When Bad Debts Attack
By Adrian Ash
July 15, 2007
Just how hard is it to beat
deflation that horror of falling wages and prices...?
BEN BERNANKE has his helicopter ready. John
Maynard Keynes proposed burying old bottles in coal mines.
And the Japanese government how can the
Ministry of Finance in Tokyo dish out enough free money to put
an end to deflation, that horror of falling prices and wages?
"Envelopes containing ₯10,000 bills ($82) and
well-wishing notes have been discovered in municipal toilets
across Japan," reports the Associated Press, "baffling
civil servants and triggering a nationwide hunt."
Curious, don't you think? The anonymous well-wisher
has left money in men's rooms in 15 prefectures in the last
month. Each package of cash comes with a handwritten note:
"Please make use of this money for your
self-enrichment."
After studying the handwriting, the authorities are
seeking an elderly gentleman or men and do we really need
any more proof that this free money comes as a gift from the
Ministry of Finance (MoF)?
After a decade of falling incomes, such desperate
remedies might just start to appeal to any government. As crazy
reflation schemes go, it's no more bizarre than throwing
freshly-printed Dollars out of a chopper or burying old bottles
stuffed full of cash in disused mine shafts.
What's more, all the Japanese "drops"
have so far been made in government buildings. But what a pity
this scheme hasn't worked; according to a report in Le
Figaro, all the free cash has been handed straight to the
police! But that's the trouble with a genuine currency slump.
You can't even give money away when the whole country is bent on
destroying its value.
The Ministry of Finance in Tokyo printed and spent
$400 billion selling the Yen between 2000 and 2004. Since it
gave up, the entire Nippon nation has begun selling the Yen on
margin. Forex account balances in Japan have risen by nearly
two-thirds from last summer to total ₯613 billion today
nearly $5 billion. "Leveraging typically makes their
positions 10 to 30 times larger," says the Financial
Times, and what the MoF struggled to achieve with $400
billion of short sales, private investors are now doing with a
quick click of a mouse.
Total Yen sales by private individuals in Japan
outweighed the volume of professional betting against the Yen
recorded at the Chicago Mercantile Exchange by the end of last
month.
Mr. and Mrs.Watanabe's profits from selling the Yen might just
be a taste of the short-sale gains yet to come or so
everyone thinks. And whether you're game to join in the world's
biggest ever "one-way bet" or not, the Yen's ongoing
decline at least shows just how debased ALL currencies
have become over the last three and a half decades.
The collapse in Japan's interest rates only served
to put a ceiling at ₯84 per Dollar. Fresh out of interest-rate
fire-power by the end of 2001, the Bank of Japan then had to
actively sell Yen to cap its currency at ₯102 per Dollar in
late 2004.
Put another way, destroying the Yen by destroying its yield
proved mighty tough with Bernanke and Greenspan in charge at the
Fed. And with $686bn in excess foreign currency reserves now
stacked up today, perhaps the only route left to beating Japan's
ten-year deflation really is to leave banknotes in rest rooms
and advise the finders to "seek self-enrichment"
with gearing.
"If the Treasury were to fill old bottles with
banknotes," wrote John Maynard Keynes the brains behind
the Bretton Woods exchange-rate system "[and then] bury
them at suitable depths in disused coal mines which are then
filled up to the surface with town rubbish, and leave it to
private enterprise on well-tried principles of laissez-faire to
dig the notes up again (the right to do so being obtained, of
course by tendering for leases of the note-bearing territory),
there need be no more unemployment and with the help of the
repercussions, the real income of the community, and its capital
wealth also, would probably become a good deal greater than it
actually is."
Was Keynes joking? No more than Ben Bernanke in his
famous speech entitled Deflation: Making Sure "It"
Doesn't Happen Here. Speaking as the Tech Stock Crash
leached into consumer spending in late 2002, the current Fed
chairman tipped his hat to Milton Friedman's idea of "money
dropped from a helicopter" to stimulate an ailing economy.
