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.


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.


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.


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!


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.


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.


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?


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!


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.


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.


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?


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.


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.


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.


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.


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.


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?


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.


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


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.


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.


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.

sunset borger


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Filed under .money matters, Free Trade

12 responses to “Japan’s ZIRP Black Hole Expands To The US, EU And UK

  1. isha


    Elaine, Maybe you have already seen this article from WSJ on the Derivative contract…would like to see your comment…


  2. MCC

    Yes, our long term prospects for prosperity seem very grim. Some people are celebrating the end of the recession and the return of growth. But from what I can see the only thing that’s growing is wealth collected in the hands of a small elite. Meanwhile WORKER income and WORKER wealth continue to nosedive. If I had any money to bet, I would wager that the “growth” to the economy in the last quarter amounted to INFLATION. Was there actually an increase in the number of items bought and sold last quarter, or was there simply an increase in the PRICE of items. Based on my trips to the grocery store, I’d bet it was the latter.


    ELAINE: Visits to Home Depot featured much higher prices. And with a housing bust!

  3. @MCC: The “growth” in the GDP this past quarter is attributable to both inflation (as you said) and government spending, like Military Spending (up 14%) and the ridiculous Cash For Clunkers program. Karl Denninger parses this in his blog this morning. My favorite line of his in the article recounts how we people who voted for Obama in hopes of reduced war and “defense” spending must be hitting ourselves over our heads with a hammer. Actually we’ve gone past that to slamming our foreheads against a brick wall. That graphic is showing up more at Democratic Underground, hahaha.

  4. justiceatsqualor

    For the sake of argument:

    Rapacious gnomes aside, maybe it’s not such a bad idea to impose ZIRP at peak EROI, at least until we get a sense of inflation or deflation. Or even what combination to expect as world-wide production decreases.

    Let the sails luff as we come about and get a feel for the wind. Never mind the hot air in the illuminist balloons for now?

  5. PLovering

    Do you have “Restless Vagina Syndrome” ???

    Or “Female Sexual Dysfunction” ???

    Well, this is your lucky day.

    Your local Big Swinging Dick Pharmaceutical Company is on the job.



    ELAINE: I had that when I was a teenager. Having children and bills to pay cured it.

  6. isha

    … the beginning of the end of the petrodollar?



    Saudis drop WTI oil contract
    By Javier Blas in London

    Published: October 29 2009 02:00 | Last updated: October 29 2009 02:00

    Saudi Arabia yesterday decided to drop the widely used West Texas Intermediate oil contract as the benchmark for pricing its oil, dealing a serious blow to the New York Mercantile Exchange.

    The decision by the world’s biggest oil exporter could encourage other producers to abandon the benchmark and threatens the dominance of the world’s most heavily traded oil futures contract. It is the main contract traded on Nymex.

    The move reveals the growing discontent of Riyadh and its US refinery customers with WTI after the price of the benchmark became separated from the global oil market this year.

    The surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, depressed the value of the WTI against other global benchmarks, throwing the global oil market into disarray.

    In January, WTI, which usually trades at a premium of $1-$2 a barrel to Brent, fell sharply, leaving it at a discount of almost $12 – a record gap. This dislocation in the market continued well into the summer.

    From January, Saudi Arabia will base the price of oil for its US customers on a new index developed by Argus, the London-based oil pricing company.

    The Argus Sour Crude Index will track the price in the physical market of a basket of US Gulf Coast crudes, including Mars, Poseidon and Southern Green Canyon.

    Argus said the change in policy reflected the “increased importance of the US Gulf coast sour crude market, in which both production and trading activity was rising sharply”.

    Paul Horsnell, head of commodities research at Barclays Capital in London, said Saudi Arabia’s decision was likely to reflect a “wider discontent” from its customers in the US about WTI performance.

    ExxonMobil, Marathon and Valero are among the US’s biggest buyers of Saudi crude oil.

    Edward Morse, chief economist at LCM Commodities in New York, said: “It is a recognition by large players that WTI sometimes does not reflect the true value of crude oil in the waterborne market.”

    Saudi Arabia has priced its oil using WTI since 1994.

    The price was based on quotes from the physical market which were compiled by Platts, a unit of McGraw-Hill.

    Oil companies then covered their exposure to WTI using the futures market on Nymex, which is owned by CME Group.

    Bob Levin, managing director of market research at Nymex, said the exchange was ready to move with the market.

    “We plan to introduce a cash-settled futures contract tracking the new Argus index,” he said.

    Mike Vinciquerra, equity research analyst at BMO Capital Markets, said the new Argus index would not replace WTI. “It’s more a supplement,” he said.

    Additional reporting by Gregory Meyer in New York

  7. charlottemom

    Ed-M – good posting. As for Goldman’s revised projection yesterday of GDP, they may well get it right after the 3.5% gdp gets revised downward. Yes 3.5% is a glowing hot number – as in radioactive.

  8. domingo

    “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.”

    hmm, i could have sworn that we were the ones to start doing that in the 70’s. My history is a little fuzzy but i could have sworn that nixon closed the gold window not the japanese.

    “But why didn’t they try to stop Japan when Japan first imposed this scheme on the entire planet”

    Because they are our imperial collaborators, we needed to “rebuild” japan and germany to counteract china/russia. We are getting screwed because we stupidly thought that those two countries are our allies against the evil communist.

    I agree that japan/china/europe are mercantilist but we can’t whine about them taking advantage of us. Expecting those countries to not fk us over is quite silly, they are our competitor and its stupid to expect them to not slit our throats.

    We started the “planned obsolescence” and its has been biting us in the ass. We had retarded economist who thought that the great depression was caused by a lack of demand and not from the lack of income.

    its amusing how economist refuse to make comparison with the aging demographic and economic concentration of the 1930’s with that of todays.

    like demographics and income concentration play no part in economic collapses.


    ELAINE: I was referring to the ZIRP system. Which began after 1995 in Japan.

  9. Matheus

    Elaine, you said:
    “This means, we will also be in the same boat in 20 years.”

    But Japan had trade surplus with US , so they could run into red at home while balancing that with their exports.
    So there will be hyperinflation here, soon ? Or China will torture us until all our industrial base vanishes… Could the dollar vanish this fall as you previously said ?

  10. nah

    government needs to collect taxes even if the money is printed from the people they collect it from…. anyone else would find themselves in the slammer… but the banks serve a special purpose…. full employment and a model economy
    the autos are so lost in the abyss… obama wants executive unlimited bailouts with no congressional aproval in a ‘crisis’… ug, the only way we can save the system is to destroy everything it stands for… the economy is unbalanced and a restructuring of assets to commodities and labor is going to be deafening when oil becomes the new dollar…. or the dollar becomes the new dollar or whatever

    the dream of hunger for the decieved

  11. Wu Wei

    @Domingo. Japan’s newly elected government is no longer a CIA puppet. Japan will now team up with China thus effectively ending USA’s power of influence in East Asia. They are even considering kicking the USA army out of Okinawa. One mighty blow indeed, Eurasia will be dominated by the Asians in the future. The Brzezinski’s and Kissingers – 0 Asia – 1!

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