BoJ’s Kuroda’s Opening Salvo: 7 trillion yen ($74 billion) of Bond Purchases a Month

In pursuit of Shinzo Abe’s parlous economic policies popularly known as Abenomics, Bank of Japan’s new chief, former ADB head Haruhiko Kuroda’s began his term with a baptism of fire.

From the Bloomberg;

Bank of Japan (8301) Governor Haruhiko Kuroda began his campaign to end 15 years of deflation by doubling monthly bond purchases in a bid to reach 2 percent inflation in two years.

With Kuroda presiding over his first meeting since taking the helm last month, the board today streamlined its asset purchase programs, temporarily suspended a cap on some bond holdings and dropped a limit on debt maturities. The BOJ will buy 7 trillion yen ($74 billion) of bonds a month, the central bank said in a statement.

Be careful what you wish for. 

This applies to Abenomics whose scale of purchases is just $11 billion short of the $85 billion a month equivalent by the US Federal Reserve

While Abenomics may create a short term boom, this will be equivalent to an economic Hara-Kiri in the fullness of time as Abenomics magnifies the risks of a debt, or if not a currency crisis.

The worst is that the BoJ’s inflationism amplifies the risks of war.

As I pointed out in the past this hasn’t been about the strong yen (or deflation), which Japanese officials use as smokescreen, but “about saving the banks and financial institutions who constitutes as the major financiers or creditors or owners of Japan’s Government Bonds (JGBs)”

Nonetheless the aggressive deployment of asset purchasing will bring BoJ’s balance sheet to the levels of her western counterparts.

As fund manager Axel Merk of Merk Investment warned,

BOJ governor Kuroda will unveil which tools from his toolbox he may deploy. We refer to it as monetary madness because we don’t see how this can have a good ending for Japan, the yen, or the world. Japan has a $6 trillion economy, more than 200 times that of Cyprus. Should the market express its discomfort with Japan’s policies, there will be ripple effects to global markets. For now, the most direct implication is that we are rather negative on the yen. But don’t kid yourself: there may not be a place to hide, there may not be such a thing anymore as a safe asset. We have long argued that investors may want to take a diversified approach to something as mundane as cash.

Given precarious Japan’s debt position, Mr. Kuroda’s embrace of “Abenomics” is like playing with fire...where everyone gets burned.

Chart of the Day: China’s Defense Spending

From Reuters (chart included)

China will raise military spending by 10.7% this year to 740.6 billion yuan ($119 billion). China’s defense spending is contained at about 5.4% of total expenditure, up from 5.3% last year, and remains at about one-fifth of the Pentagon’s spending 

This compares to the Philippines at $1.8 billion (2010) which represents .81% of GDP (Index Mundi) or $209 billion in 2011 or 1.08% of GDP (Wikipedia.org)

I am not suggesting that the Philippines should compete with China to bolster her military expenditures.

What I am also saying is that the Philippines lacks the capability to match China’s armed forces.

On the contrary the Philippines should cut government spending which should include that of the military’s. The focus instead should be on fostering trade relations with the every nation in this world. Trade relations will reduce the opportunities for conflict because trade promotes harmonious relations even among diversified interest groups.

Nevertheless expanding and nurturing a huge army will eventually take a toll on the economy as scarce resources are diverted for non-productive activities.

Moreover, huge armies become a temptation for adventurism and domestic instability. Japan’s pre-World War II political and economic policies which led to the dominance of the military in shaping national decisions should serve as example.

The ‘late’ al Qaeda leader Osama bin Laden once predicted that the overall strategy of guerilla warfare has been a war of attrition meant to bankrupt or financially bleed her foes, particularly the US. In the same way the Soviet Russia lost the Afghan War.

Developing political economic conditions in the US, predicated on the growing warfare and welfare state, have been indicating the path of such politics dictated internal decay.

And it must be remembered we are in the nuclear age, where the character of military conflict has changed relative to the 20th century.

As a final note charts of the US-China arms race in Asia I have previously posted here

Quote of the Day: A War over Insignificant Scrubby Rocks?

Here is a link to the Google Maps Satellite view of the Senkaku Islands. Take a moment to contemplate how insignificant these scrubby rocks really are. 

Some observations after zooming in and out and panning around. First, there are no visible houses, bases, airstrips, factories, or really anything of value other than some timber and potential (note - potential, not proven) oil reserves. Second, the total size of the islands is 1700 acres - slightly bigger than most modern swim tennis communities in the US. Third, given that Japan, Taiwan, and Mainland China are all well within surface to surface missile distance from each other, these islands offer no military or strategic advantage. Fourth, if there are oil reserves of any significant amount they undoubtedly extend beyond the immediate confines of these tiny islands into the waters of Japan and China. Next time someone tells you we need government to resolve international disputes peacefully, send them this.

(bold mine)

From John Keller at the Lew Rockwell Blog.

In the world of politics, common sense has hardly been common.

Will Territorial Claims Dispute Lead to World War III?

All the bellicose posturing over territorial claims are posing as a risk the real thing: World War III.

Historian Eric Margolis points out why

On 30 January, a Chinese Jiangwei II-class frigate entered the disputed waters around the Senkaku Islands, a cluster of uninhabited rocks in the East China Sea claimed by China as the Diaoyu Islands. A Japanese destroyer was waiting.

When the two warships were only 3 km apart, the Chinese frigate turned on its fire control radar that aims its 100mm gun and C-802 anti-ship missiles and "painted" the Japanese vessel. The Japanese destroyer went to battle stations and targeted its weapons on the Chinese intruder.

Fortunately, both sides backed down. But this was the most dangerous confrontation to date over the disputed Senkakus. Japan and China were a button push from war.