Bernanke's speech bears revisiting now that US
retail sales are tanking once more driven this time by the
collapse in home sales and prices. He went on:
"Like gold, US Dollars have value only to the
extent that they are strictly limited in supply. But the US
government has a technology, called a printing press (or, today,
its electronic equivalent), that allows it to produce as many US
Dollars as it wishes at essentially no cost. By increasing the
number of US Dollars in circulation, or even by credibly
threatening to do so, the US government can also reduce the
value of a Dollar in terms of goods and services, which is
equivalent to raising the prices in Dollars of those goods and
services.
"We conclude that, under a paper-money system,
a determined government can always generate higher spending and
hence positive inflation."
Neither Friedman nor Keynes got to put their
reflationary plans into action, of course. To date, Japan has
failed with its make-work programs and free money gifts, too.
But Bernanke sat at Alan Greenspan's right hand while the Fed
Funds rate was slashed from 6.0% to 1.75% in 2001 and then
cut again to an "emergency" rate of 1.0% by June 2003.
The Nasdaq turned higher...home prices soared...and
despite seventeen hikes in the official cost of Dollars since
then, there's also been a surge in that "quantitative
easing" known as trading on margin. According to the latest
NYSE data, margin debt "a broad measure of
leverage" as the Wall Street Journal puts it jumped 11%
to $353 billion in May, up from below $318 billion in April. And
this is BEFORE the US slips into recession, and lenders
stop lending for fear of bad debts.
Just how much speculation will the Great American
public indulge in when rates slide again and we're all urged to
hold hands and gear up in the markets? Difference is, the
Japanese Yen began its slide from near all-time record highs.
The Dollar, in contrast, has already sunk to a near-three decade
low on its Trade-Weighted Index.
"The arrival of Japanese households as major
investors seems to have affected foreign-exchange markets,"
said Bank of Tokyo board-member Kiyohiko Nishimura during a
speech in Washington earlier this month. "The gnomes of
Zurich were accused in their day of destabilizing markets. The
housewives of Tokyo are apparently acting to stabilize
them."
Nishimura-san might just be right if by
stabilize he means "destroy the Yen's purchasing
power." Which he does. Deflation in the classical sense
defines a shrinking supply of money; on the ground it means
falling asset prices, lower wages, and the loss of all pricing
power for business and industry.
Make the currency worth less, therefore, and
deflation is cured. Make it utterly worthless, however, and the
trouble will have only just started.
Priced against gold, there could be a whole heap of
ruin left in the Japanese Yen. Indeed, the greatest achievement
of Japan's near-zero interest rates so far has been a bull
market in gold for retail investors sick of earning
next-to-nothing on their cash.
In the economy, however, total cash earnings for
Japanese workers have barely risen over the last 13 years. In
May salaries slipped 0.1% from 12 months before. The Cabinet
Office said this week that Japanese consumer confidence fell in
June, the third monthly decline on the run, giving the lowest
score since Dec. '04.
This is what a real credit crunch looks like, a
gut-hollowing time after asset prices collapse and near-zero
interest rates can't cancel repeats of When Bad Debts Attack on
TV.
How to encourage fresh lending, fresh spending and
growth? You can make money free, but you can't force banks to
lend it. "Bank loans for start-ups still require personal
guarantors," notes Ken Worsley for JapanEconomyNews.com.
"In other words, a person needs to sign off and be liable
as an individual.
"Great risk management for the banks, bad for
start-ups and innovation. On September 29, 2006, the Prime
Minister told the Diet that he would urge banks to do away with
this in order to encourage entrepreneurship, but nothing has
actually happened."
Now the world's largest economy is settling down to
its own version of When Bad Debts Attack with US
home-owners, investment banks and retirement funds all fighting
to take the lead role.
Buy the Yen if you dare. Back the Euro if you must.
Bet against all currency values and Buy
Gold if you think the collapse of the Dollar can only
cause trouble.