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