Soon after, a Japanese naval helicopter was again "painted’ by Chinese fire control radar. Earlier, Chinese aircraft made a clear intrusion over waters claimed by Japan.

China’s Peoples Liberation Army HQ ordered the armed forces onto high alert and reportedly moved large numbers of warplanes and missile batteries to the East China Sea coast.

A US AWACS radar aircraft went on station to monitor the Senkaku/Diaoyus – a reminder that under the 1951 US-Japan mutual defense treaty, Washington recognized the Senkaku Islands as part of Japan and pledged to defend them if attacked. Japan seized the Senkakus as a prize of its 1894-95 war with Imperial China.

China’s state-run media claimed the US was pushing Japan into a confrontation with Beijing to keep China on the strategic defensive.

Japan’s newly elected government led by conservative PM Shinzo Abe vowed to face down with China. Spasms of angry nationalism erupted in both feuding nations. The Philippines, Taiwan and Vietnam, who also claim the Senkakus, chimed in with their territorial demands.

A special Chinese crisis group led by new President Xi Jinping has been set up to deal with the Senkakus – meaning any clash there may be more likely to become a major crisis.

Shades of August, 1914, when swaggering, breast-beating, and a bloody incident triggered World War I, a conflict few wanted but none could avoid.

Read the rest here

Oh, you may add to such mounting tensions the recent allegations of Russia’s violation of Japan’s airspace. Japan has ongoing territorial claim dispute with Russia over the South Kuril Islands.

Provocation over territorial claims, for me, have largely been meant to divert the public’s attention over domestic economic issues, as well as, to rally the public’s support by drumming up nationalism against foreign bogeymen.

Although any shooting skirmish that may occur could indeed spark and escalate into the real thing.

Nevertheless wars have been preceded by inflationism. Prior to World War II, I explained how Japan’s pre Keynesian Korekiyo Takahasi’s inflationist policies in the 1930 led to a quasi-coup via the assassination Mr. Takahasi which brought Japan’s military as a political force to the fore, the ramification of which, had been a war economy.

On the other hand, Nazi Germany’s war economy had likewise been mobilized via inflation.

In other words, wars are essentially financed by inflation.

As the great Professor Ludwig von Mises admonished in Nation, State and Economy, (bold mine)

Rational economy first became possible when mankind became accustomed to the use of money, for economic calculation cannot dispense with reducing all values to one common denominator. In all great wars monetary calculation was disrupted by inflation. Earlier it was the debasement of coin; today it is paper-money inflation. The economic behavior of the belligerents was thereby led astray; the true consequences of the war were removed from their view. One can say without exaggeration that inflation is an indispensable intellectual means of militarism. Without it, the repercussions of war on welfare would become obvious much more quickly and penetratingly; war-weariness would set in much earlier.

With almost every major economy wantonly engaging in inflationism, the risks of world at war seems to have dramatically increased. Possible flashpoints are manifold; in the Middle East, the Kashmir region, East Asia’s territorial disputes, or even from the aftermath of a possible collapse of the EU project.

Bank of Japan Goes Unlimited QE; Will Abenomics Be a Replay of the Takahasi-Model?

As anticipated, the Bank of Japan (BoJ) has formalized her assimilation of the policies embraced by her contemporaries, the US Federal Reserve and the ECB

The Bloomberg reports,

The Bank of Japan (8301) set a 2 percent inflation target and said it will shift to Federal Reserve-style open-ended asset purchases in its strongest commitment yet to ending two decades of deflation.

The central bank will buy about 13 trillion yen ($145 billion) in assets per month from January 2014, including about 2 trillion in Japanese government bonds and about 10 trillion yen in treasury bills. The BOJ previously said it would ease until 1 percent inflation is “in sight.”

Like all inflationism, the initial impact has been to trigger an artificial boom whose price will paid overtime via an eventual bust (most likely triggered by the return of bond vigilantes) or from a currency crisis.

Nonetheless Mark Twain once said that history does not repeat itself but it may rhyme. Telegraph’s Ambrose Evans Pritchard suggests that Abenomics could be a replay of "Japan’s Keynes" Korekiyo Takahasi:

Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on multiple fronts with fiscal, monetary, and exchange stimulus.

This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by Ben Bernanke as the man who "brilliantly rescued" his country from the Great Depression.

Takahasi was the first of his era to tear up rule book completely. He took Japan off gold in December 1931. He ran "Keynesian" budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office.

He compelled the Bank of Japan to monetise debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity.

He devalued the yen by 60pc against the dollar, and 40pc on a trade-weighted basis. Japan's textile, machinery, and chemical exports swept Asia, ultimately causing the British Empire and India to retaliate with Imperial Preference and all that was to follow -- and there lies the rub, you might say.

Takahasi was assassinated by army officers in 1936 when he tried to tighten by cutting military costs. Policy degenerated. Japan later lurched into hyperinflation.

Then Takahasi’s adaption of inflationism signified as mostly resource transfers to the military, the latter of which became the dominant force in her domestic policy affairs, which as noted above, was epitomized by Takahasi’s assassination.

And instead of reducing deficit spending, the Wikipedia.org notes that, the military influenced government "introduced price controls and rationing schemes that reduced, but did not eliminate inflation, which would remain a problem until the end of World War II". 

And like Germany, the Takashi inspired inflationism resulted to the massive build up of Japan's military might, which thus critically contributed to materialization of World War II.

Yet Japan eventually succumbed to a post war hyperinflation (JapanReview.net).

Things are different today than in the 1930-1945. Japan has the largest debt in the world as % of GDP, where a breakaway of consumer price inflation could easily trigger a debt crisis. Moreover increasing monetization of her debt risks an inflation spiral.

