Japan’s ZIRP Black Hole Expands To The US, EU And UK

As the EU, UK and US fall into the Japanese ZIRP death trap, all three are wondering why ZIRP doesn’t fuel lots and lots of lending.  Well, why bother lending any money if you can’t make much profit from it?  After all, playing commodities markets is bringing in much more loot!  Ask Goldman Sachs about this matter.  The rate of default on past, earlier loans is still rising, not falling.  In both domestic and business real estate.  So the losses outstrip any potential gains with lending at an ever lower rate.  We know how this works.  We saw this at work in Japan for the last 20 years.

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Deflation fears as Eurozone and US credit contracts – Telegraph

Data from the European Central Bank shows that the M3 broad money supply has contracted over the last six months, confounding expectations that ultra-low interest rates would soon boost monetary growth. Loans to the private sector fell 0.3pc from a year earlier, the first such decline since the data started in 1983…. .

…The picture is even starker in America where M3 has shrunk at an annual rate of 6.5pc over the last three months, a pace of contraction not seen since the 1930s. US bank loans have plummeted since May.

. Michael Taylor from Lombard Street Research said the eurozone was “blundering towards deflation”. Inflation was minus 0.3pc in September, but unevenly distributed. Prices fell 3pc in Ireland, 1.8pc in Portugal, and 1pc in Spain. “All the ingredients are there for deflation next year. At some stage this may start alarm bells ringing at the ECB,” he said.

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Obviously, we have to look to Japan to predict the future.  Japan, as we all can see, is a hyper-merchantile state that depends very much on the US keeping a fake free trade/fake fiat currency regime going.  Japan’s desperation to keep this game aloft is obvious even today: their FOREX holdings of US dollars is now over a trillion dollars.  Way, way back when the US still negotiated with Germany and Japan to drop the value of the dollar against both export giants, Japan had to concede defeat.  That is, they had to strengthen the yen or else.

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But since 1986, the US ideologists who are a bunch of crooks and liars convinced every President starting with Ronnie Reagan that ‘free trade’ was the ideal method for balancing trade and preventing inflation.  Well, free trade DOES prevent ‘inflation’!  It does this by sucking out of strong currency countries, all of their industries!  Then, when goods are made in cheap currency places with low wages, why, goods shipped back home are cheaper!  Duh!

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Of course, this is a road to social suicide.  Any nation stupid enough to do this ends up in history’s rubbish bin.  Japan figured out way back after WWII how to have ‘free trade’ with the US and not allow many or even any US goods, only US commodities, into Fortress Japan.  That is, they simply openly refuse, collectively, to buy American goods!  Or Korean goods, for that matter.  This social revolt against free trade meant that Japan could enjoy one-way trade.

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But the theology of the ‘floating currency regime’ that was supposed to balance trade was a severe problem for the Japanese.  They needed to keep the yen cheap against the dollar.  To do this, they began a very novel thing, that is, they held dollars in their FOREX bank.  So the yen was kept weaker than the dollar via holding dollars out of international markets.

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The US responded by creating seas of easy lending which would madly replace the dollars the Japanese held.  When China imitated Japan and did this for the exact same reason as Japan, the US discovered we could create even more lending of newly hatched magical dollars made out of thin air and China would also soak up trillions of dollars just like the Japanese.  All, so China could also destroy our industrial base.  Isn’t that just sweet of them?

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Japan’s success at all this led directly to the creation of the infamous ZIRP system.  Hitherto, no bank could ever exist at zero interest.  It would attract zero savers.  But then, the Japanese and finally, all the major international banks and money dealers discovered that they could dispense with attracting capital since the rising government debts thanks to zero interest rates, became the ‘capital’ these bankers could use to create even more lending!  Wow!  Then, to cap this ridiculous and continuing mess, the international bankers decided to capitalize themselves with the Derivatives Beast!

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This monster grew to immense size during the Japanese ZIRP regime.  That is, once one entity, the world’s #2 economy, decided to run a system totally in the zero sector in defiance of hundreds of years of banking, and with no gold reserves to back it, we saw all systems do likewise. Each used different tools to gain the ZIRP system’s ability to create infinite money out of thin air.

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This is because, since the dawn of money, any government can create infinite DEBT via simply handing out IOUs based on future taxes.  That is, Imperial Spain, in order to kill Queen Elizabeth and deal with the revolting Dutch, issued IOUs based on future gold from the New World and taxes in Spain and then went bankrupt a short while later after the Armada sank.  The Armada was the apex of Spanish power.  Spain continued to decline until it became a rump state and is now sucked into the EU where it has very little power.

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All the deflation articles I see online whine about how credit isn’t being created.  AU CONTRAIRE!  There is plenty of credit being created out of very, very thin air.  Credit with no capital savings behind it: government fiat debts.  That is, central banks are lending to governments at ZIRP rates and are holding these debts based on the principal being paid back sometime in the undetermined future.  When things ‘get better’.  Only Japan also shows us that this magic moment never arrives.  That is, the dynamics of ZIRP means no government will ever stop borrowing!  Why stop?

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And you can’t raise rates to normal levels (3%) because this will cause sudden catastrophic hikes in the overhang of trillions of dollars of principal that needs to be ‘turned over’ frequently. So ZIRP becomes a trap.  Governments eat more and more future savings in the form of tax promises and instead of private debt swelling in size, we get government debt swelling in size. Thanks to the ZIRP system in Japan for 20 years, the principal owed on Japanese debts is now over 200% of GDP.

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This means, we will also be in the same boat in 20 years.  So we have to get rowing.  Dropping interest rates to zero only increases government debts.  It does NOT increase lending in other sectors.  We see this in Japan.  So we will see this here.  Except for one major exception: Japan owes itself this money.  We owe Japan and China this money.

