Indonesia’s Boom: Resource Based or Credit Bubble?

Indonesia’s economic boom has been driven by the resource industry. So declares this Bloomberg article:

The world’s fourth most-populous nation is seeing its economy reshaped as cities on islands including Sumatera and Borneo grow faster than Java, home to the nation’s capital, Jakarta. A transmigration program championed by former President Suharto in the 1980s, combined with China’s demand for palm oil, coal and iron from Indonesia’s rural provinces, helped outlying cities expand as much as 4 percentage points faster than the national average over the past decade.

As China’s expansion boosts incomes of miners and farmers in some of the sleepiest and most far-flung corners of Asia, companies from Unilever Plc (ULVR) to Toyota Motor Corp (7203). are flocking to Indonesia’s second-tier cities to tap their rising demand. At the same time, increasing urbanization raises pressure on President Susilo Bambang Yudhoyono to improve infrastructure and strains environmental resources…

The boom in second-tier cities has helped swell the middle class. Seven million Indonesians joined their ranks each year for the past seven years, according to a 2011 World Bank report. Private spending grew 5.4 percent in the fourth quarter of 2012 from a year earlier, and consumer confidence in March was 116.8, the eighth straight month the indicator exceeded 115. Pekanbaru, Pontianak, Karawang, Makassar and Balikpapan regions will lead growth, McKinsey says…

Government joins the spending boom…

As new shops and apartments spring up, the government is trying to keep up, spending more on roads and ports. President Yudhoyono plans to build 30 new industrial zones across the 17,000-island archipelago and to spend $125 billion on infrastructure by 2025, including $12 billion on 20,000 kilometers of roads, enough to go halfway round the world….

The conclusion…

The main driver behind the increasing wealth and power of the nation’s regional capitals is a decade-long boom in the nation’s resources. In the past 12 years, palm oil prices have more than tripled, even after a 34 percent drop in the past year. China-led demand has lifted coal, copper and gold as much as fourfold in a decade.

A very important lesson I’ve learned from the great proto Austrian Frederic Bastiat is to differentiate between the seen or the “immediate; it manifests itself simultaneously with its cause - it is seen” and the unseen or the “series of effects”. 

While it may be true that resources boom have on the surface contributed to the boom, what hasn’t been seen are the more important underlying factors that has led to a property boom in “second tiered cities”.

Like the Philippines the so-called boom in secondary cities are being driven by credit expansion (red arrow left pane, chart from the IMF).  

Importantly credit growth has been accelerating since 2011 (light blue ellipse) amidst the backdrop of zero bound or record low interest rates.

Indonesia’s loans to the private sector has ballooned by 50% since 2011 (tradingeconomics.com)

Such credit boom has not only been reflected on the property sector but also to Indonesia’s stock market

chart from tradingeconomics.com

Like the Phisix, the zooming JCI continues to establish fresh record highs.

Remember both property and stock markets are titles to capital goods which are main beneficiaries of typical credit bubbles

Indonesia’s money supply M2 has also swelled by 33% since 2011. (tradingeconomics). So booming credit has likewise been manifested on money supply.

Indonesia’s credit bubble has been putting pressure on producers prices. Also Indonesia’s government plans to raise minimum wages by 50% this year!

Although Indonesia has received accolades for previously imposing austerity as fiscal balance has markedly improved, the reality is that part of the improving government debt-to-gdp (23.1% in 2012) has been due to the cosmetics, or improvements on the denominator, provided by statistical growth fueled by Indonesia’s credit boom.

Indonesia’s fiscal balance remains modestly negative 

Nonetheless, credit fueled private consumption combined with government spending has now been manifesting on Indonesia’s trade and current account balance which has sharply deteriorated.

This means the Indonesian economy would have rely on foreigners to finance the boom which makes her vulnerable to "sudden stops".

So yes, while media paints Indonesia boom or may I say “illusion of success” on the resource trade, the reality is that such boom has been an embodiment of the business cycle in motion.

Yet that which is unsustainable won’t last. 

People hardly learn from history.

IMF to Central Bankers: Keep Blowing Bubbles

The IMF’s advice to central bankers is an example why we can expect central bankers to keep blowing asset bubbles. 