Contrary to mainstream's expectations, once the inflation genie gets out of the bottle it will be hard to contain them, especially with politically influential power blocs resisting them. As in the case of Takashi, the military resisted spending cuts that led to Takashi's fatality.

Although we already seem to be seeing typical symptoms of geopolitical strains from inflationism through the Senkaku Island dispute. 

About a week ago, both the Japanese and Chinese government reportedly scrambled jet fighters over the contested island nearly resulting to a direct confrontation (RT.com). Yesterday, 3 Chinese patrol ships reportedly entered Japanese territorial waters (Japan Daily Press).

The bottom line is that the effects of inflationism will ultimately be destabilizing for both the economy and in societal affairs, as depicted by the unfolding geopolitical developments.

Why Kashmir is Tinderbox for a Nuclear War

Historian Eric Margolis at the lewrockwell.com warns that the contested Kashmir region should always be in one’s radar screen since the area is a flashpoint that can precipitately trigger a world war with the pronounced risks of nuclear exchanges.

India and Pakistan have fought three wars and some very large battles over Kashmir. Both claim the entire mountain state. Pakistan’s intelligence service, ISI, has waged a long covert campaign to insert guerillas into Indian Kashmir to aid a series of spontaneous rebellions against Indian rule by the state’s Muslim majority…

Muslim Kashmiris have been in almost constant revolt against Indian rule since 1947 when the British divided India. Today, 500,000 Indian troops and paramilitary police garrison rebellious Kashmir. Some 40,000-50,000 Kashmiris are believed to have died over the past decade in uprising.

India blames the violence in Kashmir on "cross-border terrorism" engineered by Pakistani intelligence. Human rights groups accuse Indian forces of executions, torture, and reprisals against civilians. Large numbers of Hindus and Sikhs have fled strife-torn Kashmir after attacks by Muslim Kashmiri guerillas. It’s a very bloody, dirty war.

The Kashmir conflict poses multiple dangers. First is the very likely chance that local skirmishing can quickly surge into major fighting involving air power and heavy artillery. In 1999, a surprise attack by Pakistani commandos into the Indian-ruled Kargil region provoked heavy fighting. The two nations, with more than one million troops facing one another, came very close to an all-out war. I have on good authority that both sides put their tactical nuclear weapons on red alert. Angry Indian generals called on Delhi to use its powerful armored corps to cut Pakistan in half. India’s cautious civilian leadership said no.

Second, the Kashmir conflict also involves India’s strategic rival, China. Beijing claims the entire eastern end of the Himalayan border separating India and China, which Chinese troops occupied in a brief 1963 war. China also occupied, with Pakistan’s help, a high strategic plateau on the western end of the Himalayas known as Aksai Chin that was part of historic Tibet.

China is Pakistan’s closest political and military ally. Any major Indian attack on Pakistan would risk intervention by Chinese air, ground and missiles forces in neighboring Tibet.

Third, in the midst of all these serious tensions, India and Pakistan’s nuclear weapons – delivered by air and missile – are on hair-trigger alert. This means that during a severe crisis, both sides are faced with "use it, or lose" decision in minutes to use their nuclear arsenals.

The strategic command and control systems of India and Pakistan are said to be riddled with problems and often unreliable, though much improvement has been made in recent years.

A false report, a flight of birds, and off-course aircraft could provoke a nuclear exchange. By the time Islamabad could call Delhi, war might be on. A US Rand Corp study estimated an Indo-Pakistani nuclear exchange would kill two million immediately, injure or kill 100 million later, pollute the Indus River and send clouds of radioactive dust around the globe.

Given the recent skirmishes and the suspension of trade links, as well as the increasing use of territorial claims by governments as camouflage or as diversion to homegrown economic malaise and of the increasing political recourse towards policies of redistribution via financial repression, this area seems more geopolitically sensitive or more fragile than the East Asia’s territorial dispute.

Asian Banking: China and Asian Banks Fill Void Left by European banks

Nature abhors a vacuum.

In Asia, the Bank of International Settlements recently remarked that China and Asian banks filled the void left by retrenching European banks

The Central Banks News notes…

A pullback by Swiss and euro area banks from Asia-Pacific has been countered by an expansion of local banks, including Chinese and offshore centers, resulting in a continuous rise in international credit to the booming region, the Bank of International Settlements (BIS) said.

Fears of a lack of funding in Asia-Pacific due to the retrenchment of European banks after the global financial crises and the euro area’s debt crises thus never materialized….

The statistics…

Foreign lending to Asia Pacific rocketed by 41 percent, or $613 billion to total outstanding claims of $2.1 trillion by mid-June 2012 from mid-2008, just before the collapse of Lehman Brothers, BIS said in its December quarterly review.

This expansion is in stark contrast to a drop in international lending to emerging Europe of 14 percent, or $230 billion, and a more modest increase in lending to Latin America of 24 percent, or $254 billion, in the same period.

In Asia Pacific, the total claims of euro area banks shrank by an estimated 30 percent, or around $120 billion, between mid-2008 and mid-2012 and their share of foreign lending fell from 27 percent  to 13 percent by mid-2012, BIS said.

More stats…

Drawing on other sources, such as Bankscope, BIS found that the unconsolidated total assets of Chinese banks’ foreign offices in Asia (excluding Singapore) grew by $135 billion, or 74 percent, from 2007 to 2011.

And based on data from Dealogic, BIS learned that Asian banks, including those from Hong Kong and Singapore, increased their syndicated loans to emerging Asia Pacific by 80 percent, or $223 billion, from 2007 to 2001. Asian banks' share of total signings rose to 64 percent from 53 percent.

Insights to draw from the above.

