Kuroda’s Abenomics May Trigger Global Financial Market Earthquake

Much of the global financial markets have been complacent about what has been going on in Japan. 

Kuroda’s Policies Incites Bond Market Volatility

Yet part of the collapse in gold-commodity prices has been attributed[1] to the recent spike in coupon yields of Japanese Government Bonds (JGBs) across the yield curve, which may have forced cross asset liquidations on investors to pay for margin calls. 

The two week upsurge in 2-year and 5-year JGB yields (chart from the Bloomberg) has essentially brought interest rates to early 2012 levels with year-to-date changes exhibiting an of increase 3.7 and 6 basis points (bps), respectively. Such increase in the short end spectrum of the yield curve comes in the light of the decline in 10 year yield at 20.4 bps, according to Asianbondsonline.org[2] data at the close of April 18, 2013.

The steep climb in short term yields relative to the long term has also materially flattened the JGB yield curve.

While yield curves usually serve as reliable indicators for recession[3], where an inverted yield curve would usually translate to symptoms of growing liquidity shortages from resource misallocations via rising short term rates relative to long end of the curve, central bank manipulation may have muddled up its effectiveness. 

Japan’s rising short term rates are likely manifestations of the growing risks of price inflation from Bank of Japan’s (BoJ) Haruhiko Kuroda’s adaption of ECB chief Mario Draghi’s “do whatever is takes”, in the case of Japan “to end deflation”, or aggressive inflationism channeled through the doubling of Japan’s monetary base.

Kuroda’s “Abenomics”, which is the grandest experiment with monetary policies by yet any central bank, will bring about Japan’s monetary base to over 50% of the GDP by 2014[4], compared to the FED’s QEternity at 19% of the GDP.

Kuroda may have already attained the goal of defeating the strawman-bogeyman called “deflation”[5], that’s if McDonald’s will act as the trendsetter for Japanese companies. Japan’s McDonald’s franchise has announced price increases for as much as 25% for some of her products[6].

But the marketplace hasn’t seen what a continuous rise of interest rates will mean for Japan and for the global financial markets.

Around ¥103.76 trillion (US$1.04 trillion) of JGBs will mature or will get rolled over this 2013.

Of the total, I estimate around 76% of these to be short term papers. They consist of Treasury Bills, 2-year bonds, JGBs for retail investors consisting of 3 and 5 years fixed rate aside from floating rates) and 5 year bonds, based on Japan’s Ministry of Finance latest update[7].

In 2014, ¥72.98 trillion (US$ 733 billion) will mature. 2-5 year bonds will makeup over 60% of such debts.

Consider these figures. According to James Gruber at the Forbes.com[8]

Government debt to GDP in Japan is now 245%, far higher than any other country. Total debt to GDP is 500%. Government expenditure to government revenue is a staggering 2000%. Meanwhile interest costs on government debt equal 25% of government revenue.

Add to this Shinzo Abe’s fiscal stimulus package announced last January amounting of ¥10.3 trillion[9] US $116 billion (January), US $103.5 billion (current) and the Liberal Democratic Party LDP’s proposed US$ 2.4 trillion of public work spending programs[10] spread over 10 years which should expand on the current levels of debt.

In other words, Japan’s unsustainable debt structure has been founded on the continuance of zero bound rates. Thus a further spike in yields from the prospects of “crushing deflation” via monetary inflation will bring to the fore, Japan’s credit and rollover risks. For instance a doubling of interest rate levels will translate to a doubling of interest costs on government debt and so on. Remember, BoJ’s Kuroda set a supposed “flexible” inflation target of 2% in two years[11], while paradoxically expecting bond markets to remain nonchalant or placid.

Thus any signs of the emergence of a loss of confidence that may resonate to a debt or currency crisis may unsettle global markets.

The Japanese government via Abenomics has essentially been underwriting their economic “death warrant”.

It would be a mistake to infer “decoupling” or “immunity” from a debt or currency crisis in Japan.

A Japan crisis will hardly be an isolated event but could be the flashpoint to a global finance-banking-economic crisis given the increasingly fragile state from debt financed economic growth and debt financed political system

Yet we appear to be witnessing emergent signs of instability or a backlash from “Abenomics” based on Japan’s credit default swaps (CDS) last Thursday.

From Bloomberg[12]: 

Two-year overnight-index swap rates that reflect investor expectations for the Bank of Japan’s benchmark rate are set for the biggest monthly jump since November 2010 and reached 0.095 percent this week, according to data compiled by Bloomberg. The contract has climbed from a low of 0.039 percent in January to the highest since July 2011, approaching the 0.1 percent upper range of the Bank of Japan’s benchmark rate target. The comparative swap rate in the U.S. was at 0.163 percent.

While I expect Abenomics to incite a capital flight yen based selloff from Japanese residents and companies that should benefit the Philippines or ASEAN overtime[13], it would be a different scenario if the financial markets precipitately smells the imminence of a crisis.

So the coming week/s will be crucial.

The Crux of Abenomics

It’s also important to analyze why Abenomics has been initiated.

Looking at the composition of the Japan’s public debt, since September 2008[14] or over a period of 4 years, the banking industry [42.4% September 2012; 39.6% September 2008], the Bank of Japan [11.1% September 2012; 8.7% September 2008], foreign investors [9.1% September 2012; 7.9% September 2008] general government [2.6% September 2012; 1.5% September 2008], and others [2.7% September 2012; 2.4% September 2008], posted increases in JGB holdings. The banks, the BoJ and foreigners essentially absorbed the largest share of the growing pie of JGBs.

