OK, I Get It. Things Are Coming Unglued

As long as major stock indices around the world keep soaring (forget for a moment the carnage in smaller stocks), and as long as bonds trade at near all-time highs, and as long as the yield of dubious government debt is close to zero or below zero so that borrowing has become a profit center for governments and a loss center for investors, as long as we live in this wondrous world, who cares about the global economy?

This is a resounding theme. Super-ugly data about Japan’s economy piles up, and people say, “Yeah but look, the Nikkei surges.” And this discussion is over.

It doesn’t matter that the Nikkei surges as the Bank of Japan is buying every JGB that isn’t nailed down. It’s buying them from banks, pension funds, and individual investors to pile them up on its balance sheet where they can be selectively defaulted on without sparking social chaos. Everyone seems to have accepted the alternative to social chaos, namely a gradual loss of “wealth.”

So banks, pension funds, and other investors are selling their JGBs to the Bank of Japan and are looking at stocks as a place to stash their proceeds. This buying is unrelated to what companies in the Nikkei are doing. It’s an effort to get rid of increasingly toxic JGBs. And hedge funds anticipate that pension funds and other investors are shifting into stocks, and they front-run them, and the Nikkei surges….

But off to the side, in Cairns, Australia, the finance honchos of the G-20 are meeting this weekend. And they’re already jabbering. They’re lamenting just how badly the global economy is faltering. But it was overshadowed by the iPhone 6 razzmatazz and the IPO hoopla of Alibaba, whose shares give investors ownership in a mailbox company in the Cayman Islands that has a contract with some Chinese outfit, and nothing more. But hey, the purpose of owning a stake in a mailbox company is to make a buck and get out. An equation that might work for a while in this era of endless liquidity.

There they were, the finance honchos of the G-20, fretting about the global economy. US Treasury Secretary Jack Lew knew exactly what was wrong with it. First he patted himself and the Fed on the back for the crackerjack performance of the US economy under his leadership that “continues to be a source of strength in the global economy.”

In reality, after diving in the first quarter and recovering in the second, the US economy is flying along at barely above stall speed and is in no position to pull along anything.

Alas, the overall global economy “continues to underperform,” he told reporters. “This is particularly true in the Euro Area and Japan, while a number of emerging market economies” – including China, the big one – “are also slowing.”

These “surplus” countries, as he called Japan and the countries in the Eurozone somewhat mysteriously, weren’t doing enough to stimulate their economies. And this was dragging down the global economy, he said.

OK, I get it. Things are coming unglued despite – not because of – worldwide money-printing binges, enormous government deficits, and years of ZIRP. The cost of capital has disappeared as a factor in decision making. A tsunami of liquidity has purposefully inflated asset prices around the world to breath-taking levels. Risks no longer matter. Yet, it’s still not enough to generate “sustainable,” as he called it, economic growth. And much more of the same is needed.

To that effect, Lew told Japanese Finance Minister Taro Aso that his government must stick to its strategy of the “three arrows” to goose economic growth. A strategy that entails devaluing the yen, feeding Japan Inc., whittling down real wages, and gradually defaulting on its mountain of debt through inflation and devaluation.

Japan has been spending about twice the amount it collects in taxes, year after year! Its economy is completely addicted to reckless deficit-spending. Neither businesses nor individuals are willing to pay for more than half of what the state hands them. It has been the world’s most prolific, two-decade-long stimulus party. And look how that has turned out: Japan is buckling under the ever-growing pile of debt. There is no longer a good solution. And now consumers, pierced by the three arrows of Abenomics, are bleeding heavily.

Unperturbed by this sight, Lew wants Japan to pierce consumers with more arrows. And he might get his wish.

BOJ Governor Haruhiko Kuroda, when he arrived in Cairns, declared that the yen, which has already lost over 30% of its value since the beginning of Abenomics, was fine. “What’s undesirable is for exchange rates to move in a way that deviates from economic fundamentals. From this perspective, I don’t see any major problem with current moves,” he said. The money-printing binge would continue.

Germany, one of the other targets of Lew’s pointing finger, brushed it off when Finance Minister Wolfgang Schäuble, in Hong Kong on his way to Australia, told reporters the obvious: “In the global economy and in Europe, we are in a situation in which we seem to have too much liquidity and too much public debt,” he said. “It means that room to stimulate growth from the demand side and the monetary-policy-side is – with regional differences – small.”

Schäuble will be shouted down. Free money is too much of a lure. It’s readily available. It causes asset prices to surge. It makes some people immensely rich. In its wake, real wages get trimmed down. Consumers have to go into debt to maintain their standard of living. Those poor souls who can’t go into debt have to cut their standard of living. Prudent investors and savers get sacrificed on the altar of this religion. But after six years of it – and after 20 years in Japan – the global economy is still, or once again, faltering. And so, even more of the very same treatment is needed. Got it?