Unlike mainstream thinking, Chinese and Asian banks’ picking up of where European banks vacated signifies as spontaneous market action at work. This has essentially dissipated “fears” over the lack of funding. Again, nature abhors a vacuum.

The withdrawal of European banks in Asia may perhaps be read as “home bias”. Due to the ongoing crisis, European banks may have taken a defensive posture or may have reconfigured their corporate strategies to optimize on their competitive advantages on the domestic arena or has been made to raise capital by reducing expenses and by taking lesser external risks.

Yet such void presented an economic opportunity for Chinese and Asian banks. The report does not indicate that the actions of Asian banks have been under the directives of respective governments.

Also, the increasing role of China’s banks in providing financial intermediation to Asia has been consistent with her government’s push to promote the yuan as an international reserve currency. Deepening trade and financial relations and exposures will help promote regional currency based transactions.

On the other hand, this again reveals of the paradox between China’s militant regional (territorial claims) policy and economic and financial relations with the region—another instance of Dr Jekyll and Mr. Hyde relationship.

Importantly, this report shows of the deepening trend of financial integration in the region. The implication is that regional markets will be more correlated and more intertwined which should optimize the region’s economies of scales and hasten the financial and economic development

Alternatively, greater interconnectivity and interdependence infers to greater contagion risks.

China and Pakistan Concludes Bond, Currency Swap Deals

China’s Dr. Jekyll and Mr. Hyde’s relationship with the world continues

While China’s yuan may hardly be reckoned or considered as an international reserve currency yet, they certainly have been moving towards that direction coming from the trade and investment aspect.

From Reuters.com, (bold mine)

Pakistan will join a growing list of central banks that will invest in China's interbank market as the world's second-largest economy opens its capital markets.

The People's Bank of China announced on Monday that it had signed an agreement with the State Bank of Pakistan to help Pakistan invest in its local debt market, without providing details about the size of the investment programme.

China has allowed foreign central banks to invest in its domestic interbank bond market since 2010 as part of efforts to widen investment avenues for foreign yuan asset holders and promote the international use of the Chinese currency.

China and Pakistan signed a three-year currency swap deal worth 10 billion yuan ($1.60 billion) in December 2011 and companies in the two countries are encouraged to accept export and import bills in Chinese yuan.

The central banks of Japan, South Korea, Singapore, Thailand, Hong Kong and Indonesia are among those who invest in China's bonds onshore.

China’s record gold imports could also signify as part of the process aimed at attaining international currency reserve status.

But of course the most important dynamic will be in the trade and investments dimensions; where the yuan/renminbi may be used for trade and financial flows from which may motivate China’s trading partners to hold the yuan/renminbi as reserves for their banking and financial institutions.

This why China’s foreign policy based on gunboat diplomacy over territorial claims has been inconsistent with her currency status goals. 

For me, this implies that her present appearance of militancy could be a smokescreen for what seems as undeclared political interests working behind the scenes.

Senkaku Dispute Controversy: News versus On the Ground Observation

Writes analyst Sherwood Zhang of Matthews Asia Funds (bold highlights mine)

It’s no wonder some pundits began calculating the potential economic impact that strained China-Japan relations may have on Japanese firms. But during my recent week-long visit in Shanghai, my on-the-ground observations following the protests left me feeling as if the concerns might be overstated. An executive of a Japanese restaurant chain operator told me that physical damage to the firm’s stores during the protest was actually quite limited compared to the impact that followed anti-Japan protests in 2005, which were sparked by controversies surrounding a shrine for Japan’s war dead. I also visited a popular Japanese retail store where customers were picking through the season’s new arrivals with no obvious concern for politics. In this globalized economy, boycotting Japanese business interests is no small feat as so many firms are intertwined. One Taiwanese leasing company I met with, which provides much-needed funding for small businesses in China, actually counts a Japanese financial institution as a strategic shareholder. These types of partnerships and joint ventures exist in nearly every sector in China, spanning food and beverage to auto manufacturing.

At the end of my trip, I noticed one last bit of encouragement—a wedding ceremony held at my Shanghai hotel. Seeing the photograph of a happy union between a Japanese bride and her Chinese groom on a television monitor in the hotel lobby gave me some hope for greater harmony between the people of China and Japan.

I have been pointing out that the Senkaku-Scarborough controversial disputes have been about concealed national political agenda and how the Chinese government has had a hand in agitating nationalist uproar, for reasons other than history and oil-gas-natural resources than as cover to or as distraction of the current economic woes, to suppress dissent and as pretext to inflate the system.

The world of politics is a world of smoke and mirrors.

Japan’s First Shale Gas Discovery

I made my case that Shale gas will be the energy of the future which means this will become an international phenomenon (see here, here, and here)

I have also pointed out that Argentina and China have began to access Shale as with Israel’s recent major discovery.

This time it is Japan’s turn.

Japan’s baptism with Shale gas from Japan Times, (bold emphasis mine)

Japan Petroleum Exploration Co. has succeeded in extracting shale oil from the Ayukawa oil and gas field in Akita Prefecture, a first for Japan, company officials said Wednesday.

Japan is trying to diversify its energy sources and develop untapped resources following the Fukushima nuclear disaster.

Japan Petroleum, known as JAPEX, succeeded in obtaining crude oil by pumping hydrochloric acid into a shale rock layer about 1,800 meters deep to remove limestone that clogs cracks in the rocks, the officials said. It started drilling Monday.

Shale oil was confirmed after the extracted liquid substance was put into a centrifugal separator.

Interest in developing shale oil, or oil contained in deep underground shale rocks, has been growing globally, with a sharp increase in commercial production of shale oil and gas in the U.S

JAPEX said it will analyze the ingredients of the crude oil while preparing to dig a new oil well next business year, which starts April 1, and proceed with the drilling process.

