Last week’s move by the Bank of Japan (BoJ) to take interest rates into negative territory should not have come as a surprise. BoJ Governor Haruhiko Kuroda had denied just two weeks beforehand that it was being considered. As a rule of thumb, never believe anything a central banker says until they have officially denied it. We should now take anything that Bank of England boss Mark Carney says with a giant dose of salt. If he even hints at a rate hike, expect UK rates to join Japan’s, below zero.
The BoJ’s commitment to more stimulus was unequivocal – it “will cut the interest rate further into negative territory if judged as necessary”. So for beleaguered savers, the beatings will continue until morale improves. That Japanese monetary policy has finally joined that of the eurozone, Denmark and Switzerland was only to be expected. Japan has been flirting with deflation and sub-optimal growth for the best part of 25 years.
However, the Japanese authorities may have been better off listening to the advice of Mr Takashi Ito, who wrote to the editor of the Financial Times in August 2010: “First, Alan Greenspan opened the taps wide for too long, fearing Japanese-style deflation, which fuelled the housing bubble that led to the recent financial crisis. Now, fearing the lost decade plus, the Fed is probably going to keep easing until some different but unpleasant outcome is the result. Stagflation, perhaps, or hyperinflation?
This is so ironic, because for so long people have sneered at the Japanese for their inability to steer their economy to recovery. Perhaps because they have sneered so much, it is no longer possible to admit that, after a huge housing bubble bursts, there is nothing to do except suffer many years of economic indignity. The fixation with Japan was not helpful during Mr Greenspan’s watch, nor, I fear, will it be of much use this time. The Japanese may be different, but they were not stupid”.
What a gorgeously Japanese phrase that is: “years of economic indignity”. Not that our authorities will acknowledge it, of course. Instead of facing reality, we must have every fibre of the state strained to save the banks. The War on Cash will be prosecuted even unto the very last saver’s pound, dollar, euro or yen. The awkward truth is that financial repression does not appear to be working. You can cut interest rates to zero – or even below it – but you cannot force a saver to spend. Not yet. So the editorial pages of the financial press are now bursting with new advocates of a cashless society.
Financial repression does, however, appear to be hurting the very banks it was presumably supposed to save. Bank stocks are doing a serviceable impression of 2008 revisited. Rumours of insolvency continue to swirl around Deutsche Bank (which, with gross derivative exposure of roughly $73trn, is hardly a tiddler). Swiss banking giant Credit Suisse has its shares trading at a 24-year low. Perhaps dropping interest rates below zero isn’t that supportive for banks after all?
The great Austrian school economist Ludwig von Mises warned of what can happen after a period of uncontrolled credit expansion, such as we have had in the West since the early 1970s. I have quoted him before and make no apology for quoting him again: “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”
Our central banks have made it clear that there will be no halt to “further credit expansion”. And we know that, far from deleveraging, the world has added a further $57trn of debt to an already excessive debt load since Lehman Brothers failed. If Mises is right – and he had first-hand experience of Weimar-era hyperinflation – then the outlook is also clear. We should prepare for the possibility of a disorderly collapse of our currency system.
Mises also warned about what happens just before we reach this terminal phase. “Finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly… The crack-up boom appears.” At which point there is a flight into real assets – tangible things that, unlike paper money, cannot be easily printed. So lower equity values today may actually be an opportunity. And in an environment of central-bank insanity, gold remains a must-own asset.
|Cash in circulation
as % of GDP (2014)
Category: Market updates