That’s of course until bubbles pop by their own weight, or until the stagflation menace emerges or a combo of both.

But stagflation has been absent based in the econometric papers of the IMF, that’s according to the Bloomberg:

Monetary stimulus deployed by advanced countries to spur growth is unlikely to stoke inflation as long as central banks remain free of outside influence to react to challenges, according to a study by the International Monetary Fund.

In a chapter of its World Economic Outlook released today, the Washington-based IMF said that inflation has become less responsive to swings in unemployment than in the past. Inflation expectations have also become less volatile, according to the report.

“As long as inflation expectations remain firmly anchored, fears about high inflation should not prevent monetary authorities from pursuing highly accommodative monetary policy,” IMF economists wrote in the chapter called “The dog that didn’t bark: Has inflation been muzzled or was it just sleeping?”

Considering the distinctive political-economic structure of each nations, such pursuit of bubble policies will translate to varying impacts on specific markets and economies. For instance, emerging markets are likely to be more vulnerable to price inflation.

And by simple redefinition and measurement of inflation as based on econometric models and statistics, the IMF has given the green light for central bankers do more.

This also means that the IMF has prescribed to central bankers to throw fuel on the inflation fire.

Based on mainstream’s twisted definition of inflation, such as being predicated on demand and supply “shocks”, hyperinflation ceases to exist. 

Interestingly too the IMF hardly see current policies as having “compromised” central bank independence.

Again from the same article:

The BOJ’s new policy “is something that we hope will lift inflation durably into positive territory, which would help the economy,” said Jorg Decressin, deputy director of the IMF’s research department. “We see in no way the operational independence of the BOJ compromised at all.”

This is a rather absurd claim. When central banks buy government debt, they effectively encroach into the realm of fiscal policies. 

Instead of voters determining the dimensions of fiscal policies via taxation, central bank financing of fiscal deficits motivates government profligacy that enhance systemic fragility through higher debts and the risks of price inflation (stagflation) or even hyperinflation.

As fund manager and professor John Hussman notes at HussmanFunds.com in 2010:

Historically, and across the world, the primary driver of inflation has always been expansion in unproductive government spending (think of Germany paying striking workers in the early 1920s, or the massive increase in Federal spending in the 1960s that resulted in large deficits and eventually inflation in the 1970s). But unproductive fiscal policies are long-run inflationary regardless of how they are financed, because they distort the tradeoff between growing government liabilities and scarce goods and services.

For instance, Japan’s government will increasingly become dependent on the Bank of Japan via Kuroda’s “shock and awe” Abenomics policies. This makes Japan vulnerable to a debt or a currency crisis.

And recent interventions on the fiscal space by central banks of developed economies essentially reveals of the closely intertwined relationship between governments and central banks. (charts above from Zero Hedge)

This only validates the hypothesis of the Austrian school of economics that the fundamental role played by the central banks has been to support the government (welfare-warfare state) and the cartelized crony banks, which essentially means that central bank independence is a myth.

As refresher let me quote anew the great dean of Austrian economics explained: (bold mine) [The Case against the Fed page 57]

The Central Bank has always had two major roles: (1) to help finance the government's deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm's advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks' inflationary expansion credit

Yet here is the IMF’s prescription for more bubble blowing, from the same article:

“The dog did not bark because the combination of anchored expectations and credible central banks has made inflation move much more slowly than caricatures from the 1970s might suggest - - inflation has been muzzled,” the IMF staff wrote. “And, provided central banks remain free to respond appropriately, the dog is likely to remain so.”

As I explained before, inflationism represents a political process employed by governments to meet political goals. Inflationism, which is an integral part of financial repression, signify the means (monetary) to an end (usually fiscal objectives). And when governments become entirely dependent on money printing from central banks, hyperinflations occur.

Just because money printing today has not posed as substantial risks to price inflation, this doesn’t mean such risks won’t ever occur.

And that the current low inflation environment basically implies "free lunch" for central banks.

Price controls, market manipulations (via central bank), the Fed’s Interest rate on reserves (IOR) and even productivity issues have also contributed significantly to subdue price inflation over interim.

