Don’t Bet on Deflation Lasting Forever

Imagine the poor economist without a sense of humour…

How he must suffer!

This week was to be dominated by central banks. Two big ones — the Bank of Japan (BoJ) and the Fed — were to make important policy announcements.

The speculators placed their bets, front-running the news, and sat on the edge of their chairs.

More mumbo-jumbo

This morning, the BoJ came out with more mumbo-jumbo.

Yield curve control’, it promised.

The central bank says it will target a 0% yield on 10-year Japanese government bonds.

It added that it would continue buying the nation’s stocks (by way of exchange-traded funds) and charging a negative interest rate of 0.1% on the accounts banks keep with it.

Japan’s stock market crashed in 1989. Since then, the no-luck Japanese have had sluggish growth, recession, and on-again/off-again deflation.

For more than a quarter-century, the gears of Japan, Inc. have turned slowly. And not for lack of trying.

The government spent hundreds of trillions of yen on ‘infrastructure’ projects in an attempt to ‘jump-start’ the economy with fiscal stimulus.

At one point, they were pouring more concrete — on roads, bridges, dams, and other public works — than the entire US.

Critics charged that so much cement was used — channelling rivers in the countryside and building ugly bridges to nowhere — that it amounted to the largest vandalisation program in history.

The Japanese feds tried monetary policy, too.

ZIRP (zero-interest-rate policy) began in Tokyo. They invented QE (quantitative easing) too; it was supposed to get more ‘liquidity’ into the system and boost stock and bond returns.

And yet, nothing seemed to work.

From Tokyo to Harare

But rather than admit its manipulations have done no good — rather than raise a white flag…back off…and let the market sort itself out — Japanese authorities march on with more claptrap announcements, more pigheaded interventions, and more of the nation’s real wealth squandered on dumbbell projects.

Like soldiers of the Imperial Japanese Army abandoned on a remote atoll in 1945, they continue to fight a lost war.

The Japanese government already has the highest debt load in the world, at 230% of GDP.

Now that the older Japanese in retirement are selling their Japanese government bonds rather than buying them, the central bank funds the entire government deficit.

And the BoJ buys so many stocks and bonds, hustlers are said to be creating new investments just so the naïve geniuses can buy them.

Today’s announcement tells us that the central bank will buy more government debt, adding to its pile — already about one-third of all outstanding Japanese government debt.

This is what Zimbabwe and Argentina did. It is a classic way to ruin an economy, by ‘monetising’ debt.

It amounts to paying government expenses with newly invented money.

Eventually, the extra money leads to consumer price inflation.

Rude shock

Consumer price increases are what the BoJ is aiming for.

It has even developed an Orwellian lie to describe its main policy goal. It says it wants ‘price stability of 2%’.

No kidding. It describes 2% annual inflation as ‘stability’. Maybe it’s a translation problem.

But just as the authorities have been unable to lure price increases up to their quacky 2% level…so they will be unable to keep them there once they arrive.

Instead, inflation will keep right on going. The authorities, who built an economy where companies, households and the government can barely survive at zero interest rates, will be unable to bring it under control.

Then retirees will get a rude shock. They put their savings into government bonds yielding almost nothing. They’ll find out what they’re worth when consumer price inflation is running at 3% or 5% or 10%. (ZILCH is the answer.)

And then, the whole illusion that the authorities know what they are doing will give way to the reality that they are no better than witchdoctors, fortune-tellers, or presidential candidates.

Meanwhile, today is a big day for the Fed, too…

Again, speculators sit on the edge of their seats, awaiting the latest gibberish.

Will the Fed tell us that, since the economy is strengthening, the time has come for another 25-basis-point increase (effectively, nada)?

Or will it say that it will remain watchful…‘data dependent’…like a sentry at a volcano ready to throw a maiden over the edge if the rumblings increase?

We don’t know. But we are on the alert…ready to laugh when the news comes out.


Bill Bonner,
For Markets and Money, Australia

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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