Nov 062014
 November 6, 2014  Posted by at 12:16 pm Finance Tagged with: , , , ,

NPC Ford Motor Co. coal truck, Washington, DC 1925

I think I should come back to what I wrote yesterday in The Revenge Of A Government On Its People, because in my view the essence of that essay deserves far more attention than I see it get, either in reactions to my piece or in the financial press as a whole.

That essence is that, as reported by Reuters yesterday morning, Bank of Japan Governor Haruhiko Kuroda, in a speech at a seminar, stated that last Friday’s surprise QE9 measures were a reaction to one thing, and one only: falling oil prices. This was not announced on Friday, and nobody is addressing it now, though it is a crucial piece of information. First, here’s Reuters:

BOJ’s Kuroda Vows To Hit Price Goal, Stands Ready To Do More

“There’s no change to our policy of trying to achieve 2% inflation at the earliest date possible, with a roughly two-year time horizon in mind ..” [..] “There are no limits to our policy tools, including purchases of Japanese government bonds .. ”

Kuroda said while inflation expectations have been rising as a trend, the BOJ decided to ease to pre-empt risks that slumping oil prices will slow consumer inflation and delay progress in shaking off the public’s deflationary mind-set.

“In order to completely overcome the chronic disease of deflation, you need to take all your medicine. Half-baked medical treatment will only worsen the symptoms ..” While he stressed that Japan’s economy continued to recover moderately, Kuroda said falling commodity prices could be risks to the outlook if they reflected weakness in global growth.

That is to say, plunging oil prices scared Kuroda to such an extent that he couldn’t even wait for their effect to play out. He felt sure about what the effects would be: more deflation, aka less consumer spending. Kuroda was convinced beforehand that the Japanese people would not use their ‘oil savings’ to make alternative purchases, he very strongly suspected they would keep the savings in their pocket. Well, not if he can help it. As I wrote:

You would expect falling oil prices to provide the Japanese, like Americans, with some very welcome, even necessary, financial breathing room. But PM Abe and BoJ’s Kuroda will have none of it. And no matter how you look at it, there’s something at best curious about a central bank that decides to throw ‘free money’ at an economy BECAUSE it sees falling resource prices, which would supposedly make money available already.

Kuroda makes money available to the system because he is afraid, make that convinced, that other available money, from lower gas prices, will not be spent ‘properly’. He doesn’t have faith in consumers’ contribution to inflation/deflation, even if they have more money available. So he launches another step of QE, which he knows will never reach consumers, to keep deflation at bay. There is something very peculiar about all this. Where does QE end up? Here:

BoJ’s Surprise Easing Showers Wealth On Japan’s Top Billionaires

The Bank of Japan’s unexpected stimulus has already made the country’s richest even wealthier, adding more than $3 billion to the four top billionaires’ net worth. Fast Retailing Chairman Tadashi Yanai, Japan’s richest person, saw his fortune grow by about $2 billion in the three trading days since the central bank’s Oct. 31 announcement that sparked a plunge in the yen and a rally in stocks. While billionaires such as Yanai gained, the central bank’s unprecedented asset purchases to support economic growth have yet to show evidence of spreading beyond Japan’s wealthiest people and corporations.

What consumers see of this is that since Kuroda’s QE9 ‘policy’ is aimed at sinking the yen, oil becomes more expensive for the Japanese people. A shrewd way of denying people the benefits of lower oil prices, while at the same time enriching Tokyo’s elites. Kuroda – and PM Abe’s – own stated goals are more important than the people of Japan who are supposed to benefit from these goals. They’ve sworn to raise inflation rates to 2%, and you better not stand in their way. If Japan doesn’t get rid of the duo, and fast, even crazier ideas will be tried out. And the game doesn’t stop there. Europe, too, will be affected:

Kuroda Has Draghi in a Bind as Euro Soars Against Yen

Mario Draghi has something new to worry about as he prepares for tomorrow’s European Central Bank policy meeting: the euro-yen exchange rate. The yen approached a six-year low versus the shared European currency after Bank of Japan Governor Haruhiko Kuroda surprised investors late last week by extending his record stimulus program. Kuroda’s actions jeopardize the weaker euro that analysts say Draghi needs to reflate the economy, heaping pressure on him to come up with a policy response. “Kuroda has thrown down the gauntlet to Draghi,” Robert Rennie at Westpac Banking Corp. said: “Whether Draghi will, or can, accept the challenge remains to be seen.”

The question then becomes if Draghi et al are pondering the same line of thought that Kuroda does. Deflation is a major issue in Europe already. Lower oil prices can be as much of a threat there as in Japan. My first idea would be that Europeans are more likely to spend the cheap oil savings into the economy than the Japanese are, but on the other hand there’s so much poverty all over the old continent that many people won’t have much at all to spend.