And again since monetary inflation represents a process, such take time to unfold via different stages, which is why price inflation tend to occur with suddenness to become a significant threat.

IMF’s reckless advocacy of bubble policies will have nasty consequences for the world.

The IMF experts or bureaucrats, who are paid tax free and are tax consumers, hardly realize such blight will affect them too. 

The existence of the IMF depends on quotas or contributions from members which come from taxes. Such applies to other multilateral agencies such as the UN, OECD ADB or etc, which is why these institutions almost always campaign for more state interventions.

Yet should a crisis of a global dimension emerge, and where a chain of defaults by governments on their liabilities (such may include developed economies, BRICs, Asia and elsewhere), their privileges, if not their existence, will likewise be jeopardized, as governments retrench or have their respective budgets severely slashed or faced with real "austerity". 

Let me venture a guess, such scenarios haven’t been captured by the IMF's econometric models. 

When the late Margaret Thatcher warned that "the problem with socialism is that eventually you run out of other people's money [to spend]", this applies to multilateral institutions too.

Murray Rothbard on Margaret Thatcher and Thatcherism

UK’s former Prime Minister Margaret Thatcher  passed away at the age of 87, yesterday. She was known as the “Iron Lady”, which according to the Wikipedia had been due to “her uncompromising politics and leadership style”. 

Murray N. Rothbard, the great dean of the Austrian school of economics, wrote about the accomplishments or legacies of Ms Thatcher and "Thatcherism": (Chapter 63, The Exit of the Iron Lady Making Economic Sense)

Mrs. Thatcher's departure from British rule befitted her entire reign: blustering in rhetoric ("the Iron Lady will never quit") accompanied by very little concrete action (as the Iron Lady quickly departed).

Her rhetoric did bring free-market ideas back to respectability in Britain for the first time in a half-century, and it is certainly gratifying to see the estimable people at the Institute of Economic Affairs in London become Britain's most reputable think-tank. It is also largely to the credit of the Thatcher Era that the Labour Party has moved rightward, and largely abandoned its loony left-wing views, and that the British have decisively abandoned their post-Depression psychosis about unemployment rates ever being higher than 1%.

The Thatcher accomplishments, however, are a very different story, and very much of a mixed-bag. On the positive side, there was a considerable amount of denationalization and privatization, including the sale of public housing units to the tenants, thereby converting former Labour voters to staunchly Conservative property owners. Another of her successes was breaking the massive power of the British trade unions.

Unfortunately, the pluses of the Thatcher economic record are more than offset by the stark fact that the State ends the Thatcher era more of a parasitic burden on the British economy and society than it was when she took office. For example, she never dared touch the sacred cow of socialized medicine, the National Health Service. For that and many other reasons, British government spending and revenues are more generous than ever.

Furthermore, despite Mrs. Thatcher's lip-service to monetarism, her early successes against inflation have been reversed, and monetary expansion, inflation, government deficits, and accompanying unemployment are higher than ever. Mrs. Thatcher left office, after eleven years, in the midst of a disgraceful inflationary recession: with inflation at 11%, and unemployment at 9%. In short, Mrs. Thatcher's macroeconomic record was abysmal.

To top it off, her decisive blunder was the replacement of local property taxes by an equal tax per person (a "poll tax"). In England, in contrast to the United States, the central government has control over the local governments, many of which are ruled by wild-spending left Labourites. The equal tax was designed to curb the free-spending local governments.

Instead, what should have been predictable happened. The local governments generally increased their spending and taxes, the higher equal tax biting fiercely upon the poor and middle-class, and then effectively placed the blame for the higher taxes upon the Thatcher regime. Moreover, in all this maneuvering, the Thatcherites forgot that the great point about an equal tax is precisely that taxes have to be drastically lowered so that the poorest can pay them; to raise equal tax rates above the old property tax, or to allow them to be raised, is a species of economic and political insanity, and Mrs. Thatcher reaped the proper punishment for egregious error.

Read the rest here

Ms. Thatcher, R.I.P.

Parallel Universe in Gold: More US States Push for Gold as Money

Even amidst aggressive inflationism from central bankers and from predatory confiscation of people’s savings, prices of gold has staggered.