The company estimates shale oil deposits at some 5 million barrels for the Ayukawa and neighboring oil and gas fields. For all of Akita, shale oil reserves are projected at 100 million barrels, worth nearly 10 percent of Japan's annual oil consumption.

This again gives evidence that geopolitical frictions from territorial disputes has hardly been about oil, gas or natural resources or about history. These are excuses. 

Territorial controversies are essentially about political smoke and mirrors

As I recently wrote,

War has always been used as opportunities to exploit society (through financial repression) and suppress internal political opposition in order to advance the interests of the ruling political class whose interest are interlinked with the politically favored banking class, the welfare and the warfare class.

The shale gas boom will ultimately expose such political charlatanism.

As a side note, beneficiaries of fossil fuels see Shale gas as a considerable competitive threat so they launch propaganda offensive against it through, for instance, the latest movie by Matt Damon "The Promised Land" has been financed by the United Arab Emirates

Notes the Heritage Fondation 

While left-leaning Hollywood often targets supposed environmental evildoers, Promised Landwas also produced “in association with” Image Media Abu Dhabi, a subsidiary of Abu Dhabi Media, according to the preview’s list of credits. A spokesperson with DDA Public Relations, which runs PR for Participant Media, the company that developed the film fund backingPromised Land, confirmed that AD Media is a financier. The company is wholly owned by the government of the UAE.

Expect more false evangelism from detractors of Shale gas and of the laissez faire capitalism from which Shale gas has been a product of.

Senkaku Dispute: Japan-Taiwan in Water Canon Gunfighting

From the Economist, (hat tip Bob Wenzel)

A fierce shootout with water-cannon broke out between Japan’s coast guard and Taiwan’s on the morning of September 25th. The Japanese side was trying to repel an armada of almost 60 Taiwanese fishing vessels, which had sailed irritatingly near the islets, by blasting some of them with deck-mounted water cannon. Taiwan’s patrol boats retaliated by firing back with their own high-pressure hoses at the Japanese coastguard ships, all the while booming over loudspeakers that these rocks are the sovereign territory of the Republic of China (Taiwan’s official name) and that the Japanese vessels must leave Taiwan’s territory immediately. The fishing fleet managed to sail within three nautical miles (5.5km) of the disputed islands, before being turned back by the Japanese side. Meanwhile Taiwan’s navy dispatched frigates to the country’s north-eastern coast and scrambled warplanes, such as F-16s and Mirages, to monitor the civilian armada, according to a statement issued by the defence ministry on September 26th. The point, they say, was to be prepared for any eventuality. The president, Ma Ying-jeou, lent his support too, not missing a chance to add that the waters around the contested islands have been fishing grounds for Taiwan’s fishermen for more than 100 years.

This marked Taiwan’s first foray into the waters that surround the uninhabited Diaoyus since the Japanese government first nationalised a few of them, two weeks ago. The Japanese government is said to have protested to Taiwan through Japan’s de facto embassy. The incident complicates the ongoing row between Japan and the People’s Republic of China, over the archipelago’s sovereignty. Even without Taiwan’s interference, the affair has triggered huge protests on the mainland, some of them violent, and calls to boycott Japanese business.

Two things: one, this unfortunate event could be a prelude to the real thing, or two, this serves as another pantomime distraction of the public from domestic troubles or justification or cover for inflationism-interventionism.

Senkaku Islands Dispute: Chinese Government Behind Anti-Japan Protest

It seems that the Chinese government may have a hand in the agitation, mobilization and organization of the nationwide protest against the Japanese over the disputed Senkaku Islands.

From the LA Times,

The last week's anti-Japan demonstrations in China have been a spectacular display of just how easily the ruling Communist Party can harness the power of protest.

In the aftermath of nationwide protests, in which mobs trashed Japanese-owned businesses and set fire to Japanese model cars, critics are questioning the degree to which the Chinese government fanned the flames as part of its dispute with Japan over an island chain both nations claim.

"It is obvious that this was planned," said Ai Weiwei, the dissident artist, who videotaped some of the protests. The 1989 pro-democracy demonstrations in Tiananmen Square were "the last time that the people themselves organized a real protest and then the government sent in tanks to crush them," he said.

Although there has been no evidence that police officers participated in the violence, in many cities they directed the public on where to protest and cleared streets to allow tens of thousands to mass. Many protesters interviewed Tuesday said they had been given the day off by employers to demonstrate. Sept. 18 is a traditional day of protest, marking the anniversary of the Japanese invasion of Manchuria in 1931.

These organized demonstrations, which in the Philippines is known as the “hakot” crowd, as I previously pointed out have merely been camouflages.

In reality these are most likely smokescreens to the worsening internal problems experienced by both countries and to the mounting interventionism being applied by the increasingly desperate political authorities.

The war rhetoric, expressed through nationalism, has been used to divert people’s attention, to suppress political opposition and to justify inflationism, as well as other interventionists measures being imposed on China and Japan's economy. 

Quote of the Day: China’s Territorial Disputes: Distractions from Homegrown Problems

Well I have been saying that ‘the brouhaha over Asia’s territorial disputes have really been smokescreens.  

Dr. Ed Yardeni sees the same:

The Chinese government is picking fights with some of its neighbors over several islands in the South China Sea. These issues have been simmering for a very long time. Why are they coming to a boil now? One possibility is that the Chinese government is stirring up nationalist sentiments to distract the locals from some serious homegrown problems, and doesn't believe that the US will side with Japan and other Asian nations disputing China's territorial claims.