On the other hand, Public Pensions [7.0% September 2012; 11.7% September 2008], Pension Funds [3.0% September 2012; 3.8% September 2008] and Households [2.7% September 2012; 5.2% September 2008] holdings of JGBs shriveled given the same time frame.

The share of Life and non-life insurance industry has remained largely little changed.

Despite the much ballyhooed battle against “deflation”, the changing debt structure reveals of the crux of Abenomics.

Financials (banks and insurance) accounted for 61.7% of JGBs holdings in 2012. Considering that the largest holders of equities in Japan have reportedly been the banking and insurance industry[15] as households account for only 6.8%, Abenomics has functioned as redistributive mechanism or a subsidy in support of these highly privileged sectors.

Thus, Abenomics has partly been engineered to forestall stresses and frictions that may increase the risks the collapse of these sectors. This also exhibits how this hasn’t been about the economy but about preserving the privileged status of political connected industries which politicians also depend on for financing.

Further Abenomics operates in a logical self-contradiction. While the politically and publicly stated desire has been to ignite some price inflation, Abenomics or aggressive credit and monetary expansion works in the principle that past performance will produce the same outcome or the that inflationism will unlikely have an adverse impact on interest rates, or that zero bound rates will always prevail.

The idea that unlimited money printing will hardly impact the bond markets is a sign of pretentiousness.

But there seems to be a more important reason behind Abenomics; specifically, the Bank of Japan’s increasing role as buyer of last resort through debt monetization in order to finance the increasingly insatiable and desperate government.

Note in particular, savers via Japanese household have reduced stock of JGBs by a whopping 48% since 2008, while pensions by both the public and private sectors contracted by 40% and 21% respectively.

Such a slack has been taken over by the banking system and the BoJ. While foreign holdings have manifested growth, they are considered as fickle and may reverse anytime.

Reduction of JGBs by savers could partly manifest Japan’s demographics or her negative population growth[16]. But such explanation hasn’t been sufficient.

The distribution of Japan’s household assets has mainly been channeled towards cash and deposits (55.2%) and insurance and pension reserves (27.7%). This is according to the latest flow of funds reported by the Bank of Japan[17]

According to the following charts from Danske Bank[18], Japanese investors with parsimonious exposure on foreign assets have been net sellers of foreign stocks (right window).

But more important aspect is that Japan’s insurance and pension companies, which accounts for the second largest bulk of household assets, have increasingly been deploying their resources overseas (left window). The rate of growth has been accelerating in tandem with BoJ’s policies.

In addition, gold priced in the yen[19], in spite of last week’s quasi-crash, which is likely an anomaly, has been ramping up higher since 2008.

Japan’s pension and insurance fund’s accelerating exposure on foreign securities, combined by the bull market in gold priced in the yen and the increasing preference by Japanese companies to tap foreign capital[20] can be seen as seminal signs of capital flight. 

Thus, Abenomics provides the insurance cover or a backstop against capital flight. With this we can expect Abenomics to eventually include price controls and importantly capital-currency controls.

Japan’s major bellwether the Nikkei 225 fell by 1.25% this week, which really is a speck relative to the astounding 28% year-to-date gains. The other major benchmark, the Topix, lost 1.91% but remains 31.04% from the start of the year.

But there appears to be increasing signs of divergences even in Japan, which may be seen as parallel to the ongoing distribution in the global marketplace. The leaders of the recent rally Topix banks (left) and the Insurance (right) sectors seems as exhibiting signs of exhaustion[21]

Finally the coming weeks will be very critical for global financial markets. If Japan’s short term rates continues to spiral higher then this may provoke amplified volatility on the global financial markets.

Another very important factor will be how Japanese authorities will react to them.

Otherwise, if the volatility in yields will be suppressed then we can expect the boom bust cycles to remain in play.

It pays to keep vigilant

---

[1] See Tanking Gold and Commodities Prices and the Theology of Deflation, April 15, 2013

[2] Asian Bonds Online Japan ADB

[3] See Influences Of The Yield Curve On The Equity And Commodity Markets, March 22, 2010

[4] Zero Hedge CLSA Breaks The Wall Street Mold: Sells Japanese Equities To Buy Gold, April 18, 2013

[5] See Japan’s Lost Decade Wasn’t Due To Deflation But Stagnation From Massive Interventionism July 6, 2010

[6] See Abenomics: Japan’s McDonald’s to Raise Prices by 25% April 19, 2013

[7] Quarterly Newsletter of the Ministry of Finance Japan, What’s New, January 2013

[8] James Gruber Forget Cyprus, Japan Is The Real Crisis, Forbes.com March 23, 2013

[9] See More Magic from Abenomics: 10.3 Trillion Yen in Fiscal Stimulus January 11, 2013

[10] Quartz Abe is planning a massive fiscal stimulus—but what’s left to stimulate? Yahoo Finance December 20, 2012

[11] Wall Street Journal BOJ's Kuroda Says 2% Inflation Target "Flexible" April 11, 2013

[12] Bloomberg.com Kuroda Endgame Seen as Swaps Climb Most Since ’10: Japan Credit April 18, 2013

[13] See Will Japan’s Investments Drive the Phisix to the 10,000 levels? March 19, 2012

[14] Quarterly Newsletter of the Ministry of Finance Japan, What’s New, January 2009

[15] See Japan’s Economic Minister: We Will Print Money to Boost the Stock Market February 12, 2013

[16] The Statistics Bureau and the Director-General for Policy Planning Chapter 2 Population Ministry of Internal Affairs

[17] Bank of Japan Flow of Funds - Overview of Japan, US, and the Euro area – March 25, 2013

[18] Danske Research Monitor Japanese investor flows, April 19, 2013

[19] Gold.org Spot gold price in JPY in oz

[20] See Abenomics: More Signs of Backfire April 16, 2013

[21] Tokyo Stock Exchange Stock Price Index - Real Time

Has Thomas Malthus been a free market friend or a foe?