Priced in major currencies (USD, EUR, GBP) except Japan’s yen, gold has substantially softened since mid 2011 (Gold.org)

Technically speaking, languid gold prices has been mostly due to a selloff in paper gold and through short sales. (chart from Danske Research)

In an interview with the South China Post, George Soros attributes falling gold prices to deleveraging in the Eurozone:

But when the euro was close to collapsing in the last year, actually gold went down, because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else

This implies that gold has not been deflationary hedge.

Nonetheless Mr. Soros partly acknowledges of the parallel universe that exists in the pricing of gold:

Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down. If you have the prospect of a crisis, you will have occasional flurries or jumps. So gold is very volatile on a day-to-day basis, no trend on a longer-term basis.

Gold really has not lost its safe haven status, the role of currency safe haven may have partly been assumed by bitcoin.

But the bear raid on paper gold could have been orchestrated to influence “inflation expectations”. Gold plays a vital role in the commodity sphere, signifying a key benchmark on commodity ETFs, from the Mineweb last March:

The exodus from gold pulled down the entire commodities ETP complex, global data from BlackRock showed, as the gold segment accounts for some 70 percent of total commodity ETP investments.

Some $5.1 billion left commodities ETPs as inflows to industrial metals and broad basket commodity ETPs failed to offset the gold meltdown.

In other words, by suppressing gold prices, the general commodity sphere will likewise follow.

 

Also my personal view that gold’s has been undergoing a normal reprieve (profit taking-shake out phase) considering TWELVE consecutive years of advances.Markets hardly ever move in a straight line.

Yet aside from record central bank buying buying of physical gold as noted by Mr. Soros, gold coin sales has just been slightly off the record highs, while silver coins remains on record breaking path,

The more significant part of the growing parallel universe in gold dynamics is that about a dozen US states appear to be in the process of legislating gold as money.

From Bloomberg

Distrust of the Federal Reserve and concern that U.S. dollars may become worthless are fueling a push in more than a dozen states to recognize gold and silver coins as legal tender.

Arizona is poised to follow Utah, which authorized bullion for currency in 2011. Similar bills are advancing in Kansas, South Carolina and other states.

The measures backed by the limited-government Tea Party movement are mostly symbolic -- you still can’t pay for groceries with gold in Utah. They reflect lingering dollar concerns, amplified by the Fed’s unconventional moves in recent years to stabilize the economy, said Loren Gatch, who teaches politics at the University of Central Oklahoma.

If gold’s role as money will continue to get political recognition, then eventually this will reflect on prices, in spite of Central bank-Wall Street’s stealth suppression schemes.

ADB: Asia Faces Risk of Asset Bubbles from Capital Flows

Here is what I wrote last weekend

Unless external shocks—possibly such as the potential deterioration of geopolitical US-North Korea standoff into a full-scale military engagement—any slowdown for the Phisix will likely be limited and shallow, as the manic phase or the credit fuelled yield chasing process induced by domestic policies (artificially low interest rates and policy rates on special deposit accounts) will likely be compounded by capital flight from developed nations as Japan.

It seems that the ADB has partly picked up on my concerns.

From the Bloomberg,

Developing Asia’s growth recovery faces the risk of asset bubbles from rising capital inflows, the Asian Development Bank said…

Officials from South Korea to the Philippines have taken action, or are studying measures, to counter the inflow of capital to the region amid policy easing by some developed economies. The Bank of Japan said on April 4 it would double the monetary base by the end of 2014 in the nation’s biggest-ever round of asset purchases, joining the Federal Reserve and the European Central Bank in boosting stimulus to support growth.

“Advanced economies will likely continue their accommodative monetary stance, and authorities in developing Asia must safeguard the soundness of the finance sector to avoid the emergence of disruptive asset bubbles,” the ADB said. “Robust growth has largely eliminated slack productive capacity in many regional economies such that loose monetary policy risks reigniting inflation.”

As I pointed out, all bubbles are of domestic origin.

Capital flows or what truly has been about “capital flight” or of people’s attempt to protect their savings via foreign currency arbitrages from domestic inflationism and other financial repression measures only aggravates such conditions. They don’t cause them.

