothing to computers are reporting weaker sales growth, undermining Premier Wen Jiabao’s goal of relying more on consumer spending for expansion as the economy cools.

Passenger-vehicle sales trailed analysts’ estimates in July. Sportswear seller Li Ning Co. shut 1,200 stores in the first half and department-store chain Parkson Retail Group Ltd. (3368)’s same-store sales rose at less than a quarter the pace of a year earlier. Gome Electrical Appliances Holding Ltd. (493) said it would report a first-half loss on lower sales.

The reports show an extra drag on the second-largest economy after export growth almost stalled in July and factory output missed forecasts. The year’s fastest decline in industrial companies’ earnings and a stock market at a three- year low mean income gains may slow, giving consumers less money to spend and boosting odds Wen will add stimulus.

“The pressure on retail sales is growing bigger and bigger,” said Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. “When exports are fragile and investment is weak, if companies started to reduce their production or workforce, how can it be possible for consumer spending to stay strong?”

Retail sales missed economists’ forecasts in three of the last four months and Mizuho said they will stay weak. Sales increased 13.1 percent in July from a year earlier, the National Bureau of Statistics said Aug. 9, compared with the median 13.5 percent estimate of 32 analysts surveyed by Bloomberg News.

Again, this seems more of a hard landing than a slowdown.


Even the China’s major equity bellwether the Shanghai Composite, which recently has been broken to new lows seem to be confirming this.

Be careful out there.

Tuesday, August 28, 2012

ASEAN Experts: Yuan to Replace U.S. dollar, Euro

From Xinhua,

China's currency could be eventually used as an alternative to the U.S. dollar and Euro by southeast Asian countries, experts said.

Phathanaphong Phusuwan, a senior official of the Bank of Thailand, said in a seminar on Thai-Chinese trade, investment and finance relations on Saturday that the yuan would likely be used more between China and ASEAN member states in the long run.

In the panel discussion co-hosted by the National Research Council of Thailand, Huaqiao University and the Thai-Chinese Culture & Economy Association here, the official of the Thai central bank commented the Chinese currency could possibly replace the U.S. dollar and Euro when it comes to trade, financial and money-exchange dealings throughout the ASEAN community, due in part to the unresolved economic and financial problems in the United States and the European Union.

"In the long run from 2015 onwards, trade with Asia will largely increase under the ASEAN-China Free Trade Area agreement, which will influence the use of the yuan and the local currencies. The yuan is then a good alternative for the international trade in the future," said the official, referring to the year in which the regional bloc will become an ASEAN Economic Community.

Nevertheless, he said, the role of the Chinese currency in Thailand and other ASEAN states will remain limited in the short and medium terms.

Thai merchants have increased their use of the yuan in trade, following the easing of restrictions by the Chinese government, he said. A dozen Thai commercial banks and foreign banks' branches here currently offer yuan-based services, including foreign currency deposits, money exchange, fund transfers and purchases of Chinese banknotes.

The Chinese currency has accounted for 10.8 percent of China's trade dealings with the world during the first half of this year, according to a report of the Thai central bank.

ASEAN’s plan to embrace free trade with China should be welcomed.

Yet the above again reveals of the (economic) love –(geopolitical) hate relationship between ASEAN and China.

While free trade may increase the usage of China’s yuan for trade and finance within the region, the role of the yuan as ASEAN’s reserve currency is not guaranteed. This will ultimately depend on the interplay or action-reaction feedback by global participants, not limited to politicians.

For instance, if China’s slowdown turns into a hard landing, what will be the response by the Chinese political authorities? If China inflates as massively as their counterparts in the West, then the likelihood of concerted massive inflation by major economies may mean, hardly a yuan standard for ASEAN, but of a potential return of the role of gold as money (I just don’t know how this would take shape; perhaps a modified Bretton Woods standard?).

Or if China adapts protectionism or goes into a shooting war over territorial claims with ASEAN neighbors then the free trade agreement will simply evaporate or reneged upon. [As a side note, the geographical claims dispute, for me, has most likely been a False Flag]

Given that current political and economic events remain so fluid and sensitive or vulnerable to dramatic changes, it would be a mistake to read present trends into the future.

Although I am hopeful that the technology backed globalization and decentralization will become the dominant force overtime. As well as, I am hopeful of the return of sound money or the de-politicization of money.

Quote of the Day: Fed is Like the Arsonist Disguised as a Firefighter

Remember: the Fed is like the arsonist disguised as a firefighter who claims only he can put out the fires he started. Yeah, maybe the firefighter can’t rescue people from the building if he doesn’t have an axe to break down the door, but giving him a way to break in makes it far more likely that he’ll set fires in the first place.

Claiming that a gold standard ties the Fed’s hands is exactly the reason to favor it, not oppose it. The Fed was primarily, though not solely, responsible for getting us in this mess in the first place precisely because its hands were free to flood the market with artificially cheap credit.

The discretion of Big Players like the Fed is the problem, and the solution is not somehow hoping that next time they will use that discretion only for good and not evil. Tying Federal Reserve Notes to gold would take away some of that discretion, and eliminating the central bank completely in favor of a competitive monetary system with commodity backing of any sort would take it all away.

When the arsonist can’t set fires, we don’t need to worry about whether or not he has the tools to put them out. That is the fundamental argument for constraining both central banks and competitive ones by making the money they create redeemable in gold.

This is from Professor Steve Horwitz’s refutation of Ezra Klein’s critique of the Gold Standard.

Austrian Business Cycle at the US Federal Reserve: Unintended Consequences from Monetary Policies

A paper investigating the roots of current crisis published by former Bank of International Settlement economist William R. White now at the US Federal Reserve at Dallas comes largely with the perspective of the Austrian Business Cycle Theory (ABCT).

