The global economy is slipping. There can be no denying that fact.
There is less and less growth. Deflation is becoming an increasing threat. Indebtedness continues to rise.
It is like the game of musical chairs that we played as kids. Remember the feeling of anxiousness as a chair was removed? You knew that someone wasn’t going to make it, but you just prayed you would find a seat. And then when you somehow made it to the next round, the whole process just started all over again.
That is the situation that global policy makers face. The pie that that everyone is trying to divide up keeps getting smaller and smaller, all the while the debts keep piling up. And into this slow moving pressure cooker, the Bank of Japan just tapped out. They have thrown in the towel and gone “all in.” They have said they don’t want to play this game anymore – they are headed upstairs to start on the cheese plate.
The Bank of Japan is now completely monetizing the government’s annual deficit. Think about that for a second. The Japanese government, whose debt to GDP level is 200%, is continuing their massive deficit spending, but instead of borrowing in the open market, they are simply stuffing the bonds onto the Bank of Japan’s balance sheet.
And who can blame them? There is no good way out of this mess. Don’t ever kid yourself about that fact. There is no growing your way out of 200% debt to GDP levels.
Since you are never going to pay it back through growth, that leaves two options. The first is to default on it. But that is ugly process and almost no country has ever voluntarily pushed itself towards that option.
Which leaves the final and only real choice – inflate your way out.
You need to give the Japanese credit. They have realized that the world economy is slowing fast. There is less and less to go around, so getting out ahead of the process is a smart move.
While all the other Central Banks are busy arguing about the appropriate level of accommodation, the Bank of Japan has just said “f@#% it, I’m all in.”
But what about the other countries?
I actually applaud the Japanese decision because I think we are about to experience a period much like the 1930s where the countries that devalued later were the ones that experienced the greatest amount of real economic loss.
Now don’t get me wrong – I think the Japanese QE policy is a bold gambit that could very easily run amok. But where I differ from most other pundits is that I think the losses have already occurred. You might as well get to work inflating the debts away because delaying the process only increases the ultimate cost.
But the Japanese move has tightened the pressure on other Central Banks. Last night the South Korean Vice Finance Minster said that his government will manage the won to make it move in line with the weakening Japanese Yen. The Koreans have had a look at Japan’s attempt to pick up share and said “wait a minute – not so fast… We’re in too.”
The Koreans are going to have to print furiously to keep their currency in line with the Japanese Yen’s weakness.
And how long will China be able to sit idly by as their competitive advantage is whittled away? The Yen is also down a long way against the Chinese Renminbi.
The Chinese are trying to restructure their economy, but they too need growth. They might be able to withstand a year or two of subdued growth, but eventually they are going to have to turn on the monetary taps as well.
The Japanese policy has set in motion a series of events that will result in a series of competitive devaluations that will be accomplished through aggressive quantitative easing. The rest of the world will not sit idly by and allow the Japanese to hoist their deflation on everyone else.
The only question is the speed at which all the other countries react. Last night it was Korea. I expect more and more announcements like that. With eventually the big daddy of them all – China pushing down on the accelerator again.
Although investors are all giddy with excitement about the rising stock market, the macro risks are increasing exponentially. The Japanese are applying tremendous pressure on the rest of the world. One of my twitter guys summed it up best by paraphrasing Mark Zuckerberg:
He’s right. Something is going to break.