Wednesday, February 6, 2013

Zero Hedge on Japan: Why "This Time Won't Be Different"

From Zero Hedge post titled "Why "This Time Won't Be Different" For Japan In Two Charts" (2/6/2013; emphasis is mine):

...The problem is what happens once said rotation [from JBG to shares and equities] and begins?

Well, the clock begins ticking. Because with a debt load of some 230% of GDP, and with debt that is 2000% of government revenue, about five times more than the second highest (Greece), a simple doubling of average interest rates means half of all government revenues goes to pay interest. Double rates again, and it's game over for the funding side of the Japanese P&L statement, as all inbound cash will have to pay down interest, pushing Japan into the long-delayed hyperinflationary spiral.

And, by the way, none of the above is new! In fact, everything said previously has been well-known to every Japanese PM, and central banker for the past 30 years. It is also the reason why nobody has attempted the kind of ultimately suicidal move that Abe is now trying.

The good news is that it will ultimately be the bond market which puts an end to this latest bout of insanity before it is too late. Unless of course, we get bad news, which in Japan will means 2% inflation... then 12%... then 22%.... then 222% and so on.

By that point every central bank will be openly monetizing not only its own but everyone else's debt too, as the full 1930s rerun, which most certainly included full-blown currency war just before full-blown trade war erupted, unfolds.

And as everyone knows from history, both of the above metaphoric wars in the 1930s culminated with a different war. A real one.

Yup. Kyle Bass has also said as much and more.

Japan's Prime Minister pork-cutlet-curry Abe said in the National Diet session on February 7 that his pride and confidence were shattered to pieces when he had to resign in one year the last time around. I guess the now-confident Abe wants something that he can claim as his lasting legacy. Good or bad is not the point.

One of my Japanese twitter followers said Mr. Abe may be thinking that 2% annual inflation will be linear. Well, he's a poli-sci major. I'm guessing the rules of mathematics apply differently in politics.

The last time Japan's finance minister (Korekiyo Takahashi) inflated the hell out was right before the start of the second Sino-Japan war which was the effective start of World War II in the Far East.


Anonymous said...

It's a worldwide banking system. The US Federal Reserve supplies the money to all the world's bank since they have to, owning the reserve currency.

It is boiling down to who can assimilate the most debt without imploding first. And the reserve currency is based on debt, Japan owns some, China owns some, Euroland owns some, all the major banks do.

The balancing act is to keep competitive trading partners while the waiting game plays out, Countries try to devalue together to keep their currencies equal for trading hence the near zero % rates for cheap money.

If external trading fails then internal consumption is the name of the game ex. China is now great because they can consume their own goods where a few years ago they were great because they exported (what a circle jerk business commentary is).

Citizens can live comfortably with low or no growth rates, it is the banks that need inflation to survive otherwise known as a Ponzi scheme.

So far, world banks treading water with bond issues and relatively low rates of return or relying on new taxation to filter into their coffers. This stymies production, ruins incomes, leaves no future for the young businesses but governments can't afford to have businesses giving a better rate of return (dividends) than government's own bond issues or the jig is up and inflation begins in earnest with rising % rates.

Japan is going to suffer more like old Russia trying to bear the costs of nuclear cleanup and you know what happened to old Russia.

Anonymous said...

@12:54 Anon: could you elaborate on why banks would like inflation?
Thank you...

Anonymous said...

I am keen to read anon at 12:54.

Banks do not herd cash and lend to you. They lend money they don't own, it's the one from consumers.
If you borrow at a time of no i,flation, and then inflation spikes, you're cooked, as the service of your debt is indexed on inflation.
Banks like to cook : deals, books, consumers or partners.
You can hastily read : loan at 1% service , guaranteed by governement. Yes, but it is for one year only, and that's long term loans...

Anonymous said...

This current banking system (worldwide) is based on compounded interest..Banks can never have less money on the books, they always need more to cover compounding interest or deflation ensues and banks collapse.

Not only do banks like inflation but need it, continuously or they have to go begging for handouts (bailouts, bond purchases from governments, use phony accounting gimmicks, etc.) while waiting for an upturned economy.

When people hunker down for whatever reasons, no interest rate is low enough to entice them to take out loans ex, real estate/ Without new loans (new money to banks) no new interest can be collected or even shown on the books for the future.

Like I said it is a Ponzi scheme (i.e. compounding interest) that ends in deflation sometimes know as devaluation of currency, outright defaults, bankruptcies on countrywide scales (national).

Governments and banks pretend to set rates and dictate economies but in reality only follow the markets, as in, look at all the money pumping with no results. Consumer will go back to buying and spending when their confidence comes back. In the meantime banks struggle to stay alive as they are already insolvent. Banks are the walking dead.

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