China’s Communist leadership change isn’t going smoothly at the same time that the economy is slowing significantly. For example, electricity output during the three months through August rose only 1.4% y/y. Crude oil demand has flattened out around 9.5mbd over the past six months through August. Fred Smith, the head of FedEx, warned on Tuesday that China watchers may be “completely underestimating” that the export slowdown is more than offsetting attempts by the government to boost growth.

The recent widespread protests in China against Japan’s claims to some of the disputed islands in the South China Sea are already harming the economy. Japanese companies are temporarily closing their manufacturing facilities and retail outlets in China. Trade between China and Japan totaled $323 billion (saar) during August, with China’s exports to Japan at $147 billion and imports from Japan at $176 billion.

China’s Shanghai-Shenzhen 300 stock price index rallied late last week, but now seems to be resuming the downward trend of the past year. The price of copper rebounded smartly last week on news that China will spend to build subways and roads, but could weaken if tensions between China and Japan don’t abate soon. Japan’s Nikkei is also vulnerable to the dispute between the two countries.

The sad part is that the smoke and mirror’s game only worsens the problems

Inflationism and the Senkaku Islands Dispute

At the Minyanville Jonah Loeb postulates 5 factors behind the intensifying Senkaku Island dispute between Japan and China, particularly history, resources (vast oil reserves), economic stakes, provocation by both governments and impact on US presidential elections.

First below is the an abbreviated timeline of the Senkaku Dispute, the complete timeline can be seen at the Globe and Mail here

-1996: The nationalist group builds another lighthouse on another of the islands. Several activists from Hong Kong dive into waters off the islands on a protest journey. One of them drowns.

- 2002: The Japanese ministry of internal affairs starts renting three of the four Kurihara-owned islands. The other is rented by the defence ministry.

- 2004: A group of Chinese activists lands on one of the disputed islands. The then prime minister Junichiro Koizumi orders their deportation after two days.

- September, 2010: A Chinese fishing boat rams two Japanese coastguard patrol boats off the islands. Its captain is arrested but freed around two weeks later amid a heated diplomatic row that affects trade and political ties.

- April 16, 2012: Tokyo governor Shintaro Ishihara announces he has reached a basic agreement to buy the Kurihara-owned islands.

- July 7, 2012: Japanese Prime Minister Yoshihiko Noda says his government is considering buying the islands.

- August 15, 2012: Japanese police arrest 14 pro-China activists, five of them on one of the islands.

- August 17, 2012: All 14 are deported.

- August 19, 2012: Japanese nationalists land on the islands without permission.

It is important to point out the current geopolitical troubles on Senkaku essentially got resurrected in 2010-2012 when Japan’s fragile post-Lehman economy got slammed by the triple whammy natural disaster (earthquake, tsunami and nuclear power meltdown) and as China’s economy has turned south in response to the diminishing returns of the 2008-2009 stimulus as shield to the post Lehman crisis.

Meanwhile, the Bank of Japan has resorted to ever increasing amounts of quantitative easing to save the beleaguered crony banking and finance, the nuclear industry and other zombie crony firms.

Yet like the Scarborough-Spratly’s island dispute I do not believe that this has been about history nor has this been about resources, but both ideas have been peddled as popular rationalizations for the standoff.

Jonah Loeb writes,

4. Both countries' governments are being provocative. Tokyo Governor Shoharo Ishihara, an outspoken character with a long history of anti-Chinese comments, sparked the dispute by launching a public fundraiser to buy the islands from their private owners, forcing the Japanese government’s hand as China fought back against Ishihara’s bid…

5. It could have a major effect on the US presidential race. More and more American politicians, especially those on the right, have been spinning some pretty harsh anti-Chinese rhetoric for a while, and that’s only increased since this dispute started. Mitt Romney claims that he will declare China a “currency manipulator” if he’s elected, and China is therefore as suspicious of the United States as it is angry at Japan.

It is true that politicians have been stoking inflammatory statements; a Chinese general recently said that China’s military should “prepare for combat”.

In reality these are most likely smokescreens to the worsening internal problems experienced by both countries and to the mounting interventionism being applied by the increasingly desperate political authorities.

In a speech Professor Joseph T. Salerno made this very important point. (bold highlights mine)

War has a number of advantages for the ruling class. First and foremost, war against a foreign enemy obscures the class conflict that is going on domestically in which the minority ruling class coercively siphons off the resources and lowers the living standards of the majority of the population, who produce and pay taxes. Convinced that their lives and property are being secured against a foreign threat, the exploited taxpayers develop a "false consciousness" of political and economic solidarity with their domestic rulers…

The war rhetoric have been used as opportunity to deflect public opinions to a foreign bogeyman as greater interventionism are being applied to the economy

Again from Professor Salerno

A second advantage of war is that it provides the ruling class with an extraordinary opportunity to intensify its economic exploitation of the domestic producers through emergency war taxes, monetary inflation, conscripted labor, and the like. The productive class generally succumbs to these increased depredations on its income and wealth with some grumbling but little real resistance because it is persuaded that its interests are one with the war makers.

The point being:

We thus arrive at a universal, praxeological truth about war. War is the outcome of class conflict inherent in the political relationship — the relationship between ruler and ruled, parasite and producer, tax-consumer and taxpayer. The parasitic class makes war with purpose and deliberation in order to conceal and ratchet up their exploitation of the much larger productive class. It may also resort to war making to suppress growing dissension among members of the productive class (libertarians, anarchists, etc.) who have become aware of the fundamentally exploitative nature of the political relationship and become a greater threat to propagate this insight to the masses as the means of communication become cheaper and more accessible, e.g., desktop publishing, AM radio, cable television, the Internet, etc. Furthermore, the conflict between ruler and ruled is a permanent condition. This truth is reflected — perhaps half consciously — in the old saying that equates death and taxes as the two unavoidable features of the human condition.