Political authorities have only made capital flows or "foreign/exogenous factors" a convenient scapegoat, or a misleading justification to the unwitting public, the expansion of government’s control or financial repression of the economy. Such will be channeled through the immoral assault on private property via capital or currency controls which is a path towards totalitarianism.

While I am pleased that the ADB has partly seen reality, they remain in steep denial over the real causes.

 

Nonetheless for as long as price inflation remains subdued, and for as long as government’s monetary policies remain tilted towards perpetuating permanent quasi booms, asset bubbles will keep inflating…until they fall under their own weight. I don’t think we have reached this critical inflection point yet.

War on Savings: Australia Doubles Retirement Taxes

Crisis or no crisis, Cyprus may have set a trend for governments to seek ways to tax private sector savings. 

Australia has reportedly doubled taxes on retirement savings.

Here is the eloquent Simon Black of the Sovereign Man

Though Australia’s national balance sheet is comparatively quite strong, the government has been running at a net deficit for years… and they’re under intense pressure to balance the budget.

The good news is that Australia now has a goodly number of investor-friendly immigration programs designed to bring productive foreigners into the country, similar to the trend we’re seeing across Europe.

On the flip side, though, the Australian government has just announced new rules which penalize citizens who have responsibly set aside savings for their own retirement.

Any income over A$100,000 drawn from a superannuation fund (the equivalent of an IRA in the United States) will now be taxed at 15%. Previously, all such income was tax-free.

The really offensive part about this is that the government is going to tax people’s savings ‘on both ends,’ meaning that people are taxed on money they move INTO the retirement fund, and now they can be taxed again when they pull money out.

The Cyprus debacle drew a line in the sand– fleecing people with assets, or income, in excess of 100,000 dollars, euros, etc. is now acceptable. This is the definition of ‘rich’ in the sole discretion of governments.

And make no mistake– if it can happen in Australia, which still has reasonable debt levels despite years of deficit spending, it can happen in bankrupt, insolvent nations like the US.

We can see from the following charts why.

The Australian government has embarked on a spending spree since 2009. Australia’s fiscal balance has been deteriorating since.

This shows of the Emmanuel Rahm syndrome or Austrian economist Robert Higgs’ ratchet effect where crises have always been an excuse to justify government expansion.

And by doing so Australia’s government has been ramping up debt. External debt grew by about 30% since 2009, while debt to gdp has began to reverse from years of austerity or fiscal “discipline”. 

And as I have earlier pointed out, Australia has also been manifesting signs of bubbles

Australia’s credit to the private sector as % to gdp is now about 128%

 

While the banking sectors exposure account for 145.76% of the gdp in 2011.

And like almost every country, low interest rates have been a principal factor in driving credit expansion

Despite the above, Australia’s stock market has hardly recovered from the 2008 global financial debacle. (all the wonderful charts above are from tradingeconomics.com)

This means much of the credit expansion has been directed to the property sector, as measured by the phenomenal manic growth of housing prices (chart from vexnews). 

This proves that much of today's statistical economic growth have been Potemkin Villages

Yet once the global pandemic of bubbles pop, we can expect governments coordinate the dragooning of the public’s resources via more confiscation of savings to advance the interests of the political class via bailouts and more quack Keynesian fixes.

Of course this relationship will persist until people tolerate them. However, eventually the curse of the laffer curve will prevail or a financial repression (tax) revolt can also be an expected response.

Portugal Considers Using T-Bills to Pay Public Workers and Pensioners

Crisis stricken governments have been finding ways to skirt requirements for them to scale down on their bloated bureaucracies. 

Rumors have circulated that the Portuguese government have contemplated on paying public workers and pensioners in Treasury bills.

From the Wall Street Journal,

In his televised statement, Mr. Passos Coelho said the government would try to revise its budget plan through new spending cuts rather than new tax increases. A person close to the government said it had mulled the idea of paying public employees and pensioners one month of their income in Treasury bills, forcing them, in effect, to lend the Treasury the money the court said it couldn't cut from their paychecks. A government spokeswoman denied that the idea was being considered.

Since the Portuguese government can’t print money as they operate under the ambit of the euro which is managed by the ECB and Eurosystem (central banks of the Eurozone), then they will simply “print” debt papers.