Has preeminent demographer and economist Thomas Robert Malthus, whom has been widely criticized for his population time bomb theory, been taken out of context? 

Yes says Michigan State University professor Ross B. Emmett at the FEE

Robert Malthus (his friends called him “Bob”) was one of the primary interpreters of Adam Smith for the generation after Smith. Indeed, a lot of people who pick on “Thomas” Malthus get Bob Malthus wrong.

That’s not to say that Malthus was right about everything. But even more than Smith, Malthus’s economics built upon the idea that all humans similarly respond to incentives; and he thereby rejected the idea of natural hierarchy. Writing in a country that had excessive restrictions on labor markets—take a look at the Poor Laws—Malthus was an advocate of free labor markets. And Malthus argued that private property rights, free markets, and an institution that would ensure that both parents were financially responsible for the children they bore (that is, marriage) were essential features of an advanced civilization.

“Wait a minute,” you may be thinking. “Are we talking about the Malthus who claimed back in 1798 in his Essay on the Principle of Population that population growth would decrease per capita wellbeing? Isn’t this the guy who argued that the combination of population growth and natural resource scarcity would create catastrophic consequences, including disease, starvation, and war for much of the human race? And didn’t he miss the benefits of entrepreneurship and innovation, blinded as he was by the fallacy of land scarcity?”

That Malthus—let’s call this one “Tom”—is more a creature of ideological opponents of markets than of Malthus’s own writings. So maybe we should revisit Malthus and see what he actually said.

It all begins with a thought experiment: what would happen to human population in the absence of any institutions?

The answer is the population principle, which is the only thing most people know about Malthus. And it’s largely correct. In the absence of institutions, humans are reduced to their biological basics: Like animals, humans share the necessity to eat, and the passions that lead to procreation. To eat, humans must produce food. To procreate, humans must have sex. If there are no institutions, human population will behave like any animal population and increase to the limit of their ecology’s carrying capacity.

The biological model is simplistic; it treats humans as mere biological agents. It is this biological model that produces all the results people usually associate with Malthus’s name. And it’s not very far off from people’s conditions when their institutions have suddenly been disrupted by things like conquest, revolution, or war. (Consider the dual problems of war and drought that resulted in famine for Ethiopians in 1983–85, for example.)

But for Bob Malthus, the biological model is only a starting point. The model set up his next concern: the incentives created by different institutional rules for families’ fertility choices (in Malthus’s terms: the decision to delay marriage). The comparative institutional analysis that emerged from his further investigation became the basis for his defense of the institutional framework of a free society.

Read the rest here

On the vilification of Thomas Malthus

It turns out the mainstream view of Tom (as opposed to the real “Bob”) was first created by opponents of markets, sustained throughout the nineteenth century by lovers of hierarchy, and resuscitated in the twentieth century by environmentalists committed to the view that there are natural limits to economic growth. These environmentalists picked out the bits they liked and scrapped the rest, as it suited their agendas.

Mangling of the definitional context of politically sensitive issues such as liberalism, capitalism, inflation or deflation and etc..., has been a typical communications strategy used by statists to skirt on the argumentation of substance.

Matthew Ridley: Bitcoin as Synthetic Money

The impressive and articulate Matthew Ridley on his blog explains that Bitcoin is a form of synthetic money: 

Bitcoins resemble “commodity money”, like gold or cowrie shells, which rely on scarcity and indestructibility to be a good store of value. Real commodity money is vulnerable to inflation if there is suddenly a new discovery of gold — or deflation if there is suddenly a demand to use the commodity differently. In theory “fiat money”, such as we use today, avoids these problems — but governments have always removed the check on supply by printing money at whim to reduce debts.

There might be a way to cross fiat with commodity money and capture the benefits of both. Selgin calls this “synthetic commodity” money. Unlike fiat money it would have absolute scarcity; unlike commodity money it would have no non-monetary use. For example, a government could print paper money and then ostentatiously destroy the lithograph plates to show that it would never print any more.

In effect, this happened to the Swiss Iraqi dinar in the 1990s. Saddam’s regime used high-quality money engraved in Switzerland and printed in Britain. But during the first Gulf war in 1990 the supply dried up because of sanctions. Saddam began to print dinars at home, but these were easily faked, so they fell in value. The Swiss dinars remained in circulation for many years (though growing tatty) and held their value against the dollar.

Metaphorically, Bitcoin’s creators have destroyed the plates by making it impossible for anybody to change the programmed supply. So far that part of the experiment is succeeding, but Bitcoins are not yet ready for prime time. A friend who acquired some is sitting on a handsome profit, but finds the only thing he can exchange them for in his nearest city is chocolate.

Selgin points out that to get an exchange network going from scratch is hard enough when a new currency is fully compatible with established money, as in Birmingham; or when it consists of a commodity with other uses. But to do so using something with no non-monetary uses, so no one ought to want it at all except as a means of trade, should be almost impossible.

This only makes Bitcoin’s modest foothold even more impressive. An appetite for new kinds of money is there. The use of mobile phone credits as a currency in Africa, pioneered by M-pesa, is another example, and has had as jealous a reaction from central banks as Birmingham’s private coins did from the Royal Mint.

