The most widely-reported result of the recent G-7 meeting was Japan's attempt
to convince the other major economies to admit that a crisis is imminent and
take appropriately radical steps. The response seems to have been a bunch of
blank stares. As India's Business Standard noted:
G7
pact offers minimal cover for Abenomics reset
A Group of Seven compromise offers minimal cover for Shinzo Abe. The Japanese
prime minister's plan to revitalize the world's third-largest economy needs
fresh impetus. Abe didn't get as much international backing as he might have
liked from hosting the rich nations' club. But, the summit communique can,
just about, be spun his way.
Abe's counterparts, understandably, do not share his view that the world
risks another Lehman Brothers-style financial crisis. That is important because
Abe has inexplicably committed to raising the country's sales tax next April,
a surefire way to choke off recovery - unless a shock of this scale emerges.
So Japan -- which, remember, has already borrowed eye-popping amounts of money,
increased its central bank balance sheet by more as a percent of GDP than have
either the Fed or ECB, and pushed interest rates on most of its government
bonds into negative territory, all to no avail -- has decided to act on its
(manifestly justified) sense of panic by starting a new round of deficit spending:
Japan's
Abe Plans Up to $90.7 Billion Stimulus, Nikkei Says
(Bloomberg) - Japan Prime Minister Shinzo Abe plans to propose a fiscal
stimulus package of as much as 10 trillion yen ($90.7 billion) after warning
Group of Seven leaders that the global economy faces significant risk of
another crisis, according to the Nikkei newspaper.
Abe will seek a second supplementary budget worth 5 trillion yen to 10 trillion
yen after July's upper-house election, the Nikkei reported Saturday without
attribution. Proposals will include accelerating the construction of a magnetic-levitation
train line from Nagoya to Osaka, issuing vouchers to boost consumer spending,
increasing pay for child-care workers and setting up a scholarship fund,
the Nikkei said.
"When you want to get the economy going, as long as demand in Asia is weak,
you need additional public spending," Martin Schulz, a senior economist at
Fujitsu Research Institute in Tokyo, said by phone. "Since private spending
is still not picking up, the government is simply taking up the slack."
The stimulus package would be the second this fiscal year after Japan approved
a 778 billion yen supplementary budget this month to aid recovery from earthquakes
in the Kumamoto region.
And about that tax increase...
Japan
Abe set to delay sales tax hike by one-three years - sources
(Reuters) - Japanese Prime Minister Shinzo Abe will postpone a sales tax
hike planned for next year, perhaps by as much as three years, government
sources say, a move he will justify as part of G7 efforts to avert another
global financial crisis.
While the tax hike was seen as critical to reining in Japan's massive public
debt, Abe and his aides have signalled the chance of deferring it as Japan's
economy skirts recession and a threat of deflation re-emerges ahead of summer
upper house elections.
"We've reached a global agreement to cooperate to avoid another big crisis
from erupting ... As G7 chair, Japan will spearhead such moves to contribute
to the global economy using all policy tools available," Abe told reporters
after the Group of Seven (G7) leaders' summit in western Japan on Friday.
"We must reignite powerfully the engine of Abenomics. That undoubtedly would
include a decision on what to do with the sales tax hike," he said, offering
his strongest hint yet that next year's tax hike will be delayed.
What does this mean? In a nutshell, the next phase of the global economic
crisis has begun. First, governments responded to the 2000 tech stock crash
with lower interest rates and big deficits. Then they responded to the housing/banking/derivatives
bust of 2008 with even lower interest rates, bigger deficits and experiments
like QE. Then they responded to the resulting anemic recovery with negative
interest rates and more QE.
None of the above has produced the kind of growth in the US, Europe or Japan
that slows the upward march of debt/GDP, which means everyone is still digging
their own financial graves. Since this is not an acceptable long-term strategy
(eventually the sides of the hole cave in and bury you), something else has
to be tried by the people who hope for re-election a few years hence. So now
we're back to massive deficits, but with a negative interest rate twist. Think
about it: When a government issues negative-rate debt, it earns a profit on
the transaction. And when it sells its debt to its own central bank it in effect
owes the money to itself. A site called Forex Live just published an interesting
analysis of this unprecedented situation:
A
paradigm shift is under way on deficits
If you can print your own money, you can issue unlimited amounts. The only
risks are inflation and a decline in the currency.
It just so happens that inflation and a decline in the currency are exactly
what many governments want.
In the developed world, inflation is non-existent and the currency war rages.
The trump card in that game is default via monetization and it's coming.
The dominant ethos of the past 25 years has been a drive towards fiscal
discipline. Politicians and political commentators have built their reputations
and careers as misers. There is something inherently, almost pathologically
wrong about defaulting.
That will all change.
The idea of default sounds like it would create panic; if not in the streets
then in markets. But it's easier than you might assume and it will happen
sooner than you think.
The hard part is already done. It's simply a matter of taking the debt the
central bank already owns and writing it off. To ease the shock value of
it, the debt will simply be converted into bonds the central bank will continue
to 'own' but will have 0% coupons and no maturity.
Japan will be the first to do it
Japan is a demographic nightmare and has been unable to stir inflation for
the past 20 years despite zeroed out rates. The debt-to-GDP ratio is a mind-blowing
227.9% with a fresh stimulus budget coming. There is no way out.
At the moment, the BOJ owns 35% of Japan's government debt and at the current
pace of buying it will hit 63.3% at the end of 2020. With the stroke of a
pen, all that could disappear.
I don't even think it would be disruptive. The central bank could launch
a new round of QE at the same time as the announcement and keep control of
what's left of the bond market. At the moment, Japanese 10-year are yielding
-0.11%. The means you have to pay interest to the government just so they'll
give you your money back in 10 years. Almost everyone who owns Japanese bonds
is an insurance company or pension fund that has no other choice.
How do markets react
Governments face hard choices but they will find that monetization is far
easier than Eurozone-style austerity (how many governments won re-election
after that?) or stalled out growth.
Certainly in the first episode there will be some worries in markets. Gold
will undoubtedly rally and the currency will decline. It may even create
some inflation.
But like QE, the first forays will be small and governments will quickly
fall in love with the ability to spend in ever-larger amounts.
This is disturbing on a lot of levels, but it's also quite conceivable. When
governments figure out that in a world of deflation (caused by the industrial
overcapacity and bad debt from their previous policy mistakes) they really
can borrow and spend whatever they want -- and if it causes inflation, well,
great, they win the currency war -- then the floodgates will open.
Japan, as it has with past monetary and fiscal insanities, is leading the
way. And if history is any guide the rest of us will follow along shortly.