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Japan’s Bonds Fall as Supply Concern Outweighs Deflation Signs – Bloomberg.com

Japan’s benchmark 10-year bonds dropped for a third day as concerns the government will increase debt sales outweighed signs deflation is deepening. ..

Benchmark 10-year yields gained to their highest level in 11 weeks after Nikkei English News said the Finance Ministry may issue as much as an extra 8 trillion yen ($87.7 billion) in bonds in fiscal 2009 from a year earlier. Bond losses were limited before a report in two days that economists said will show consumer prices dropped at a record pace, adding to signs the Bank of Japan will keep borrowing costs near zero.

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So, has ZIRP made Japan richer or poorer?  Only when ZIRP enabled the weak yen, did anyone profit.  Now that the yen is strong against the ZIRP dollar, this has also vanished.

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2009/10/28 23:24 – Corporate Income Took Record Plunge In FY08: Tax Agency

Corporate income fell 35.4% on the year in fiscal 2008 in the largest decline on record, while the number of firms ending in the black sank below 30% for the first time, according to data issued Wednesday by the National Tax Agency. .

Some 2.8 million corporations filed tax returns through July. They reported a total of 37.98 trillion yen in income for the twelve months through March, down 20.83 trillion yen on the year to a six-year low. The decline was the second in two years. .

Self-assessed income tax tumbled 4.82 trillion yen, or 33.2%, to 9.70 trillion yen.

 

Japan’s wealth depends on transferring US industrial power to Japan.  And this means, the US should have CONSUMER spending, not government spending.  The FOREX business enabled consumer spending in the US but this has now switched to the Japanese ZIRP style of government borrowing to infinity. And when the government borrows, it tends to not buy Japanese. The only exception to this is the stupid auto buying scheme whereby the US subsidized Toyota sales which saved Japan from total industrial production collapse.

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But everything has fallen more than any time in Japanese history since WWII.  We see clearly the dangers of a ZIRP system with this dire news from Japan: as government borrowing increases, tax revenues are falling.  In the US, it is falling, too.  Eventually, tax revenues have to cease falling and government borrowing must fall.  But this is IMPOSSIBLE in a ZIRP system!  This is the hole economists worry about. But why didn’t they try to stop Japan when Japan first imposed this scheme on the entire planet?

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Back in the late 1990’s, I complained about this all the time at the economic forums at the NYT, Atlantic Monthly and Salon before all three killed their regular forums in favor of only commenting on disconnected stories.  I was alarmed about the Japanese system for many years now.  Brad Setser once told me to leave his pathetic forums because I kept hammering him about Japan every time he whined about China’s  currency games.

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Well, the leader into the black hole of ZIRP was not China but Japan!  And we see this increasingly clearly as events unfold.

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USD falls as PBOC-backed report recommends for China to broaden EUR

In currencies, US dollar briefly weakened to its worst levels since Aug of 2008 against the Euro above 1.5060. Greenback losses were widely seen after PBOC backed report recommending that China raise proportions of Euro, Yen in FX reserves even while keeping USD as main component of its reserves. Japanese Yen was also firmer, with USD/JPY falling below 91.60 from 92.20 session high. In commodity FX, AUD traded up toward 0.9280 amid overall risk appetite. The Aussie did decline briefly on the disappointing Q3 PPI report from Australia, boding poorly for the quarterly CPI expected later in the week. New Zealand traded around unchanged levels at 0.7530, underperforming relative to AUD after a dovish WSJ report citing RBNZ Bollard that the country is unlikely to face any upward pressure on interest rates until mid-2010 at the earliest. Reserve Bank of New Zealand is expected to decide on interest rates later in the week as well.

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Both Australia and New Zealand have normal interest rates. So both are the new destination of carry trade business.  And both are seeing their currencies climb and after a joyous period of thinking they are very rich as imports explode into the countries, both are going to see their own businesses collapse as trade becomes increasingly one way.  And both will end up like Iceland: bankrupt.  The fact that China is no longer holding just US dollars in their gigantic FOREX holdings is no surprise.  They switched gears way back in August, 2007, when they began to hoard yen, too.

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Capmark Files for Bankruptcy With $21 Billion in Debt (Update3) – Bloomberg.com

Capmark Financial Group Inc., the lender owned by companies including Goldman Sachs Group Inc. and KKR & Co., filed for bankruptcy protection after posting a second-quarter loss of about $1.6 billion. .

The company listed consolidated debt of $21 billion and consolidated assets of $20.1 billion as of June 30, according to Chapter 11 documents filed yesterday in U.S. Bankruptcy Court in Wilmington, Delaware. Forty-three affiliates also sought protection. .

Capmark, based in Horsham, Pennsylvania, is one of the largest U.S. commercial real estate finance companies, with more than $10 billion in originations, according to Moody’s Investors Service. The company, formerly known as GMAC Commercial Holding Corp., services more than $360 billion of debt. It has struggled as the default rate on commercial mortgages held by U.S. banks more than doubled to the highest since 1994.

 

This is a significant bankruptcy.  It is the next shoe to drop in the collapse of the real estate bubble.  I see abandoned projects all over my own region.  Empty stories in malls proliferate.  The downward spiral we are in isn’t being fixed by the Japanese style ZIRP lending system.  It is making things worse, not better.  I just got the Goldman Sachs ‘Effective Regulation’ pdf and will be deeply analyzing this later tonight.  I have to take father-in-law and husband to doctors today, so I hope everyone has a good day, may the sun shine.  Halloween is just about here.  And maybe I will dress up as the Derivative Beast.

 

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