Home » Currency War » Welcome to the Currency War, Part 10: Fewer Choices, More Risk

Welcome to the Currency War, Part 10: Fewer Choices, More Risk

by John Rubino on June 5, 2013 · 10 comments

For a while there it looked like Japan had the answer. A strong new leader comes in and cuts through all the indecision, orders the central bank to flood the system with cash to depreciate the currency now rather than later – and boom, the stock market soars, exports rise and the economy starts growing again.

The entire left-of-center world eyed this process hungrily, sensing both vindication of their views and the coming economic nirvana when their governments finally accepted the truth about debt (it doesn’t matter) and easy money (a free lunch that always creates wealth). If Japan’s success proved sustainable, within a matter of months the European Central Bank would have no choice but to join the money creation orgy. And with the euro and yen both falling like rocks, the US Fed would soon have to follow.

But Japan’s success, to put it mildly, didn’t turn out to be sustainable. Just as Austrian economists and common sense predicted, interest rates on Japanese bonds soared, as the global markets subtracted the 2% target inflation rate from the 1.5% or so yield on long bonds, and decided that a negative real interest rate probably wasn’t the best deal. They sold, bond prices plunged, yields rose, and Japan hit the wall that Kyle Bass and others have been predicting it would hit for, it seems, ever. Japan’s stock market, now unsure exactly what is going on, has sold off in huge, bloody chunks. (The following chart does not show today’s 518 point drop.)

Nikkei June 13
Here in the US something similar is happening. Share prices are at record levels and real estate is booming, which is a recipe for instability, so the Fed has been making noises about easing back on the asset purchases. And the stock market, no surprise, has started doing what it always does when the Fed tries to siphon off the river of liquidity. It is tanking, down another 200 points on the Dow as this is written on June 5.

What does this mean? Well, the obituary of the supercycle credit bubble that began in the 1940s has been written so many times that it would be crazy to say anything that definite. But it is safe to say that the corner central banks have been painting themselves into has gotten a lot more cramped in the past few weeks. The global economy, led by Europe but with the US close behind, is slowing despite debt monetization that would have been labeled insanely inflationary by pretty much the entire economics profession two decades ago. But shifting the printing press into an even higher gear is very risky, based on the Japanese experience.

So our options appear to have narrowed to just two: Roll the dice on complete monetization in which the central bank buys up all the debt being issued — government, corporate, asset backed – and accept that an asset inflation might ensue (a global debt-for-equity swap, in other words). Or retrench, let interest rates rise to normal levels, and hope that that doesn’t send the leveraged speculating community (which includes the governments issuing and rolling over trillions of dollars of short term debt) into cardiac arrest.


  • Bruce C.

    JR is presenting the now binary options from the central banks’ perspective (complete monetization of all debt or the complete abstinence of market interventions from here on.)

    It’s an interesting no-win dilemma for them because both options lead to the same thing. I’m beginning to see what I think is going to happen within the next year or so. Each month economic data will continue to be mixed or even slightly negative and so the stock market will meander because of the perverse bullish expectations of continued QE but balanced by the bearish threat of a stagnate or shrinking economy. At some point it will become clear that neither QE will stop nor will the economy improve, and that will send a chill – if not panic – throughout the financial markets. It will suddenly become clear to everyone that things are very abnormal and unsustainable and unstable. That is when things will get really exciting and interesting (and gold should really take off).

    • sculptorbill

      the most chilling read in Dollar Collapse this week: http://www.marketoracle.co.uk/Article40810.html

      Capitol (gold) controls in France UK Germany…illegal to put gold coin in the mail or FED EX envelope? over a $2000/per oz fine for doing so? Governments are getting ready to really quash gold ownership and keep “money” digital, on record, taxable, seizable,
      they want no cash transactions, no precious metal holdings, no bitcoin. Not only is price of gold manipulated down, they want to make it isolated, unmovable, unliquid, forcing assets into the total government/computer controlled economic machine.
      gold is destined to be black market “pirate money” in the west.
      gold represents too much honesty in accounting, provides not enough opportunity for govt to tax, seize, manipulate. gold ownership must be revoked and repressed, like freedom, in the coming great deflation.

      • makeupdiva

        meanwhile gold and silver are still being purchased by the American people. I am waiting for the collapse and know it is coming – the tricks they are able to get away with to keep this thing afloat are amazing but they can’t fight gravity forever. The middle class of America are clueless – sad really because there is so much information out there!

