Kamikaze Finance

Guest Post by Bill Bonner, Chairman, Bonner & Partners 

Source: Wikimedia

Dear Diary,

Not much market action yesterday. So, let us turn to what is bound to be the funniest… and scariest… story in the financial world.

Once again, our hat is off to the stalwart, intrepid and half-mad Japanese. They are going where no respectable economist would go… no responsible public policy should go… and no one with his wits about him would want to go.

We begin with the latest news: Nippon is in a slump. The numbers from the third quarter confirm that the feared “triple-dip” recession is here.

Japanese growth fell at a 1.6% annual rate for the June-to-September quarter. The consensus forecast had been for a 2.2% rise in growth.

This is bad news for Abenomics. He lets fly his arrows. They end up sticking in his derriere. The idea (if you can call it that) was to stimulate inflation, growth and job creation.

How?

Easy. You print more money!

Bailouts and Boondoggles

For the last 20 years, the Japanese government has been borrowing the retirement savings of its long-suffering “salarymen” and spending the money on bailouts and boondoggles – often involving vast amounts of concrete that now covers half the country.

If that weren’t enough – and it obviously wasn’t – in March 2001, the Bank of Japan invented QE to add some monetary steel to the fiscal cement. The Bank of Japan became the largest buyer of the government’s debt… increasing the monetary base by roughly 60%.

What did all this feverish building get the Japanese people, apart from five times as much government debt?

Absolutely nothing. The index of Japanese industrial output was at 96.8 in 1989. Today, it is still at 96.8.

In other words, this entire “stimulus” has stimulated not a single electron, proton or neutron. The real economy has not grown by a single yen. Nor has a single new job been created.

Nothing succeeds like failure. Per acre, no nation has ever been abused by so much monetary and fiscal failure.

You’d think the Japanese would have had enough of it by now. Instead, like a woozy customer just before closing time, they call out for more.

Abe’s Hidden Agenda

Or at least they elect Shinzo Abe, who promises more.

Especially more QE: Instead of buying a piddling 60% of Japanese government debt, the BoJ will buy all of it.

We hold our breath. We reach for the back of a chair to steady our staggered legs.

Could we have read that right?

Yes. Bloomberg reports that the BoJ’s record stimulus “may see it buy every new bond the government issues.”

And now the scam comes into focus. The real purpose is not to stimulate the economy; it’s too late for that. The hidden agenda is to bring down Japan’s enormous government debt – about 240% of GDP – and stiff retirees and other bondholders in the process.

Abe’s plan was to announce an ambitious program of foolhardy meddling. This, he reasoned, would send the exchange value of the yen down… and make Japanese exports more attractive on world markets.

It’s an old trick: Japan would gain market share by debasing its currency.

But it didn’t work. Output is falling. Household earnings are dropping too.

Japan doesn’t just export; it also imports. The yen has fallen 23% versus the dollar since Abenomics got started in December 2012. This may have made Japanese labor cheaper, but it also made it more expensive for domestic manufacturers to import oil and other raw materials.

And it reduced the buying power of the Japanese consumers. Real household income has fallen 6% since the start of 2012.

Good Work, Abe

In the past, Japan has relied on two things to finance its deficits: the profitability of its industries and the thriftiness of its savers.

But the fall of the value of the yen increased the costs of imports so much that the trade surplus has turned into a large trade deficit.

Instead of the ¥5 trillion surplus the county enjoyed in 2010, Japan has an ¥11 trillion deficit in 2014. And instead of the 10% savings rate the nation enjoyed in 1990, it now has a 3% savings rate – and sinking toward zero.

Good work, Abe.

But that’s not the end of the story. Now, there is no hope of growing the economy faster than the debt. Tax receipts have been flat for 20 years, as the population ages and shrinks. And with a growing trade deficit and disappearing savings, Japan can only hope to cut its debt down by inflating it away by way of the printing press.

Stick with the Trade of the Decade: Buy Japanese stocks. Sell Japanese bonds.

And stay tuned… The kamikaze finance story is just getting started.

Regards,

Bill

Further Reading: Japan isn’t the only country addicted to debt. In their book The New Empire of Debt, Bill and co-author Addison Wiggin offer a frightening look at America’s precarious financial position. They also detail the steps you should take now to protect your savings from the inevitable collapse of the US “Empire of Debt.”

We’re offering Diary of a Rogue Economist readers a FREE hardcover copy of Bill and Addison’s book. All we ask is that you cover shipping. Go here for full details.