This leads us to central banking inflationism. Today’s interventionism has become more pronounced through central bank inflationism. And war financing has intrinsically been tied with inflationism.

As Mises Institute's founder Lew Rockwell recently wrote

Through this convoluted process – a process, not coincidentally, that the general public is unlikely to know about or understand – the federal government is in fact able to do the equivalent of printing money and spending it. While everyone else has to acquire resources by spending money they earned in a productive enterprise – in other words, they first have to produce something for society, and then they may consume – government may acquire resources without first having produced anything. Money creation via government monopoly thus becomes another mechanism whereby the exploitative relationship between government and the public is perpetuated.

Now because the central bank allows the government to conceal the cost of everything it does, it provides an incentive for governments to engage in additional spending in all kinds of areas, not just war. But because war is enormously expensive and because the sacrifices that accompany it place such a strain on the public, it is wartime expenditures for which the assistance of the central bank is especially welcome for any government.

In short war gives political cover for authorities to inflate the system.

Of course, again as I previously argued, the territorial disputes could be used as an election campaign propaganda.

War has always been used as opportunities to exploit society (through financial repression) and suppress internal political opposition in order to advance the interests of the ruling political class whose interest are interlinked with the politically favored banking class, the welfare and the warfare class.

The Senkaku Island dispute has been no different.

US Foreign Policy Backlash: Egypt’s President Morsi Defies the US

The US seems to be losing allies with her militant foreign policies. The well attended Non Aligned Movement held in Tehran Iran included US protégé Egypt’s President Mohammed Morsi, who apparently flouted pressures from the Washington.

Writes Eric Margolis at the lewrockwell.com,

To Washington’s further annoyance, Egypt’s new president, Mohammed Morsi, shrugged off threats of a cut in US aid and flew to Tehran. Under the 30-year Mubarak dictatorship, Egypt had been a bulwark against Iran. But no more. The increasingly assertive, independent Morsi made clear that Egypt would follow its own foreign policy interests rather than those of the US and Israel, as in the past.

Morsi has surprised just about everyone. When he stumbled into power earlier this year he was regarded as a plodding nobody, selected by the all-powerful military to do its bidding and not make trouble. The Muslim Brotherhood leader, a former space engineer, threw off his cloak of humility and quickly proceeded to muzzle Egypt’s bullying US-backed military, the key to US domination of Egypt for the past 40 years.

How Morsi pulled this off without facing a military coup remains a mystery. But he certainly had the backing of most Egyptians. It took Turkey’s Islamist Lite government a decade to push the swaggering generals back to their barracks and bring real democracy.

The Egyptian leader stunned everyone by openly blasting the Syrian regime of Bashar Assad, calling for its replacement by an elected, democratic government. Egyptian intervention in the bloody Syrian conflict may help pave a way to a peaceful settlement. It could also rekindle ancient Egyptian-Syrian rivalry for leadership of the Arab world.

In spite of issuing dulcet banalities about Egypt’s turn to democracy, Washington is extremely unhappy with Egypt’s newly elected government. Egypt will no longer be a discreet defender and ally of Israel, as under Mubarak, but a rival power that genuinely demands a Palestinian state and sees no reason to confront Iran or other US foes.

The US is responding to Egypt’s newfound independence by muttering about cuts to its annual $1.3 billion donations to Egypt’s military and millions more in secret payments. However, the Saudis and Gulf Arabs are lending cash-strapped Cairo $3 billion and the US-run IMF another $4.8 billion in loans. Interestingly, President Morsi just visited China where he received pledges of aid.

In past years, most non-aligned conferences, whose objective was to find a middle way between the West and Soviet Empire, produced only hot air, often quite anti-American. As America’s world power declines after the loss of two wars and deep recession, the NAM meeting in Tehran maybe a step, albeit small, towards moving away from today’s unipolar world towards a more balanced, equitable international system.

Egypt’s supposed disobedience and the success of the Non-Aligned Movement (NAM) has very important implications

One, the US seems to be losing geopolitical capital.

The motivation by incumbent political class to stir up conflicts around the world has been getting the opposite response than intended by Washington.

Part of the militant imperial policies has been meant to divert public’s attention from the steepening deterioration of the domestic fiscal and economic conditions. Part of these has been designed to justify and protect the businesses interests of the military industrial complex and of the imperial or geopolitical ambitions of neoconservatives.

Yet the apparent success of the NAM also exhibits of the implied impact of globalization, where trade rather than war have become the key domestic agenda for many, if not most, of developing countries. (For instance Russia became the 156th member of World Trade Organization last August 22)

Second, the erosion of the imperial status, through the prospective realignment of geopolitical power or “towards a more balanced, equitable international system”, extrapolates to the decline of the US dollar standard.

Current policies of inflationism embraced by the US along with her Western peers, which radically conflicts with globalization, will compel more developing countries to cooperate as regional or as specific nation trading blocs than depend on the US. Thus realignments will not just be within the context of geopolitics, but also in the currency spectrum.

The increasingly desperate political-economic power cabals working behind the scene may force the issue by pushing the Washington to go to war with either Syria or Iran. But such wars will not do away with the deepening trend towards economic, financial, political and moral bankruptcy the US has been challenged with. Instead wars will continue to nibble away at the social fabric and the political economic foundations of the US.

As a side note, interestingly China pushes forward with the Non Aligned Movement plank

At the Xinhua, Ma Zhaoxu, Assistant Minister of Foreign Affairs was quoted, (bold emphasis mine)

Non- aligned movement is an important platform for developing countries to move forward together. China supports the non-aligned movement for its positive role played in international affairs. China and other developing countries share similar histories, and face the common task of keeping world peace and boosting development. China will work together with the members of non-aligned movement to push the international order in a more fair and rational direction. China's attendance at the NAM summit also delivers an important message that China will always deepen traditional friendships and expand mutually beneficial cooperation, as well as maintain common interests with other developing countries.