Read the rest here.

I would add that bitcoin’s evolution has also been a function, not only of as a cross between fiat money and commodity money, but also of the technology adaption lifecycle or technology diffusion via the S-curve.

French President Hollande’s Class Warfare Politics: Do as I say, not as I do

In politics, one should watch what political agents do rather than simply believe on what they say.

From the Economist

“I DON’T like rich people,” François Hollande once said. When campaigning for the French presidency in 2012, he promised an end to bling, a top income-tax rate of 75% on the rich, and a modest, “normal” presidency in touch with the people. Now the Socialist president’s new disclosure rules reveal that seven of his ministers, including his prime minister, Jean-Marc Ayrault, are millionaires. Laurent Fabius, the foreign minister, who comes from a family of art dealers, duly declared over €6m ($7.9m) of assets, including a flat in Paris worth €2.7m and two country houses. Michèle Delaunay, minister for the elderly, reported €5.2m of assets, including two properties in Bordeaux and two houses in different south-west resorts. Until now, only the president had to publish his wealth. Mr Hollande’s 2012 declaration included two flats in Cannes and a villa nearby, valued in all at nearly €1.2m, just under the threshold at which France’s annual wealth tax kicks in.

To rephrase Mr. Hollande’s campaign slogan “I don’t like rich people competing with me, so I’ll tax them to oblivion”.

Saturday DSL Blues, DSL Bleg

Once again my DSL connection has totally bogged down similar to last Saturday.

And there seems no way to be able to operate normally when the company’s DSL technician tells you that this has been a "bandwidth traffic" problem which means network connectivity disruption has been company problem and not a local one. That’s if such a claim is true. I have been in agony this April for having to call PLDT’s service repair number 172 to report on disruptions quite frequently (about 3x a week). Today I called twice.

Aside from wasting too much time on PLDT’s 172, to my dismay I went to their office and found out that the PLDT’s Dansalan, Mandaluyong business zone is closed on Saturdays, so there won’t be any attempts to address “network problems”, since I would assume that my connection has been linked to the Dansalan office, where their technical people comes from. [update: I just received a call from PLDT promising to remedy this, but I don't need promises, I need results: services for the payments rendered]

I have been a subscriber on PLDT’s DSL for about 9 years. Yet from my end, their services has been rapidly worsening.

Has this been just me or Mandaluyong based subscribers? Or has PLDT’s DSL connection really been a general network problem? I would appreciate some feedback from my Philippine based readers who are wired via PLDT’s DSL.

Since I am also considering a switch, I would also appreciate comments or recommendations for those who are connected with Globe and Skycable.

Pls post your comments or email me: benson.te@gmail.com

Thanks.

Abenomics: Japan’s McDonald’s to Raise Prices by 25%

Lo and behold! This is one example of the supposed magic of Abenomics, Japan’s McDonald’s will raise prices of their products by 25% in order to offset losses!

From Bloomberg

McDonald’s Corp. (MCD)’s Japan business will raise some prices by much as 25 percent next month, the fast food chain’s first increase on burgers in the country since 2008.

Hamburger prices will go up to 120 yen from 100 yen and cheeseburgers will rise to to 150 yen from 120 yen in Japan in May, McDonald’s Holdings Co. Japan Ltd. said in a statement today. The hikes are part of the company’s plan to boost profitability, it said.

McDonald’s is raising the prices after the Japanese unit reported a 12 percent drop in operating profit last year. Fewer discounts drove March same-store sales 3.6 percent lower at the local business, the 12th consecutive monthly decline.

Of course basic economics tells us that higher prices leads to lesser demand. Thus a fall in purchasing power should extrapolate to lesser sales in terms of quantity (and also quality) which eventually should put pressure on profits. 

Chart from Yardeni.com

Yet given Bank of Japan’s recourse to inflationism which hasn’t been anything new, as the Japanese government has been doing this since the start of the new millennium, but has only become more aggressive since 2008, McDonald’s has been suffering from poor sales which isn’t supposed to be the case, especially at the onset of expansionary boom. 

The employment of such poilcies embodies precisely the definition of insanity specifically "doing the same thing over and over again but expecting different results."

Inflationism will hardly bring a boost to the economy, why? Because it inhibits economic calculation and the division of labor by distorting market prices.

As the great Murray N. Rothbard explained (bold mine)

Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation. Since prices do not all change uniformly and at the same speed, it becomes very difficult for business to separate the lasting from the transitional, and gauge truly the demands of consumers or the cost of their operations. For example, accounting practice enters the "cost" of an asset at the amount the business has paid for it. But if inflation intervenes, the cost of replacing the asset when it wears out will be far greater than that recorded on the books. As a result, business accounting will seriously overstate their profits during inflation--and may even consume capital while presumably increasing their investments.  Similarly, stock holders and real estate holders will acquire capital gains during an inflation that are not really "gains" at all. But they may spend part of these gains without realizing that they are thereby consuming their original capital.

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

This only means that in a highly inflationary environment McDonald’s and other Japanese firms will be compelled to either reduce quality or to continually raise prices in order to survive or even speculate, which is contradictory to bring about ‘competitiveness’.

Yet any elevated accounting figures boosted by higher prices will be exposed when the BoJ desists from pursuing inflationist policies—the boom bust cycle.