In the run-up to today’s ECB meetings there’s been lots of criticism of Draghi ‘going it alone’ and communicating very poorly with eurozone members’ central bankers. And he seems to be on course for his perhaps most serious confrontations:

Mario Draghi’s Efforts To Save EMU Have Hit The Berlin Wall

Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into €1 trillion of stimulus without the acquiescence of Europe’s creditor bloc or the political assent of Germany. The counter-attack is in full swing. The Frankfurter Allgemeine talks of a “palace coup”, the German boulevard press of a “Putsch”. [..] .. a blizzard of leaks points to an ugly showdown between Mr Draghi and Bundesbank chief Jens Weidmann. They are at daggers drawn. Mr Draghi is accused of withholding key documents from the ECB’s two German members, lest they use them in their guerrilla campaign to head off quantitative easing.

[..] We now learn from a Reuters report that Mr Draghi defied an explicit order from the governing council when he seemingly promised to boost the ECB’s balance sheet by €1 trillion. He also jumped the gun with a speech in Jackson Hole, giving the very strong impression that the ECB was alarmed by the collapse of the so-called five-year/five-year swap rate and would therefore respond with overpowering force. He had no clearance for this. [..]

The North is competitive. The South is 20pc overvalued, caught in a debt-deflation vice. Data from the IMF show that Germany’s net foreign credit position (NIIP) has risen from 34pc to 48pc of GDP since 2009, Holland’s from 17pc to 46pc. The net debtors are sinking into deeper trouble, France from -9pc to -17pc, Italy from -27pc to -30pc and Spain from -94pc to -98pc.

As I said, there’s neither love nor trust lost between the Japanese government/central bank and the people of Japan. And though Abe and Kuroda understand the link between deflation and consumer spending much better than most western ‘leaders’, what they don’t – want to – understand is that there is no magic wand to boost spending, other than raising wages. But wages have been falling for 20 years in Japan, and companies have n incentive to raise them in the present environment.

What will happen if oil and gas prices fall further? What is other commodity prices also start falling? What will Kuroda come up with then? Will he tell Abe to raise taxes? The 2nd part of the sales tax rise, of which part 1 hammered the economy after April 1, is already bitterly discussed. Other tax hikes seem even less plausible.

Japan is slowballing its way into a dead end street. Europe may be doing the same, just at an earlier stage, but picking up speed. While the US and UK are in a detour to that same dead end, blissfully unaware that no matter what you spend, you still end up in the same place, just poorer. Whoever can get his citizens to borrow most will seem strongest the longest, and then still break down.

But that’s tomorrow’s tale. Kuroda’s statement that QE9 (or whatever one may label it) was the direct, even pre-emptive, reaction to plummeting global oil prices, should give us lots of things to ponder. What will happen to European in/deflation numbers? They already look ugly, and where additional spending should come from is entirely unclear. What about the US? How far is it still removed from a deflationary threat? And what will it do when that threat intensifies, for instance when commodities’ prices sink?

Kuroda has thrown the first stone, and he’s named it. Central bank policies are no longer about the general state of an economy, or about jobs numbers, they’re about the threat of specific price levels. Now, I think that unlike the western press, Yellen and Draghi and other central bankers are acutely aware of what Kuroda stated yesterday. But perhaps I give them too much credit.

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    NPC Ford Motor Co. coal truck, Washington, DC 1925 I think I should come back to what I wrote yesterday in The Revenge Of A Government On Its People,
    [See the full post at: Inside The Minds Of Central Bankers]

    John Day

    So deflation is showing up in decreased demand for oil/energy, the “master commodity”?
    That seems ideal from a viewpoint of “powering down”, which is the transition we all need to make going forward.
    Weakening the Yen keeps fuel prices in Japan from dropping, keeps Japanese from consuming more fuel. Japan has been using more fuel since shuttering the nuclear power plants. This is effectively more austerity for the Japanese people, and they will consume less from the outside world with their weaker currency.
    Europe is already in austerity, but not overtly transitioning the economy into sectors involving more human-input, compared to cheap robot manufacturing.
    The Japanese are known for being able to buckle-down and work together, but Europeans, not so much. Individual European states have repeatedly been able to buckle-down in times of adversity.
    If this is the clever misdirection guiding us into getting by with less, then EU break-up is necessary pretty soon. Will the UK lead the way? It would be easiest for them.
    Central bankers are used to cooperating in one way, while presenting things in another way. Here is more on the purported plan to transition to SDRs (special drawing rights) as the new global reserve currency.
    It would seem to make global central banking a supranational authority, and appears to be supported widely, as the world chafes at the boot of the $US regime.


    Keynesian insanity. Add in, fear of loss of control and you have the necessary ingredients for the destruction of societies and nations.

    Do these bureaucrats really believe folks stop heating their homes, driving to work, buying groceries and purchasing necessities because they believe the piece will fall? Maybe the dumb apparatchiks within leviathan believe, but not the ring leaders. And it is the leaders who have been granted full consent, as usual, so here we are.

    Unfortunately, the likes of FDR have been sold as heroes when in fact they are the villian opportunists who were sure to not let a crisis go to waste.

    It’s all here, for inquiring minds.

    Price supports, burning of crops, and other assorted breakings of windows. Whatever was necessary to keep ’em down and neatly queued up in bread lines.

