(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 March 4, 2015
( Free of charge to the people I met)
The end of an era for economic stimulus via central bank monetary easing policies
Stock markets the world over in NY, Europe, Japan, Asia and elsewhere continue to see record highs.
With the exception of the US, the economies of Japan, Europe and even China are sluggish.
In its recent review of growth in the global economy, the IMF (International Monetary Fund) issued an upward adjustment for America's growth at 3.6% while issuing a downward adjustment for Japan at 0.6%, Europe at 1.2% and China at 6.8%. At the February 24th meeting of the FRB (Federal Reserve Bank, America's central bank) Chair Yellen testified at Congressional hearing that there would most likely not be "an increase in the federal funds rate for at least the next couple of (Federal Open Market) Committee meetings" and gave the impression that the rate increase the market was expecting would be postponed again until at least June.
What the FRB seemed to want to say was that “not only has the American economy yet to fall into a solid trajectory but that there still remain sources of future instability.” The economic environment not only in the US but the world over is not conducive to daily record highs in stock prices. The Bank of Japan served as an FRB monetary easing outpost with 80 trillion yen in additional easing through the end of October last year and the ECB (European Central Bank) will begin 140 trillion yen in easing from March. The Bank of Japan and the ECB continuing this competitive easing (currency injection), after the FRB has stopped, means a continual decrease in the value of the yen and euro against the dollar and, simultaneously, a decrease in interest rates for government bonds. Japanese short term government bonds already have negative interest rates and 30% of the balance of European government bonds and 60% of German bonds also have negative interest rates. Currently the logic that government debt is a safer investment than cash is not being supported.
Japan and Italy are countries potentially in danger of default. In corporate terms it's as if a company is writing checks it can't cash. While America's financial affairs could also potentially bottom out, America has a degree of discretion with its status as holder of the global currency (world money) and a default on American debt is impossible to fathom. Even though America, which won't default, has 10 year bonds with an interest rate of 2.0%, Italy's are 1.67% and Japan's are at 0.42%. There is a phenomenon counter to the traditional logic of credit when the faith in government bonds sure to default is higher than in those not in danger of default.
“This counter-intuitive phenomenon in faith is a result of excessive cash (currency) devaluation” and excessive monetary easing.
The central banks have been playing with prices in order to improve outlook by increasing the face value of assets via currency devaluation as a result of an excess injection of currency, and in order to increase prices for goods and services without improvements to demand have excessively devalued the currency so the price tags for these goods and services are increased.。 Who would incur debt to save money with no value if the cash has less value than the debt (promissory note)? Of course, anyone would borrow at negative rates to play at the casino called the stock market. That's why stock prices worldwide continue to increase. What kind of reaction will the market have as easing (injections) continue along with negative interest rates and those negative rates continue to speed up?
With increasing scarcity in positive interest rate lending, a run on the debt markets where liquidity is low due to excessive bond holdings by the central banks could lead to a bond collapse and high interest rates that neither the exchange market nor stock market will be able to control.
The expected climax has changed from March to June.
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Written by Toshio Masuda