Moreover, given that Japanese households are said to be ‘risk averse’ where 56% of their liquid assets are in the form of cash and where liquid ‘cash’ financial wealth accounts for 319% of Japan’s GDP, while only 5.8% have been invested in equities and .08% in foreign assets, one should expect that the massive fall in the purchasing power of the yen, will lead not to more investments, but to yield chasing masked as capital flight.

Former Morgan Stanley analyst now managing director and cofounder of SLJ Macro Partners Stephen Jen quoted by SNBCHF.com 

The first stage is foreign leveraged funds shorting the yen, acting on the rhetoric from the Abe Administration. This stage is coming to an end, to be followed by the second stage: Japanese investors selling yen

We have already seen signs where Japanese firms would rather raise financing from foreigners than to deploy domestic cash to investments.

So it would signify as a grotesquely obtuse idea to blindly believe (yes inflationism isn’t economics but religion based on heuristics) that inflation will save the day for Japan. Doing the same thing over a decade hasn't help, why should it be different this time? Because of the shock and awe?

One can only look at Argentina and Venezuela’s transition from stagflation to hyperinflation to see how disastrous a policy inflation makes.

Abenomics will only hasten Japan's path to a crisis.

Inflation and Price Controls: Latin America Edition

I have been saying that price controls functions as the alter ego or the twin sibling of inflationism where both operates under the umbrella of financial repression (euphemism legal plunder of people's resources via social policies). 

I have also been pointing out that depending on statistics (historical data) to establish a theory can hardly be relied on because statistics does not capture real human events, and can be manipulated to serve political goals.

Here is how it works. First government inflates money supply via credit expansion. Next, the resultant higher prices will be blamed on “greed” on the private sector, thus, justifying price controls. Then government imposes price controls and other related restrictions.

Price controls effectively mutes statistical inflation. But on the other hand, price controls provides disincentives for producers to produce, thereby leading to goods shortages, and thus, leads to social deprivation and hardships.

At the end of the day, inflationism-price controls brings about economic crises and social unrest.

Cato’s Steve Hanke says the spreading use of price controls in Latin America, while reducing statistical inflation, has been depriving the public access to goods. (italics original)

Argentina, Venezuela, and now even Ecuador have all embraced an unfortunate, if familiar, economic craze currently sweeping the region – price controls. In a wrong-headed attempt to “suppress” inflation, the respective governments have attempted to fix prices at artificially low levels. As any economist worth his salt knows, this will ultimately lead to scarcity.

Consider Venezuela, where the government sets the price of a number of goods, including premium gasoline, which is fixed at only 5.8 U.S. cents per gallon. As the accompanying chart shows, 20.4% of goods are simply not available in stores.

While price controls ostensibly keep the prices of goods on official markets low, they ultimately lead to empty shelves, depriving many consumers access to essential goods (such as toilet paper). This, in turn, leads to “repressed” inflation – given the price controls that exist, the “true” rate of inflation is held down, or repressed through Soviet-style government intervention. As the accompanying chart shows, the implied annual inflation rate for Venezuela (using changes in the black-market VEF/USD exchange rate) puts the “repressed” inflation rate at 153%.

Likewise, Argentina is facing a similar dilemma (see the accompanying chart).

In addition to scarcity and repressed inflation, price controls can lead to unintended political consequences down the road. Once price controls are implemented it is very difficult to remove them without generating popular unrest – just consider the 1989 riots in Venezuela when President Carlos Perez attempted to remove price controls.

This only proves my observations that Venezuela and Argentina, as enduring episodes of hyperinflation (the new generation of Zimbabwes), although at different stages; Venezuela is at a more advanced state relative to Argentina’s incipient phase from earlier stagflation.

I expect stagflation-hyperinflation to occur in many parts of the world as governments rely on the printing press and financial repression to advance their interests.

So Where’s the Magic of Abenomics? Japan Post Ninth Month of Trade Deficits

So where’s the much ballyhooed ‘competitiveness boosting’ magic of Abenomics?

Despite the BoJ’s announcement of the doubling of monetary base in 2 years, Japan’s trade balance continues to drift at the negative territory.

chart from tradingeconomics.com

From the Wall Street Journal,

Japan's merchandise trade balance logged a deficit of 362.4 billion yen ($3.69 billion) in March, stretching the run of deficits to a record nine months, as the weak yen pushed up import prices.

The result compares with a median forecast for a deficit of ¥430 billion in a survey of economists by Dow Jones Newswires and showed an improvement from a revised ¥779.5 billion deficit in February.

Exports also showed some recovery, rising 1.1% from the same period last year to ¥6.27 trillion ($63.9 billion), the Ministry of Finance data released Thursday showed. In February, exports had been down 2.9%.

While exports to China remained weak, falling 2.5% on year, sales to the U.S. jumped 7% as demand there began to rise amid a steady if somewhat subdued recovery.

Continuing to darken Japan's trade picture has been a sharp increase in energy imports. Crude oil imports were up 7% while liquefied natural gas imports were up 8.8%.

Japan has been forced to sharply increase its purchases of fossil fuels for electricity production ever since the March 2011 nuclear plant accident in northern Japan. The total cost has been pushed higher by the decline in the yen since mid-November. Japan's currency has fallen nearly 20% over that period.

Overall, imports were up 5.5% to ¥6.634 trillion.

Yes, admittedly there has been some improvements, but remember the potency of inflationism have usually been in the short term, which means dramatic improvements should have already been manifest. Apparently this has not been the case...perhaps not yet.

Instead, what has been happening is that Japanese firms have been tapping into foreign funds, and of a spike in the yields of short end spectrum of JGBs which has contributed to the market's sharp volatility.

Hardly any signs of improvements.