“Escape Velocity,” that illusory surge of the US economy, trotted out for five years in a row to rationalize soaring stock prices? The Fed has wiped it from its vision of the future. Read…. Fed: Forget “Escape Velocity,” Not Gonna Happen, Ever

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  16 comments for “OK, I Get It. Things Are Coming Unglued

  1. Fred Hayek says:

    Amazing. We’ve got, functionally, a 23% unemployment rate here in the U.S., almost as bad as the worst of the great depression and Jack Lew has the nerve to act as though he’s speaking from some kind of economic high ground and can feel free to lecture other world leaders. Imagine how that would play if we had a mainstream press that ever told uncomfortable truths that upset the powerful?

    • Dave Kopriva says:

      O.K. Fred, although I agree with you lets take a look at the other side. There are 77% of the working population employed, yes? So, are those the ones that are buying all the new vehicles and miscellaneous trinkets that keep the economic fires burning? How do we reconcile the majority that seem to be employed? What is the ratio of public to private sector employment? Is the public sector not lean enough? we already know the answer to that foolish question but I am putting that topic out there as well.

      • Archy Don says:

        “…lets take a look at the other side.” What “other side?”

        So of like, “Other than that, Mrs. Lincoln, what’d ya think of the play?”

  2. Peak oil is a bitch, ain’t it?

    It’s going to get a lot worse before it never gets better. Depletion is forever.

    Stupid humans, we deserve to go extinct.

  3. Albert Jay Nocking around LA says:

    The world is falling apart because it is now fashionable to lie and be a scoundrel. The masses are just following the example set by the politicians.

  4. pebblewriter says:

    Re the Nikkei, don’t forget the BOJ’s outright equity purchases. ETF holdings are slated to reach ¥3.5 trillion by year’s end.


  5. RDE says:

    When in doubt, frack out.

    Delusion is the opium of the people.

  6. economicminor says:

    So the casino hires the gamblers and put up the money to gamble with. They gamble at their own casino and also at the other casinos in town. The casinos get the money to gamble with from the government for free. And the fake profits from all this drives up the GDP and makes both the casino owners feel happy and well and the government likes the fake growth and fake profits to show itself how wonderful all this money printing works. The casinos even pay for the campaigns for the Congress and President out of these profits and everyone is happy.

    No one actually makes anything and does anything of value but they all feel great and spend their time promoting this system as a fully functional model for the rest of the world.

    What’s wrong with this picture?

    • AJ Nock says:

      Great analogy econominor! The whole system hinges on the willingness of the Chinese to accept these funny little pieces of paper for all the products that they are producing. I think they are wising up, so it looks like the casino be closing: following the fate of those in Atlantic City.

  7. Mel says:

    ” that borrowing has become a profit center for governments and a loss center for investors”

    Yeah. Borrowing was never, ever, ever a profit center for investors. In ancient times, borrowing was done to fund productive enterprises, and the productive enterprises provided the profit. With major economies having deindustrialized, there isn’t much actual wealth created — meaning things or experiences of value that weren’t there before — and the business of managing credit has no way to fill that gap. I’m with economicminor on this.

  8. LG says:

    Laugh at me if you will but all I see is that these are the end of days for capitalism as we known it! Something will give and when it does there’ll be blood!

  9. annette says:

    For many years, I’ve been telling my family, whenever I saw foolish spending by the Average Joe, “There’s too much money out there”. The elites and general markets eventually cottoned on to that fact and set their eyes on the average Joe as an eventual target. JOE is now the bullseye and he doesn’t know it. He just thinks it’s the economy.

  10. thom prentice phd says:

    What is a JGP and a ZIRP? Could you possibly think about including in-text or footnote definitions for those of us reading Wolf Street who are not familiar with the argot?

    • Wolf Richter says:

      “JGB” = Japanese Government Bond; ZIRP = zero interest rate policy, which is the current monetary policy of the Fed and many other big central banks around the world.

      I have in the past spelled these things out on first use in each article, but after a few years it seems so repetitive.

      However, you make a good point, and I will make sure that acronyms are defined.

      • Yves says:

        I wouldn’t bother about people who can’t google for themselves…..but that’s just me.

  11. The wholesale destruction of the dollar since zero rate interest started on Wall Street and Washington seemed to me a military option to bring the globe to it’s knees. The cooking of the Greek financial books by Geithner and Paulson of now world fame so that a snookered European Union Parliament would grant EU status years too early to Greece, Paulson and Geithner reaping billions from Greece’s guarantied default, is the template for country after country at not yet bomb-able status, to be eliminated to Stone age conditions as if by their own greed alone.

Comments are closed.