Debt papers will possibly attain traits of “moneyness” or exchangeability. Since T-bills will be used by public employees and pensioners for exchange of goods and services.

One thing leads to another. “One month” of income may become a slippery slope towards perpetuity. This means debt papers may eventually substitute the euro (Gresham’s law).

More debt leads to higher taxes which will pose as a hindrance to productive commercial enterprises.

More sovereign debt issuance can be used as collateral by the Portuguese government to secure loans from the ECB, or that debt may be monetized by the ECB. So the Portuguese government will likely be incentivized to print more debt papers.

With debt papers used as money, this amplifies inflation risks.

More debt also means Portugal will remain stuck in her debt crisis.

And if and when Portugal defaults, then public workers and pensioners and all those other sovereign debt holders will become the “greater fools” (greater fool theory).

Global Equity Markets: Signs of Distribution and Japan’s Capital Flight

Global equity markets appear to showing signs of exhaustion.

Possible Signs of Distribution?

This week’s pronounced weakness (top window) in major equity benchmarks has essentially pared down year-to-date gains (lower window).

Even US markets, which has been under the US Federal Reserve’s $85 billion a month steroids since September 2012[1], appear to be exhibiting signs of divergence. 

While the Dow Jones Industrial Averages (INDU) posted only a marginal decline (-.09%) this week, there seems to be a broadening of losses seen across many important indices.

The S&P 500 fell 1.01%, the small cap Russell 2000 ($RUT) plunged 2.97%, the Dow Transports ($TRAN) plummeted 3.5% while 10 year US treasuries rallied, as yields fell. Yields of the 10 year US government bonds broke down from its recent uptrend.

The weakness in global equity markets have likewise been reflected on the commodity markets (upper window[2]). Stock market benchmarks of major commodity producers such as Brazil (EWZ) Canada (EWC) and Russia (RSX) have wobbled along with struggling commodity prices (top window[3]).

Such narrowing of gains and the broadening of losses can be seen as signs of distribution. They may indicate interim weakness.

So far, most of the ASEAN majors have remained resilient.

Except for Thailand, declines in the Philippine Phisix (-1.76%) and Indonesia’s JCE (-.3%) has been modest relative to their emerging market peers. Year-to-date, returns on the Phisix and the JCE remains at double digits, particularly 15.73% and 14.12% respectively.

Thailand’s SET has been hounded by sharp volatility following the assault on stock market investors by Thai authorities through the tightening of collateral requirements on credit margins. Even with this week’s 4.58% loss in Thailand’s SET, the Thai benchmark remains up 7% year to date.

Meanwhile the region’s laggard, the Malaysian KLSE has almost erased her annual losses with this week’s 1% weekly advance. The Prime Minister of Malaysia dissolved the parliament last April 3[4], which means that a general election will be held soon or no later than June 27 2013[5]. While politics may temporarily influence Malaysia’s markets, it will be the bubble cycle which will remain as the key driver.

The jury is out whether the diffusion of losses in global equity-commodity markets will persist and if these will begin to impact on ASEAN majors and or if developments in Thailand will also have an influence on the region’s performance.

Thailand’s equity markets will have to undergo the process of resolving the psychological conflict inflicted by Thai’s authorities.

As I wrote a few weeks back[6],

Market participants will then assess if SET officials will continue to foist uncertainty through more ‘tightening’ interventions, or if the authorities will allow markets to function. If the former, then Thai’s equity markets would have more downside bias going forward. If the latter, then Thai’s mania may catch a second wind.

If Thailand’s authorities will continue to intervene and prevent the mania phase from taking hold in the stock markets, then sentiment will only shift to the more fragmented, more loosely controlled and localized property markets

Capital Flight Will Help Inflate Asset Bubbles

The recent weakness in US equities may have been a function of 1^st quarter diminishment of US money supply aggregate M2[7] (red ellipse left window). Actions of the US equity markets have been tightly linked to, or rather, caused by the Fed’s monetary expansion[8]. The recent reacceleration of M2 may suggest that any weakness may be temporary.