Quote of the Day: The Merit of Gold

It is the outstanding merit of gold as the monetary standard that it makes the supply and the purchasing power of the monetary unit independent of government, of office holders, of political parties, and of pressure groups. The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice. It is precisely the merit of the gold standard, finally, that it puts a limit on credit expansion.

This is from the late great libertarian Austrian economist, philosopher, journalist Henry Hazlitt in his book THE INFLATION CRISIS, AND HOW TO RESOLVE IT p.173

Gold Price Crash Spurs Boom in Physical Gold Markets

Apologists for inflationism have been saying in media that the plunge in gold prices marks the “end of gold’s bull market era”. 

But they hardy explain that the such quasi-crash has been brought about mainly by a selloff in paper gold rather than the physical gold: a parallel market.

Tocqueville Asset Management’s John Hathaway explains that the US centric based selling of gold paper translated to about 1 million contracts which exceeded global annual gold production by 12%—an anomaly. Well this for me smells like manipulation.

Since the selloffs, like press releases, suddenly media has synchronically been saying that central banks lost money from their reserves, which I point out in the case of the US government this has simply been untrue or disinformation, and that such selloff justifies more inflationism which has been expected of them

Yet following the price smash up, instead of prompting the public to eschew gold, the physical gold market continues to exhibit reaccelerated demand for gold worldwide.

From Bloomberg (bold mine)

Shoppers in China lined up for gold this week, while in Hong Kong they rushed to buy bracelets and in India sought jewelry for weddings not set until December. The metal’s biggest price drop in three decades provoked the clamor.

From Zaveri Bazaar in Mumbai, India’s largest bullion market, to Australia’s Perth Mint, where sales doubled from last week, consumers headed to shops after the commodity entered into a bear market last week. As gold plunged 13 percent in the two sessions through April 15, retail sales tripled across China on April 15-16, the China Gold Association reported.

The frenzy appeared in India and China, the biggest gold- consuming nations, with cultures that traditionally acquire the metal for brides, babies or strongboxes. This year’s 18 percent decline may reignite demand that last year fell for the first time in three years, with Asian investors in particular seeing the drop as a buying opportunity.

Note the term “frenzy”.

Now to the coin market

From the Wall Street Journal (bold mine)

Sales of gold and silver coins are soaring despite the sudden plunge in the price of precious metals, benefiting mints around the world and driving the cost of the collector items to well above the value of the metal they are made of.

Coins account for about a fifth of all gold purchases for investment and are often favored by retail investors because they are far cheaper than the larger bars bigger investors buy.

While traders dumped gold futures earlier this week on signs global inflation is easing and world economies are slowing, coin prices have been cushioned by high demand from gold enthusiasts who say coins hold their value over the long term.

The premium on gold coins has risen to about 5% more than the spot price of the metal, and compares with 3% at the start of the year, traders say. For silver, the premium has risen to as much as 18% from about 15% at the start of the year. Comparisons aren't precise because the coins generally contain small amounts of other metals to strengthen them, and there is typically a small premium because of manufacturing costs.

Again prices in the real world and financial paper gold reflects on a patent disconnect.

Yes central bankers have reportedly been divided too.

From another Bloomberg article:

The biggest drop in gold prices since 1983 has divided central banks on whether the metal is cheap enough to increase investment.

Sri Lanka’s central bank governor said falling prices are an opportunity for nations to raise gold reserves and that the island will “favorably” examine buying more. The Bank of Korea said the plunge isn’t a “big concern” because holding the metal is part of a long-term strategy for diversifying currency reserves. Reserve Bank of Australia’s assistant governor said bullion has no “intrinsic value.” South Africa’s central bank governor won’t adjust its reserves policy.

Central banks own about 19 percent of all gold ever mined, and last year boosted their holdings by the most since 1964, according to the London-based World Gold Council.

In the attempt to shut down alternative currencies, and by claiming that gold isn’t a safehaven, what politicians and the inflationists want to project is that we all have NO choice but to trust governments.

This means that we ought to or should unquestionably abdicate to governments a bigger part of our savings directly via outright confiscation or indirectly by inflation for the benefit of the political class and their cronies.

 

A famous politician once said, You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.

The pushback from the gold bear raid as seen in the physical gold market implies that the governments and their apologists cannot fool all the people all the time.

Updated to add: The Zero Hedge points out that the US Mint sold a record 63,500 ounces of gold in ONE day.

According to today's data from the US Mint, a record 63,500 ounces, or a whopping 2 tons, of gold were reported sold on April 17th alone, bringing the total sales for the month to a whopping 147,000 ounces or more than the previous two months combined with just half of the month gone.

Philippine Economy: Airline Liberalization Yields Greatest Number of Cheap Travel

Well this development is certainly a refreshing plus for the Philippine economy. 

The domestic airline industry’s liberalization has led to a boom in domestic tourism and has earned the Philippines plaudit as having the greatest number of cheapest air fare in the world.

From the Economist, (bold mine)

LOW-COST airlines like Ryanair and Southwest Airlines have swollen to formidable size in recent years by offering a very different approach to that of more traditional full-service airlines. With their single-class seating, range of ancillary charges and pared-down approach to all things aviation-related, these budget carriers have become a familiar, often bemoaned, feature of holidays and business trips around the globe. In British airports, for example, more than 50% of all passengers last year squeezed into seats on low-cost carriers. But Britain only comes seventh on a list ranking countries on that criterion. Figures released by Amadeus, a global travel distribution system, show that the Philippine aviation market has the greatest proportion of low-cost flyers. In that country of over 7,000 islands, 65% of all passengers used budget carriers last year. Cebu Pacific, the nation’s biggest low-cost operator, boasted over 46% of the domestic market. Among the smallest low-cost markets are Russia, Japan and China, where budget carriers accounted for just 5%, 4% and 1% of departures respectively. In China, the government keeps strict control of the airline industry and shields the three main state-controlled carriers (Air China, China Southern and China Eastern) from low-priced competition. Shanghai-based Spring Airlines, which launched in 2005, is the country's only low-cost carrier of any size.

