``The whole world would then be able to inflate together, and therefore not suffer the inconvenience of inflationary countries losing either gold or income to sound-money countries. All the countries could inflate in a centrally-coordinated fashion, and we could suffer manipulation and nflation by a world government-banking elite without check or hindrance. At the end of the road would be a horrendous world-wide hyper-inflation, with no way of escaping into sounder or less inflated currencies.” Murray N. Rothbard on the Keynesian ideal “Bancor”
How the heck would you expect financial markets to falter with all the new stuff being worked out by major global central banks?
Let us put it this way, Japan has declared a war on her rising currency the Yen[1], which has been erroneously blamed by her government for their domestic economic malaise, by intervening in the currency markets.
This means that the Bank of Japan would have print money to sell yen in order to buy US dollars. And they have commenced on this operation just as China have begun to slow their purchases of US securities[2] —perhaps to accommodate for an appreciation of China’s yuan.
And as we have repeatedly predicted, economic ideology, path dependency and the prevailing low interest rates will prompt governments of major economies to use their respective printing presses to the hilt, in the assumption that money printing has little impact on the economy or the markets.
Policymakers are shown as exceedingly short-term oriented or with little regards to the possible consequences from their present actions.
And their academic and mainstream apologists have provided intellectual support, in the belief that by intervening in the currency market, or by the destroying their currency, they will the save the world. This is a delusion. Never has it been the case where prosperity had been attained by the destruction of one’s currency.
This is no more than a redistribution scheme by the Japanese government aimed at bolstering her exporters (17% of the Japanese economy as of 2007[3]) at the expense of the rest of the domestic economy in order to revive the old model where the US functioned as the world’s major consumption growth engine.
This interventionism could likewise be aimed at maintaining the low interest regime in the US in order to support the US banking system.
Or possibly, this could even signify as a clandestine three cornered coordinated operation with China, as China appreciates her currency by reducing purchases of US assets. Meanwhile, Japan takes over China’s role as the major accumulator of US securities, given the existing fragility of the US banking system.
Implications of the Japanese Yen Interventionism
Japan intervened in the currency markets in 2004. However the conditions of the past would be dissimilar today. Back then, the US was inflating a housing bubble, today, inflationism has been aimed at shoring up the local banking system.
Another, one possible reason Japan had not engaged in rampant inflationism during Japan’s lost decade could due to her cultural idiosyncrasy and a declining population, where Japan had wanted to maintain the value of Yen’s purchasing power. And this has been misconstrued as deflation[4].
Yet we see two problems with Japan’s interventionism.
First, the culture of savings of the Japanese will be jeopardized as the Yen is depreciated against real goods and services, rather than against the US dollar.
This isn’t likely to translate into new investments nor will this approach succeed to reinvigorate the economy. Instead, it could prompt for more capital outflows into commodity and peripheral markets.
Second, since the US has been inflating by keeping the US Federal Reserve’s balance sheet bloated, this means that Bank of Japan would not only have to print money but extensively print money WAY AHEAD of the US given the conservative position of the Bank of Japan’s balance sheet (BoJ) [see left window figure 2].
Figure 2: Competitive Devaluation And Record Gold Prices (chart courtesy of Danske Bank and Stockcharts.com)
Competitive Devaluation And Record Gold Prices
So in effect, we now have a three way competitive devaluation among the currencies of major economies, or a race to the bottom which includes the US dollar, the British Pound, and the Japanese Yen.
Thus, almost instinctively the gold market has responded to such development by exploding to new nominal record highs in US dollar terms (right chart-top window).
Priced in the Yen, Gold has likewise polevaulted as the BoJ made official her government’s interventionism in the currency market.
Slowly but surely rising gold prices continue to reflect on the growing cracks in the fiat paper money standard. Eventually the paper money system crumble like experiments in the past.
So as major economies devalue their currencies, we are likely to witness a monumental shift in the search for alternative “store of value” in the commodity markets and in the asset markets of the peripheral “emerging” economies as the ASEAN.
Figure 3: The Previous BoJ Interventionism and the Nikkei 225 (chart courtesy of Danske Bank and yahoo finance)
Japan’s previous interventionism failed to accomplish its goals (see figure 3), it took other factors to fire up a rally in the US Dollar-Japan Yen pair such as the American Jobs Creation Act Of 2004[5] which included a limited period of tax reduced incentives for multinationals who were enticed to repatriate overseas earnings, and others.
So whether this signifies as a standalone operation or a covert three way joint action among China, Japan and the US, the likelihood of the success of BoJ’s actions will likely be limited—unless Japan will aggressively take on more risk by exposing its system to the risk of hyperinflation.
In the past, such interventionism had coincided with the rising Nikkei (right window). With the degree of interventionism likely to be stronger than 2004, we should expect much of these easy money to flow into various assets.
So global bubble cycles are likely to get amplified.
Again all these add up to fly in the face of deflation exponents.
[1] Japan Times, Government acts to drive down yen, September 15, 2010
[2] Wall Street Journal Blog, Don’t Worry About China, Japan Will Finance U.S. Debt, September 15, 2010
[3] Google public data, Exports as % of the Economy, World Development Indicators
[4] See Japan’s Lost Decade Wasn’t Due To Deflation But Stagnation From Massive Interventionism, July 6, 2010
[5] Investopedia.com American Jobs Creation Act Of 2004
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