More signs of China’s Dr. Jekyll and Mr. Hyde relationship with ASEAN.

Dr Jekyll and Mr Hyde: China and Vietnam to Expand Trade Via Road Network

More signs of China’s love-hate relationship with ASEAN.

Vietnam one of the claimants in the territorial dispute in the South China Sea has forged a “historic” agreement with China to expand trade through a major road network

From ADB, (bold added)

For the first time, buses and trucks will be able to cross overland between the rugged southern regions of the People’s Republic of China (PRC) and the remote northern regions of Viet Nam using a 1,300 kilometer route spanning from Ha Noi to Shenzhen made possible through a road transport agreement between the two countries.

“The new transport agreement will have a profound impact not only on bilateral trade and tourism, but also on Greater Mekong Subregion (GMS) transport facilitation," said Yushu Feng, Principal Economist, Regional Cooperation, at the Asian Development Bank (ADB), which facilitated the bilateral road transport agreement in line with GMS transport facilitation initiatives. “This is a key milestone for regional cooperation.”

The new agreement will ease restrictions on trucks and buses travelling between major economic zones in PRC’s Yunnan province, Guangxi Zhuang autonomous region, Guangdong province and six provinces in Viet Nam, including Lang Son and Quang Ninh provinces, and the cities of Ha Noi and Hai Phong.

Previously, transport operators were only allowed to travel up to 20 kilometers into each other’s territories. Starting August 2012, each country will be able to issue up to 15,100 permits for trucks and buses that travel within the border province area, and each will be able to issue up to 500 permits for trucks and buses than can go to inland provincial areas.

Another significant route, connecting Kunming to Ha Noi and Hai Phong and governed by the same agreement, was inaugurated in Kunming on 16 August 2012.

In 2011, road transport volume between PRC and Viet Nam through the Yuyi-Friendship border gate was as much as 1 million tons for goods and around 726,000 passengers traveled overland between both countries. Transport volume is expected to increase with the newly-implemented road transport agreement. To accommodate market demand, the permit quota for 2013 will be increased, accordingly.

The controversial disputes make it to the headlines and thus fire up emotions that arouse aggression via obtuse (feel good) nationalism.

But these trade agreements which signifies “key milestone for regional cooperation” will be relegated to the business or back pages.Yes the growing trade volume between ASEAN-China are for real.

Overall, China’s seeming antagonistic foreign policies or the gunboat diplomacy has hardly been consistent with her economic policies.

This makes me suspect that one of the two contradicting policies signify as no more than false signals (if not a false flag) aimed at the promotion of concealed political goals.

Fighting the Last War: Can the Philippines Beat China?

A video circulating in the cyberspace tries to whip up nationalist sentiment by using the Korean war experience to suggest that “the Philippines can beat China” should any military conflict arise from the recent territorial dispute.

Heard of the axiom “Generals are always prepared to fight the last war”?

Such expression applies to the video. The video has been framed in the assumption that future wars will be waged in the conventional sense and thus the vaunted Filipino mettle will matter.

Well this would not only be a big mistake but is patently myopic.

We are not only in the information age but in the age of weapons of mass destruction (WMD), not limited to nuclear warfare (but also to various types of chemical, biological and other evolving warfare such as computer, robotics and etc..).

[As a side note, I will not deal here with the moral issue of whether Filipino lives lost and taxpayer expenditures in the Korean war had been justified or not].

And China has been part of the states armed with substantial nuclear armaments (from Wikipedia.org)

China has also in possession of chemical and biological weapons. I will skip on the military tale of the tape, nevertheless I have shown them here earlier

This simply means that the risks of the employment of these dreadful killing machines or instruments increases once a shooting war have been initiated.

For many, getting social acceptance means to make a big issue out of things they hardly understand.

Political correctness also means stirring up nationalist fervor when they know that someone else will get to do the bloody part of the political violence, whose major beneficiaries will accrue to politicians at society’s expense. Of course this assumes a limited shooting war.

And in case of a full scale war, this will like result to mass destruction of the society (whose families and friends of these agitators will also suffer). Of course these people can’t think through their emotions enough to understand the consequences of their advocacies or are shills for the politicos.

I am reminded by distinguished historian Arnold Toynbee who claimed that people whom have not experienced the horrors of war have the tendency to become provocateurs (or the generational war cycle).

The survivors of a generation that has been of military age during a bout of war will be shy, for the rest of their lives, of bringing a repetition of this tragic experience either upon themselves or upon their children, and... therefore the psychological resistance of any move towards the breaking of a peace ....is likely to be prohibitively strong until a new generation.... has had the time to grow up and to come into power. On the same showing, a bout of war, once precipitated, is likely to persist until the peace-bred generation that has been lightheartedly run into war has been replaced, in its turn, by a war-worn generation.

And it is why agitators of war should get themselves enlisted in the military and request to get assigned in the frontlines so they can practice on what they preach.

[Updated to add: Here is a list of the death toll of 20th century wars, given the capacity of destruction of modern weaponry--assume the worst for the new age warfare]

Of course I am not convinced that the regional territorial controversy has solely been about superficial claims to property or about resources but more about the concealed political agenda such as the advancement of the military industrial complex, and or even perhaps a smoke and mirror encirclement strategy against Russia as China’s regional economic and military policies seem like Dr. Jekyll and Mr. Hyde.

The more important way to promote peace and social cooperation is none other than through expanded trade.

As the great Claude Frederic Bastiat once warned

if goods don’t cross borders, armies will