Since the Philippine government has liberalized the airline industry in 1995, the entry of new players has prompted competition to drastically lower airfares which translated to a natural boom in the domestic tourism industry. Lowering the cost of airfare has allowed a greater number of people, across income and wealth strata, to enjoy the benefits of traveling.

Here is the current list of domestic commercial airlines from Wikipedia.org

Domestic tourism plays a big role in the tourism industry where spending share of local tourists accounts for 59.1% of the industry in 2011 as I earlier pointed out here.

Rather than blowing bubbles, real structural reforms on the local economy should be modeled after the Philippine airline industry.

As post-war free market reformist, former Chancellor of Germany Ludwig Erhard, popularly known to have ushered in "Wirtschaftswunder" or German for "economic miracle", wrote in his classic book Prosperity through Competition, page 1

Competition is the most promising means to achieve and to secure prosperity. It alone enables people in their role of consumer to gain from economic progress. It ensures that all advantages which result from higher productivity would eventually be enjoyed.

Indeed.

I Told You So: Gold Slump Used as Justification for MORE QE

I earlier mentioned that the deflation bogeyman from the recent gold-commodity panic will be used to justify more inflationism

Expect this selloff in gold-commodity sphere to increase risks towards a transition to a global crisis, and for central banks to engage in more aggressive inflationism.

Well media’s rationalization or the Fed’s implicit public conditioning strategy (signaling channel) through media to generate public support for more QE seems to have been initiated.

From Bloomberg: (bold mine)

The slump in gold may hand activist central bankers more reasons to pursue the easy monetary policy that helped drive up the metal’s price in the first place.

Among many explanations for the biggest drop in more than 30 years: a fourth annual global growth scare as data disappoint from China to the U.S. and investors fold long-held bets that monetary stimulus will ultimately unleash inflation. Other reasons for the drop range from a view that the price reached so-called technical levels to concerns that Cyprus could start a rush by indebted nations to sell their supplies of the metal.

The combination of growth jitters and reduced inflation anxiety boosts the case of Federal Reserve Chairman Ben S. Bernanke and counterparts elsewhere to keep pump-priming their economies in the hope they will finally secure traction. It also may help them beat back critics, including some U.S. Republican lawmakers.

From Wall Street Journal Blog (bold mine)

Tuesday’s inflation data reported by the Labor Department gives the Federal Reserve a new reason to keep its easy money policies in tact – inflation could be slowing.

The consumer price index was up 1.5% in March from a year earlier, the fourth time in five months that it has been below the Fed’s 2% inflation goal. The index for consumer prices excluding volatile food and energy was up 1.9% for the fourth time in five months. Readings like that are likely to get the attention of central bank officials.

The Fed has been debating when to begin winding down an $85 billion-per-month bond-buying program. The Fed has linked the bond buying to developments in the job market, saying it would gradually reduce the amount of the monthly purchases once the job market improves substantially.

No conspiracy?

Contra Media, US Government Gold Reserve Holdings Unscathed by Gold Plunge

Mainstream media attempts to downplay the “conspiracy” theory that the current plunge in gold prices may have been engineered.

So they allude to losses incurred by central banks in the wake of the selloffs 

From a Bloomberg article 

Central banks are among the biggest losers because they own 31,694.8 metric tons, or 19 percent of all the gold mined, according to the World Gold Council in London. After rallying for 12 straight years, the metal has tumbled 28 percent from its September 2011 record of $1,923.70 an ounce.

Central bank-got-hit meme looks like a press release.

Reuters has a chart suggesting the same

I don’t know about other central banks, but for the US government via the US FEDERAL RESERVE and the US Treasury, the recent slump has hardly impacted the dollar value of gold reserves because they are “valued” at 42.2222 per troy ounce.

This straight from the US Federal Reserve’s footnote on US Reserve Assets as of September 2012

Gold held "under earmark" at Federal Reserve Banks for foreign and international accounts is not included in the gold stock of the United States; see table 3.13, line 3. Gold stock is valued at $42.22 per fine troy ounce.    

And this from the US Treasury

The Status Report of U.S. Treasury-Owned Gold (Gold Report):

• Reflects gold bullion and gold coins owned by the federal government
• Summarizes the fine troy ounces and the book value of gold held by various facilities
• Identifies the value of gold coins and bullion on display at Federal Reserve banks; coins and bullion in reserve at the Federal Reserve Bank of New York; and gold held by U.S. Mint facilities

The book value of gold is currently $42.2222 per troy ounce. The information used to compile this reporting is received from the U.S. Mint, Federal Reserve banks, and FMS.

In effect, based on the US government's accounting treatment of gold reserves, media’s reporting can be seen as deceptive or misleading.

And that's even to assume yet that the official holdings of gold are intact, which is questionable. It would reportedly take SEVEN years for the FED to return the gold reserves of the Bundesbank. Why?

I am inclined to think that this quasi-crash may have provided the window for the Fed to load up gold to return to the Bundesbank. Talk about conspiracy.