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  • QEternity

    I think the go with what’s behind Curtain #1, Johnny!

  • http://theyenguy.wordpress.com/ theyenguy

    On Wednesday, June 4, 2013, the supercycle that began in the late 1940s came to an end, as the mother of all bear markets began on the Abenomics crash in Japan, EWJ, JSC, which hit Asia Excluding Japan, EPP, and the Emerging Markets, EEM, quite badly, and turned US stocks, VTI, lower.

    Japan’s Nikkei 225, NKY, fell 4% bringing the benchmark index’s losses to ten percent in the last ten trading days since its market peak and adding to pressure on Emerging Market Stocks, EEM, US Stocks, and World Stocks, VT, from both economic data and fears of Fed tapering.

    The twin spigots of Liberalism’s Finance, these being trust in the most toxic of debt, as well as currency carry-trade financing failed, on May 24, 2013, transitioning the world from the Liberalism’s Banker Regime into Authoritarianism’s Beast Regime, thus terminating the fiat money system, and birthing the diktat money system.

    The nation of Greece, traded by the ETF, GREK, is the very linchpin in the Economy of God, Ephesians, 1:10, as the sovereign Lord God, has designed it as a collection of Mediterranean Sea states, known as the PIGS, for their profligacy, to be the beachhead for the rise of the Beast Regime of Revelation 13:1-4, to rise to rule the world in ten regions of totalitarian regional governance, and occupy in all of mankind’s seven institutions, to replace the Banker Regime that has governed the world since the introduction of the Milton Friedman Free To Choose Floating Currency System in 1971.

    Fiat money died on May 24, 2013 with the failure of currency carry-trade investing, ICI, and disinvestment out of Junk bonds, JNK, on the failure of the world central banks’ monetary authority, and especially the Bank of Japan’s Kuroda Abenomics monetary policies. The monetary stimulus, credit liquidity, and monetization of debt initiatives of the US Federal Reserve and other central banks, have crossed the Rubicon of sound monetary policy, turning “money good” investments bad.

    While the diktat money system was conceived by Herman van Rompuy acting together with the EU Finance Minsters, in early May 2010 with the provision of Greek Bailout I, as well as the more recent Greek Bailouts II and III, and the Cyprus Bank Bailin, the diktat money system was unleashed onto the world by the bond vigilantes calling the Interest Rates on the US Ten Year Note, ^TNX, higher, and the currency carry traders calling the Yen, FXY, higher, on May 24, 2013, inducing investors out of currency carry-trade, yield bearing investments, such as Electric Utilities, XLU, Mortgage REITS, Global Real Estate, DRW, and Premium REITS, KBWY, and then this week, inducing investors out of Nation Investment, EFA, and Small Cap Nation Investment, IFSM, as well as risk assets such as Biotechnology, IBB, and Small Cap Pure Value Stocks, RZV, which were the loss leader style of the day.

    Liberalism was an age of prosperity and credit that came by trust in the monetary schemes of Bankers such as Ben Bernanke and Hiroki Kuroda. Authoritarianism is an age of austerity and debt servitude where one complies with and trusts in the schemes of new taxes, bank deposit bailins, and capital controls of regional sovereign nannycrats such as Olli Rehn, Jeroen Dijsselbloem, and Michel Barnierm, all for regional security, stability and sustainability.

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  • duggy_dugg

    most authors and newsies are profoundly unaware of the federal reserve bank swindle..japan does not order its central bank to do anything..nor do we ; nor europe nor most central banks in the world …,most are owned by rockefeller / redshield [ roth schild] bankstards and their families creating bogus bux and lending them to the respective gvts and forcing taxpayers to repay the bonds with which the gvts borrow the money from sintral banxx in the first place….

    last i looked , no korea and china owned their respective central banks…maybe venezuela …when kadaffi fell the bankstards swooped in …..wars are for fools to strut in costumes and come home in body bags..debt is the godzilla ..ask davy rocky or sir lordship empiror evelyn roth shield ..er sorry roth child

    debt is more powerful than thermonuclear weapons..

    eeeevilin’s great grandmother said [ they were named bauer then] if my [5] sons didn’t want war , there would be none…

    get informed ……you are not ….

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