Just Consider This (Federal Reserve)

From Bloomberg this morning:

Bernanke and his colleagues may be considering more measures to aid growth and improve public understanding of Fed policy, which could be unveiled as soon as their next meeting taking place Jan. 25-26, said Julia Coronado, chief North America economist at BNP Paribas. The Fed reiterated that it expects joblessness to drop “only gradually.”

“They still see downside risks, so I still think they’re tilted toward easing,” said Coronado, a former Fed researcher who is based in New York. She said she expects a new round of asset purchases in the second quarter, or as soon as the January or March meetings should the economy deteriorate faster.

Remember that Japan believed the same thing — they allowed a debt bubble to build up and then tried to treat it with more debt.  In the space of the last 20 years they’ve taken public debt-to-GDP to 200%, the highest of all “modern” industrial economies.

Has their economy exited recession and returned to strong growth?  Have interest rates normalized? 


But now Japanese Government Bond rate repression, which has destroyed savings returns for everyone and trashed capital formation has turned into a monster that literally prevents normalization of interest rates!

Should JGB rates go up just two percent the interest payments would exceed the entire tax receipts of the government.  That is, they couldn’t pay and would instantly implode.

So how will Japan ever get out of this?  They won’t — they’re mortally wounded with a piece of saran wrap over the sucking chest wound that they inflicted on themselves.  As soon as someone tears it off or they move the wrong way and break the seal they’re finished.

If we keep this up so are we.

There are damn few out in the analytical sphere other than myself who not only counsel pulling the artificial supports now but have consistently supported that same path since the beginning of this mess.  This is not because I want to see a monstrous crash or would like to short everything.  I will note for those who argue that’s my motivation that Japan’s stock market was over 40,000 before they entered their mess, it never went back up there, and that today it trades at more than a 75% discount to that level.

To put this in perspective that puts the DOW under 4,000 and the S&P around 400.

I know, I know, “that can’t happen here.”  That’s what people said about the Nikkei.

Financial repression can be mortal wound to an economy and nation.  We refuse to learn, despite having the lessons of history right in our face.  Bernanke’s “help” has now morphed into exactly the same path Japan took – “some help” then turned into an “extended period” and now has become a structural repression of interest rates that encouraged and supported outrageous levels of public debt that were enabled and possible only due to the repressed rates.

We’re walking down the same road but we have none of the buffers the Japanese had — a strong export economy (now falling apart due to repression’s knock-on effects) and a massive amount of internal personal saving.  We in contrast came into this with an unsustainable import economy having offshored our blue-collar labor and a monstrous amount of manufacturing and were running a negative savings rate with more leverage in the consumer sector than Japan’s household budgets by far.

This idiocy must end — but the fact is that Congress is explicitly in bed with this crap as they’re just as guilty, since it is these specific policies that enable their deficit spending binge and neither house of Congress or the executive is willing to put a stop to it.

Brace for impact folks – the only reason I’ve not gone back to Defcon 1 is that I’d like to wait until after the Holidays.  I think that we’ll get to that point before it has to happen, but perhaps I should light both to indicate a “1-1/2” status……

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