This Time is Different: Fiscal Discipline Not Required

This time is different. Each time a literature or study proposes to show that government discipline is required to avert a crisis, some rejoinder will be issued to justify the opposite.

From Bloomberg,

A paper by Harvard University economists Carmen Reinhart and Kenneth Rogoff that has been cited by Republican lawmakers to justify eliminating the budget deficit contains “serious errors,” according to a study by a group of University of Massachusetts academics.

The Reinhart-Rogoff paper, “Growth in a Time of Debt,” argued that countries with public debt in excess of 90 percent of gross domestic product suffered measurably slower economic growth.

The new study -- by economists Thomas Herndon, Michael Ash and Robert Pollin -- says that the Harvard economists excluded some data and unconventionally weighted the statistics they included to reach their conclusions.

This led to “serious errors that inaccurately represent the relationship between public debt and growth,” Herndon, Ash and Pollin said in the paper published yesterday.

In an e-mail, Reinhart and Rogoff defended the conclusions of their 2010 paper and said that “on a cursory look” the new study also finds growth slowing in nations with excessive debt. “We literally just received this draft comment, and will review it in due course,” they said.

Ash said in a telephone interview that his paper does show “a modest diminishment of growth” in countries with big debts yet nothing like “the stagnation or decline” seen in the study by Reinhart and Rogoff.

Note: The kernel of the paper’s objection to Rogoff-Reinhart’s study: “modest diminishment” versus “stagnation”.

More of Reinhart-Rogoff response at the Wall Street Journal Blog, they rebut,

cumulative effects of small growth differences are potentially quite large. It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small.

Based on the Bloomberg article, the critique is an example of the silly quibbling over statistics while ignoring of the real human effects of a debt laden economy (mostly hobbled by higher taxes, financial repression, byzantine regulations and politicization of markets--all of which diminishes growth and whose economic losses will never be captured by data). 

While I am no big fan of Professors Reinhart and Rogoff, for what I see as their skewed views of capital flows and their advocacy of inflationism as means to reduce debt, at least they recognize of the hazards or of the perils of a leveraged economy from their chronicles of 8 centuries of crises.

As Carmen Reinhart and Kenneth Rogoff writes in their book This time is different Part I Financial Crisis: An Operational Primer (bold mine)

The essence of this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us here and now. We are doing things better, we are smarter, we have learned from our past mistakes. The old rules of valuation no longer apply. Unfortunately, a highly leveraged economy can unwittingly be sitting with its back at the edge of a financial cliff for many years before chance and circumstance provokes a crisis of confidence that pushes it off.

For the mainstream: This time is different. Yes, this is mania at its finest.

Video: Marc Faber: I love the fact that gold is finally breaking down

Quotes and video from ETFDaily News

On Gold’s decline in perspective

I love the markets. I love the fact that gold is finally breaking down. Because that will offer an excellent buying opportunity. I would just like to make one comment. At the moment, a lot of people are knocking gold down. But if we look at the records, we are now down 21% from the September 2011 high. Apple is down 39% from last year’s high. At the same time, the S&P is at about not even up 1% from the peak in October 2007. Over the same period of time, even after today’s correction gold is up 100%. The S&P is up 2% over the March 2000 high. Gold is up 442%. So I am happy we have a sell-off that will lead to a major low. It could be at $1400, it could be today at $1300, but I think that the bull market in gold is not completed.

Gold fundamentals intact, signs of deflation?

$1300. Nobody knows for sure but I think the fundamentals for gold are still intact. I would like to make one additional comment. Today we have commodities breaking down including gold. At the same time we have bonds rallying very strongly. If you stand aside and you look at these two events, it would suggest that they are strongly deflationary pressures in the system. If that was the case, I wouldn’t buy stocks or sovereign bonds because the stock market would be hit by disappointing profits if there was a deflationary environment.

Dr. Faber is referring to bursting bubbles via asset deflation.

What to do under deflationary (bubble bust) conditions

Yes, I agree. That’s why I said if the gold market collapse is saying something about deflation and at the same time we have this sharp rise in bond prices and the signals are correct that we have deflation, I wouldn’t buy stocks because in a deflationary environment, corporate profits will disappoint very badly.

Policies from Cuckoo People means we should expect sharp volatilities on any assets

Everything is possible…In the economy of the cuckoo people that populate central banks, everything is possible. What you have is gigantic bubbles, the NASDAQ in 2000, then the housing bubble and then commodities in 2008 when oil went from $78 to $147 before plunging to $32 within sixth months. That kind of volatility comes from expansionary monetary policies from money-printing.

On Gold’s short and long term view.

All I am saying as a trader I would probably enter the market quickly for a rebound of $20 or $40. From a longer term perspective, I would give it some time. We may go lower. I am not worried. I am happy gold is finally coming down, which will provide a very good entry point.

I say gold will register negative returns this year, but may recover from recent lows by the yearend.

 

On being nimble.

My argument is that you should always have in this kind of high volatility environment a fair amount of cash because opportunities will always arise again and again and if you have cash you can then buy assets at a reasonable price. I think Patience is very important in this environment. The question is, how do you hold your cash? Hopefully not with a Cyprus bank.

Like Dr. Faber, I am not worried about gold’s plunge, as we’ve seen this before. I am rather disturbed by how the selloff has been rationalized through disinformation by the mainstream. Global government's deepening thrust to confiscate people's savings directly (outright confiscation via bank deposits) or indirectly (inflation) will continue to provide gold with a safehaven appeal over time.

I am more worried about the growing risks of a global/regional crisis than of gold.