    And to think, we and our offspring now have to live through a repeat government created and controlled disaster. Must be somehow related to that same government run education system. The one that writes and distributes it’s own version of history’s “Talking Points.”

    My old copy of Rothbard’s work is well warn, and every time I review it, I learn more about how it got like this and where this is all going.

    John Day

    Gail Tverberg has an updated analysis of global oil supply, demand, debt, wage, and other issues.
    If I may summarize, she sees the adaptive shifts from years of high oil prices as destroying the wages which allow consumer-economy. (Robots don’t buy stuff. Factories let workers go, or use workers as cheap as robots.)
    Drilling and exploration are down, and won’t come up until price projections come up, which is never. The current plays will keep pumping, even if losing money, because governments collapse, otherwise. After 2 years, supplies will start falling, but demand can’t rise enough to fund extraction of expensive oil… Devise your own scenario to follow.
    Oil Price Slide – No Good Way Out


    Aside, on the machinations of One World Government, New World Order, “Illuminati” inspired philosophies, let the success of the Euro stand as an example of the outcome of mass cat herding techniques.

    Seems we are heading farther afield of that scenario, not deeper into it. The Internet Reformation has thrown some rocks into the cogs of the best made plans.

    I cannot recall a time when even the common folks down at the local coffee are questioning the Fed, Pentagon and other authoritarian apparitions, to the extent they now are.

    Of course, war as rallying cry is still effective, at least to some extent, but even that is being questioned these days.

    Gonna be hard for the power to rein in media to only one newspaper “Hearst” and three audio video alphabet soup media outlets, FDR style, this day and age.


    Zero motor cycles sure sounds like a way to save energy.

    John Day, depicting deflation as even remotely positive (powering down) is not a good idea. It’s more like the bubonic plague of an economy, where fuel may well be saved, but is far from the first thing on people’s mind.


    I read somewhere that Japan is only following what the Federal Reserve is telling them to do. All central banks are in collusion, with the Fed at the head. Germany is preventing Draghi from doing what he wants to do, and so Draghi must be rubbing his hands together with glee that German exports are being hammered by Japan: “This will bend her over a barrel and eventually she will allow me to have my way.” Perhaps Merkel wanted to play ball all along, but politically she couldn’t. Maybe Japan will finally allow her to say, “Well, we have no alternative but to play along.”

    Japan is banking on the fact that other countries are not going to join in on the currency wars for awhile, and she will get a short-term advantage until they do. Japan is forcing Europe to join in.

    Japan twisted her people into a pretzel in the early 30’s and did the same thing they’re doing now. Japan did not care whether her people starved; corporations benefited. But that was then, a very different world than now.

    Greenspan said something like (and I’m paraphrasing) the world is going to deflate, but it has to be done slowly.


    That inflation has become a holy grail is bizarre,no matter what wacky definition is used.That Kuroda thinks the falling price of imported oil is something to be fought or offset is insane. Oh wait. No, those are perfectly reasonable ideas and it is we who are insane or just as well be because our ideas are not even given mention much less consideration.

    It may seem off topic but all through the 90’s Greenspan would go before congress a couple of times year, Americas elected officials,and announce that if wages rose he would slam on the monetary brakes. The peoples representatives smiled and all but kissed his ring. There is no possible theory of democracy which can explain that. Explain how politicians were happy that their constituents could look forward to falling in real terms wages and that people voted for them. Albeit there were no candidates available to battle against falling wages.

    With that bridge crossed I long ago gave up on anything worth talking about vis a vis the economy would be talked about much less even mentioned. Americas experience is a good proxy for what goes on in Japan and the EU as well. Up is down and crazy is normal.

    John Day

    Professor: Agreed on that “breaking windows to help the economy” stuff, yes on people running trucks on natural gas, like in the 1980s, no on the Mercedes with solar panel skin…

    Ilargi: I’m not so much cheering deflation, as seeing it as inevitable in our “powering down” process, a term used in the Transition community, for gradually reducing one’s use of fuel/energy. I spend a lot of time trying to envision scenarios where we power down without genocide. It’s hard. I’m constantly on the lookout for ideas.
    I know that global elites are not all in one camp, and it should be obvious to all that this is a bad time to destroy global infrastructure at the end of the era of cheap resources.
    I can see global banking elites, Jay Rockefeller types, using monetary maneuvers such as those being done in Japan, to induce reduction in the use of fuel by workers and retirees, as long as they get to keep hold of the reins of power.
    US military “solutions” have been destroying demand in Iraq and Libya, and keeping that nice, easy-oil in the ground for a bit later.
    I’m just trying to see any ways that we can get from where we were 15 years ago, to where we will be in 15, 20, 30 years, without WW-3.
    Help me out if you see something.
    Here’s the latest by the Archdruid, John Michael Greer, about the collapse of monetary economy to feudalism, and I can’t see how to get there from here.

    Dark Age America: The End of the Market Economy


    This pattern will continue until we see a run on the bullion banks. That is the only way to break the immense power of the central bankers and those they serve.

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