(This issue is submitted to a Washington D.C., Seattle, and Zurich think-tank as the English edition of “Straight from Shoulder”.)
"Straight from the shoulder " by Toshio Masuda October 10, 2014
( Free of charge to the people I met)
Toward the End of an Era
Japan reached peak economic growth in 2006, thereafter tracing a downward curve, experiencing a recession and worsening deflation due to the worldwide credit crunch (a loss of investment confidence) that itself was touched off by the 2008 US subprime mortgage crisis. The reason for Japan’s being the first among developed nations to plunge headlong into deflation was the start of retirement for the “work hard, play hard Baby Boomer generation” in 2007. Protracted deflation is a situation in which there is either a continued balance in supply and demand for goods and services, or a continued excess of supply, and is a problem that policies such as monetary easing and low interest rates are not able to handle. The roots of deflation lie in the financial structure of an economy in which low growth becomes a chronic condition, which the creation of artificial demand (a bubble) by monetary policy cannot solve, as the bubble is sure to burst. As a result of the FRB’s (Federal Reserve Bank) throwing approximately $4 trillion of easing funds at the $850 billion monetary base over 5 years, companies all rushed to borrow at low rates and repurchase their own company’s stocks and bonds. The lowered interest on bonds and stock dividends led to an improvement in balance sheets, followed by even lower interest rate funds, with which companies were able to use to buy out other companies occupying the same sector, continually increasing market capitalization. Instead of CEOs and board members using low interest funds for purposes with no immediate payoff such as research and development or increased productivity, they threw themselves into increasing their company’s stock price, granting themselves bonuses of hundreds of millions, or even billions of dollars according to the share price. While the FRB was grasping for a monetary easing exit strategy in May 2013, they decided to curtail this policy. With plans firm for a curtailment and end to monetary easing, and a rise in interest rates, funds which had been flowing into emerging economies would at once be concentrated back into the US. Because this would have a big impact on outflows for Japan and other Asian nations, requests for large-scale easing (by GDP, triple the FRB's) were made of Japan beforehand (in April). With Japan's loss in World War II, it became a vassal state to the US until its Constitution was written, so much so that that Constitution was handed down to it by the US. This is why Prime Minister Abe replaced Bank of Japan Governor Shirakawa, who defended Japan’s bank-note rule, not carrying out easing at a level higher than the monetary base, with Governor Haruhiko Kuroda, who comes across as an agent of the FRB and World Bank President. BOJ President Kuroda announced extremely large-scale monetary easing on April 4 (twice that of the monetary base), labeling it “a new dimension of monetary easing,” and made way for funds to flow from Japan and Asia to the US starting that May.
As for financial affairs in Europe in 2010, deflation has continued since the credit crisis. The ECB (European Central Bank) lowered its policy rate to 0.15% in June, and in September to 0.05%. What’s more, it is assessing negative interest rates on ECB deposits as a penalty, forcing corporate financing on banks. On October 3, European Central Bank President Draghi announced monetary easing plans to buy Euro-zone member states’ government bonds and ABS (asset backed securities), but German opposition and the inability to pin down a time period greatly lessened the possibility for eliminating deflation in European economies. The Euro-zone member states of Germany, France, Italy and Southern Europe all differ greatly when it comes to rates of economic growth as well as their overall financial situations, so when it comes to the amount of risky loans bought by the ECB and the time period involved, gaining member-state consensus across the board is proving to be a difficult challenge. Because the EU (European Union) has not yet achieved fiscal unification, when the ECB runs into a fiscal policy dead end, as it did today, practical fiscal measures cannot be taken to prevent recession, and they reach an impasse. It seems that nothing can be done to stop the worsening outlook for the economies of Europe.
The Chinese government’s basic policy of converting its economic structure from a heavy reliance on external demand to one on internal demand is being underway, but not everyone is playing along. Not to mention that 50% of Chinese businesses are nationalized, but private businesses are also continuously dependent on easy exports instead of working hard on technological development, innovation, demand creation (marketing) and structural reforms. With an annual average wage increase of 15%, Chinese competitiveness keeps falling, foreign capital flight from China is accelerating, and there is a persistent decline in total exports.
Production of steel in China has fallen as much as 40% in the past two quarters of the fiscal year, and home prices have dropped across the board as well, by 30% in some provinces. The People’s Bank of China has again started to adopt easing measures in real estate investment funds, but not only is there no immediate effect, bubble policies of monetary easing now have lost their effectiveness for Chinese economic problems as they have in the developed countries, and will lead to the continuation of economic slowdowns.
Looked at it in this light, because it appears that only the US economy is opting for autonomous growth without employing monetary easing, and funds will flow from Japan, Europe and China into the US, and the appreciation of the dollar will continue.
However, along with the end of the third quarter will come the end of the virtuous circle of corporate balance sheet profits and high stock prices. Signs of falling stock prices and rising interest rates can already be seen, as high-yield junk bonds are being sold in the New York markets.
For the US, upon whose shoulders the world has their hopes pinned, the happy-go-lucky days of the past five years appear numbered.
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Written by Toshio Masuda