Are we heading toward another economic meltdown?
Back in 2007, Strategic News Service publisher Mark Anderson warned KPLU listeners about the dangers of "cheap money" from Japan, which helped fuel the subprime mortgage debacle. Mark advised investors to put more of their money into cash, rather than stocks.
The following year, the bottom fell out of the stock market.
Is history about to repeat itself? Mark believes Japan and other nations are printing too much money again, making conditions ripe for another meltdown.
With Mark's permission, we're reprinting a special alert he recently sent to SNS subscribers on April 12:
In March of 2007, I announced on CNBC's European PowerLunch program something that the global financial leaders seem not to have yet learned: too much global "hot money" in the system had created myriad asset bubbles, virtually all of which then burst later that year and next. In terms of asset destruction, this was the largest economic collapse in world history, including the Great Depression.
We appear to have been the first to document the modern use of the term "currency wars," as the currency manipulation model launched by post-war Japan and picked up by South Korea, which was then mutated by China into the constant state of intervention innocuously named "the peg."
Last Monday (4/8/13), after many years of suffering from the results of their own past economic manipulations, Japan gave up on reform and dove back into the money pool: they began printing money at a rate about 2.5x the U.S. rate (which is itself too large), with the stated intentions of doubling the amount of Yen in circulation, and achieving a 2.0% inflation rate.
Just as no one has ever properly calibrated timing on such "Quantitative Easing," the idea that Japan will properly calibrate rates AND timing is even more unlikely.
We now run the global risk of experiencing the 2007 economic problem set again.
Here are the reasons I am sending out this alert today, in rough historic order:
1. During "Fireman" Greenspan's term at the U.S. Fed, it lost control of the economy, driving interest rates first too high, and then ultimately into the "effective zero" range where they remain today. Today, almost all Central Banks (CBs) are in the same powerless position re: rates.
This capitulation meant abandoning the tools which had provided global financial security during a long era when it appeared that moderate changes in interest rates would dampen - or even eliminate - the business cycle.
2. Commercial banks stopped following Central Banks. Once rates went to effective zero, commercial banks no longer took their cues from the Fed or other CBs. Often, today (as in Japan this week), the CB will move one way on rates, and banks will move in the opposite way from that desired by (in this case) the Bank of Japan. (In Japan's case, increased printing led to decreased short-term lending to business clients.)
The CBs have, in many countries, become decoupled from the commercial banking sector.
3. Currency wars are out of control. Virtually all nations are now playing the dangerous poker game of competitive degradation in currency values, printing money and trying to get a (temporary) advantage in exports. China deserves full blame for this contagion, but all CBs have been forced to join in, with the result that other, more subtle tools (increased productivity, rate changes), are irrelevant.
The result is a near panic-driven rush into a level of global liquidity we have not seen before.
4. Failure to regulate commercial banks. Despite massive fraud and globally-threatening failures in planning and, one is tempted to say, intellect, the banks have used the riches given them during the bailout to prevent any meaningful changes in regulation. The world therefore faces an almost identical risk profile from banking as it did in 2007.
5. Other risks are growing:
As China's national economic growth slows, we are confirming what was printed here earlier (SNS: China Banks): that the state banking system is little more than a politically-driven pipeline for cash distribution. As an example, it turns out that one quarter of all companies funded by state banks during the last national Quantitative Easing (money printing) project two years ago (also larger, on a GDP basis, than the U.S. program), did not show revenues. Not profits; revenues.
The EU is broken. All of the goofy / scary stories each morning about PIGS and Cyprus and France and ---There is only one story here: the whole concept of tightly linking country economies with highly-varied productivities, and with no way of adjusting for economic slippage, leads to a broken system. It's now fully broken.
6. And then there's Japan again. In 2007, I discovered that too much global liquidity had resulted, at least in part, from the conversion of more stable investment instrument assets, through the Japanese "carry trade," into hot money. By lending at near-zero percent rates, global investors were taking large amounts of money out of Japan and moving these funds into many other assets, including the global equity markets.
Over the last few months, since PM Abe's election in Japan, speculators have successfully bet long on the Topix and Nikkei markets, figuring (correctly) that his future plan to print massive amounts of money would raise these equity markets, and drive down the Yen. Many are already rich from acting on this anticipation.
Keep in mind, this massive shift happened before he implemented any changes.
This week, now that the Easing process has begun, we have seen the one thing I had hoped not to see again: a carry trade building out of Japan, and raising global equity markets worldwide. Other asset markets are sure to follow.
We've already seen this tale, and we know how quickly it can unwind.
What's worse, the "carry trade" is now going on using other currencies as well, since so many of their CBs have driven domestic rates into the near-zero range.
It's as though the Central Bankers of the world just aren't smart enough to have learned what was behind the individual asset bubble crashes of the last five years. And those at yet higher levels are equally uninformed. IMF Managing Director Christine Lagarde is one example, as she openly encourages Japanese printing presses without appearing to understand that this is just the next step in waging currency wars. Perhaps someone should point out to her that the Yen/dollar ratio has just jumped from the mid-70s to near 100.
In summary, it would appear that the landscape is now discouragingly similar to that which led to the Great Recession, without the concomitant wisdom from lessons learned that could protect us from a repetition. But this time around the situation has the potential to be much, much worse, with global government and bank resources already exhausted on the last bailout, and with many more nations playing the carry trade role.
Because these behaviors are keying off the intentional degradation of currencies, my 2007 suggestion of going into cash no longer seems to be as useful a solution. Rather, one should examine whether there are any alternative asset classes which combine some amount of liquidity and the advantages of being both out of the mainstream (affordable) and yet necessary in hard times.
Food and water come to mind.
CEO, Strategic News Service