In addition, the inaugural action of newly installed chief of the Bank of Japan (BoJ) Haruhiko Kuroda has been to advance Prime Minister Shinzo Abe’s aggressive “Abenomics” policies. Mr. Kuroda’s mimics his European counterpart, Mario Draghi, to “do whatever it takes” to allegedly stop deflation for Japan.

Mr. Kuroda’s “shock and awe” opening salvo will be channeled through a grand experiment of doubling of the monetary base in 2 years[9] by aggressive asset purchases by the Bank of Japan mostly through bonds[10]. Such aggressive policy is likely to stoke a massive yen carry trade, or a euphemism for capital flight.

The initial impact of a vastly lower yen has been an asset boom; surging stock markets (The Nikkei was up 3.51% for the week, 23.46% for the year), and soaring bonds.

Rising bonds or lower yields or interest rates will induce more borrowing for the Japanese government. This will in the near term, fuel more asset bubbles.

However rapid diminution of the yen (-3.51% w-o-w, 11.11% y-t-d) will also mean that aside from asset bubbles, resident Japanese will likely seek shelter through foreign currencies in order to preserve their savings, thus, such policies entails greater risks of capital flight.

So instead of promoting investments and economic competitiveness, currency devaluation will lead to distortions in economic calculation, increased uncertainty, lesser investments and a lower standard of living.

I have been anticipating this move from the BoJ. A year ago, I said that ASEAN and the Philippines will likely become beneficiaries of BoJ’s inflationism[11]

The foremost reason why many Japanese may invest in the Philippines under the cover of “the least problematic” technically represents euphemism for capital fleeing Japan because of devaluation policies—capital flight!

Capital flight will be masqueraded with technical terminologies of portfolio flows and Foreign Direct Investments (FDIs)

Now even the billionaire trader-investor George Soros shares my view. In a recent TV interview, the Bloomberg quotes Mr. Soros warning of a potential stampede out of the yen[12],

“What Japan is doing is actually quite dangerous because they’re doing it after 25 years of just simply accumulating deficits and not getting the economy going,” Soros said in an interview with CNBC in Hong Kong today. “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche.”

And it appears that incipient signs of ‘capital flight’ may have emerged.

The perspicacious analyst and fund manager Doug Noland writing at the Credit Bubble Bulletin may have spotted what seems as incipient adverse reactions from the yen’s devaluation[13].

And Japan’s move to follow the Fed down the path of 24/7 monetary inflation is a key facet of the “global government finance Bubble” more generally. Japanese institutions were said to be major buyers of European bonds this week. French 10-year yields dropped 24 bps Thursday and Friday to a record low 1.75%. French yields were down about 50 bps in five weeks. Spain’s 10-year yields were down 32 bps points this week to 4.73%, and Italian yields sank 39 bps to 4.37%. Ten-year Treasury yields were down 12 bps in two sessions to end the week 14 bps lower at 1.71%. No Bubble?

One has to realize that every crises dynamics begins from the periphery to the core. If the Japan’s capital flight dynamics will intensify overtime, then a debt or currency crisis will befall on Japan, sooner rather than later. Such a crisis will slam the region hard.

And if the account where Japanese institutions have been major buyers of Euro bonds have indeed been accurate, then this would seem like the proverbial jump from the frying pan into the fire…a sign of desperation.

Seeking refuge via euro debts represents a dicey proposition.

I recently showed how the Spanish government has essentially employed Ponzi finance to survive their welfare state[14]. Aside from raiding of pension accounts, which signifies as a key source of the people’s savings, profits from trading arbitrages by the Spain’s government have become a key source of funding welfare obligations. Thus, central bank policies are likely to concentrate on propping up asset prices in order to sustain these political objectives or risks bankrupting the welfare state.

And any sign of trouble that would undermine asset markets will prompt for central banks to intervene.

The extended economic stagnation or recessions in the Eurozone as evidenced by record high unemployment[15] has prompted the markets to speculate that ECB’s Mario Draghi may consider further lowering of interest rates[16].

The growing desperation by governments to seize private sector savings directly—via unsecured deposits in Cyprus[17]—or indirectly—via Kuroda’s ‘Abenomics’ or aggressive inflationism extrapolates that faith on the current fiat based money and banking system will erode overtime.

Financial repression will only hasten the structural economic entropy borne out of the incumbent political system.