One may interpret that Austrian economics may have “infiltrated” the US Federal Reserve or that this could also mean the the Fed have become more open to out of the box ideas [hat tip Zero Hedge; bold emphasis mine].

Here is the abstract:

In this paper, an attempt is made to evaluate the desirability of ultra easy monetary policy by weighing up the balance of the desirable short run effects and the undesirable longer run effects – the unintended consequences. The conclusion is that there are limits to what central banks can do. One reason for believing this is that monetary stimulus, operating through traditional (“flow”) channels, might now be less effective in stimulating aggregate demand than previously. Further, cumulative (“stock”) effects provide negative feedback mechanisms that over time also weaken both supply and demand. It is also the case that ultra easy monetary policies can eventually threaten the health of financial institutions and the functioning of financial markets, threaten the “independence” of central banks, and can encourage imprudent behavior on the part of governments. None of these unintended consequences is desirable. Since monetary policy is not “a free lunch”, governments must therefore use much more vigorously the policy levers they still control to support strong, sustainable and balanced growth at the global level.

Some of my favorite segments of the study

1. Mr. White challenges the “Wealth effect” or the Financial Accelerator (I made short comments here and here) principle espoused by US Federal Reserve Chief Ben Bernanke

the argument that higher “wealth” (generated by lower rates causing rising asset prices) will lead to more consumer spending also needs serious reevaluation. While not denying the empirical robustness of this relationship in the past, the argument suffers from a serious analytical flaw. Lower interest rates cannot generate “wealth”, if an increase in wealth is appropriately defined as the capacity to have a higher future standard of living. From this perspective, higher equity prices constitute wealth only if based on higher expected productivity and higher future earnings. This could be a byproduct of lower interest rates stimulating spending, but this is simply to assume the hypothesis meant to be under test.

As for higher house prices raising future living standards, the argument ignores the higher future cost of living in a house. Rather, what higher house prices do produce is more collateral against which loans can be taken out to sustain spending. In this case, however, the loan must be repaid at the cost of future consumption. No “wealth” has in fact been created. In any event, as noted above, house prices in many countries have continued to fall despite lower policy rates. This implies that the need for “payback” can no longer be avoided by still further borrowing.

2. Mr. White amplifies the view the capital markets may have been largely influenced by central bank actions, which not only increases risk exposure by the central bank itself, but likewise signify that current policies may have gone beyond the objectives of central banks. Also, current actions by central banks may have been interfering with or influencing the fiscal dimensions of government.

Ultra easy monetary policies, whether very low policy rates or policies affecting the size and composition of their balance sheets, can also have unintended and unwelcome implications for central banks themselves. Some of these effects are more technical. First, with very low policy rates, the likelihood rises that normal intermediation spreads in private markets will fall so far that these markets will collapse. The central bank may then find itself as the “market maker of last resort”. The current interbank market might fall into this category. Moreover, a similar experience in Japan in the 1990’s indicates that restarting such private markets is not easy.

Second, deeper questions can arise about central banks operating procedures in such an environment.

Third, with central banks so active in so many markets, the danger rises that the prices in those markets will increasingly be determined by the central bank’s actions. While there are both positive and negative implications for the broader economy, as described in earlier sections, there is one clear negative for central banks. The information normally provided to central banks by market movements, information which ought to help in the conduct of monetary policy, will be increasingly absent. Finally, with policies being essentially unprecedented, wholly unexpected implications for central banks (as with others) cannot be ruled out.

Beyond these technical considerations, the actions undertaken by AME central banks pose a clear threat to their “independence” in the pursuit of price stability. First, as central banks have purchased (or accepted as collateral) assets of lower quality, they have exposed themselves to losses. If it were felt necessary to recapitalize the central bank, this would be both embarrassing and another potential source of influence of the government over the central bank’s activities. Second, the actions of central banks have palpably been motivated by concerns about financial stability. Going forward, it will no longer be possible to suggest that monetary policy can be uniquely focused on near term price stability. Third, by purchasing government paper on a large scale, central banks open themselves to the criticism that they are cooperating in the process of fiscal dominance.

3. Low interest rates may incentivize a further delay in reforms, which increases the market, credit, interest rate and political risks.

A more fundamental effect on governments, however, is that it fosters false confidence in the sustainability of their fiscal position. In the last few years, in spite of rising debt levels, the proportion of government debt service to GDP in many AME’s has actually fallen. Citing as well the example of Japan, many commentators thus contend that the need for fiscal consolidation can be resisted for a long time. Koo, Martin Wolf of the Financial Times, and others are undoubtedly right in suggesting that a debt driven private sector collapse should normally be offset by public sector stimulus. What cannot be forgotten,however, is the suddenness with which market confidence can be lost, and the fact that the Japanese situation is highly unusual in a number of ways.

What is clearer is that exiting from a period of ultra easy monetary policy will not be easy. In this area, the Japanese experience over the last two decades is instructive. Central banks using traditional models will hesitate to raise rates because growth seems sub‐normal. Further, the recognition that higher short rates might cause longer rates to “spike”, with uncertain effects on financial stability, will also induce caution. Governments will also firmly resist higher rates, because they might well reveal that the level of government debt had indeed risen to unsustainable levels. Further, on the basis of recent experience, the entire financial community (with its formidable capacity for public communication and private lobbying) will oppose any tightening of policy as too dangerous. Their motives in this regard are questioned below.

Presumably a sharp enough increase in inflation would lead to a tightening of policy. However, by then a lot of further damage ‐ not least to the credibility of central banks – might well have been done.

The entire paper here:

Dallas Fed QE