The Japanese government has been using the same Keynesian snake oil over and over again and yet has been expecting different results.

They aggressively cut interest rates between 1991-1995 and pursued zero bound rates ever since. They implemented 10 fiscal stimulus packages costing more than 100 trillion yen in taxpayer money, none of which have lifted Japan’s economy from the rut. Japan’s government switched to quantitative easing in 2001.

In August 2008, Japan’s government made another 11.5 trillion in stimulus, which consisted nearly of 1.8 trillion of spending and 10 trillion of loans and credit guarantees. In 2009 the BoJ embarked on new asset purchase program covering corporate bonds, commercial paper, exchange-traded funds (ETFs), and real estate investment trusts (REITs). From December 2008 through August 2011, the BoJ’s 134.8 trillion yen purchases of government and corporate securities failed to impact “inflation expectations” according to an IMF paper authored by Raphael Lam.

And thus, according to former Mises Institute President and now Senior Editor of Laissez Faire Books[18],

For more than two decades, the Japanese central bank and government have emptied the Keynesian tool chest looking for anything that would slay the deflation dragon. Reading the hysterics of the financial press and Japanese central bankers, one would think prices are plunging. Or that borrowers cannot repay loans and the economy is not just at a standstill, but in a tailspin. Tokyo must be one big soup line.

So what the mainstream reads as a coming miracle will lead to the opposite.

Yet the pressing problem for the marketplace today is that all these cumulative disruptive actions will translate to distressing intensification of market volatilities that will be manifested through capital flight and through yield chasing dynamics.

While price inflation has substantially been offset by productive activities of globalization and innovation, boom bust cycles will reduce productivity, increase systemic fragility to crises and promote social upheaval through revolutions or wars. In addition loss of productivity means greater sensitivity to price inflation.

Exploding prices of the “virtual or digital currency”, the bitcoin looks like a testament to the growing capital flight-yield chasing phenomenon at work[19].

Yet more predatory financial repression policies will mean more capital flight and yield chasing.

Unless external shocks—possibly such as the potential deterioration of geopolitical US-North Korea standoff into a full-scale military engagement—any slowdown for the Phisix will likely be limited and shallow, as the manic phase or the credit fuelled yield chasing process induced by domestic policies (artificially low interest rates and policy rates on special deposit accounts[20]) will likely be compounded by capital flight from developed nations as Japan. 

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[1] US Federal Reserve Press Release September 13, 2012

[2] Danske Bank Weekly Focus ECB to dig further in the toolbox, April 5, 2013

[3] John Murphy Weak Commodities Hurt Producers stockcharts.com Blog April 6, 2013

[4] Guardian.co.uk Malaysia heads for general election April 3, 2013

[5] Wikipedia.org Malaysian general election, 2013

[6] See Thailand’s Officials Flexes Muscles on Domestic Stock Market Bubbles March 25, 2013

[7] St. Louis Federal Reserve U.S. Financial Data M2

[8] Center for Financial Stability FED POLICY DRIVES EQUITIES: CFS MONEY SUPPLY STATISTICS March 20, 2013

[9] See Video: Kyle Bass on Kuroda’s Doubling of Monetary Base; Japan’s Debt Trap, April 5, 2013

[10] See BoJ’s Kuroda’s Opening Salvo: 7 trillion yen ($74 billion) of Bond Purchases a Month April 4, 2013

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

[12] Bloomberg.com Japan’s New Stimulus May Trigger Yen Avalanche, Soros Says April 5, 2013

[13] Doug Noland Kuroda Leapfrogs Bernanke Credit Bubble Bulletin April 5, PrudentBear.com

[14] See Spanish Government’s Ponzi Financing Scheme April 5, 2013

[15] Bloomberg.com Euro-Area Unemployment Rises to Record 12% Amid Slump April 2, 2013

[16] Wall Street Journal Europe's Banker Hints at Rate Cuts

[17] See Cyprus: The Mouse that Roared March 25, 2013

[18] Douglas French Japan’s Bold Move of Nothing April 6, 2013 Laissez Faire Club

[19] Bitcoin charts

[20] See Phisix and the BSP: This Time is Different? March 17, 2013