I think we’ve now truly hit the full comical scale of just how bad government can be. Japan is leading the way (with the people’s permission of course).
Think please about this for a second. Japan will now print almost $1 trillion dollars per year from their central bank to try and “create” 2% inflation. if you believe in the classical definition of inflation then they already have plenty of it (inflation = increase in the money supply). However, what Japan “wants” is for price levels to rise by 2%. First off, the idea is so stupid I almost shouldn’t explain this point, but since 90% of the world buys into this BS, I guess I have to for the sake of those who do something more productive than economists (that would be anyone, physician, trash collector, line painter),
Inflation “Targeting”
The goal is that if prices rise 2%, it will “spur growth” perhaps through expected salary increases to offset the cost of goods increases. This is a good reflection of an “economist’s” opinion on the intelligence of the average person (and maybe it’s warranted, you tell me):
if you get a 2% pay raise, you will feel richer and spend more even though everything you buy costs 2% more. And somehow this will have a follow on stimulative effect on the economy.
Please, if I have any Japanese readers who voted for Abe or know someone who did, please tell me if this “trick” on you is working. Do you feel richer already?
What are the recent developments in Japan? So far, in anticipation of this, the Yen has fallen over 25% vis a vis the dollar in the last 6-8 months. That means that imports (and the Japanese import ALOT – including the already expensive natural gas they buy from Australia to replace their shut down nuclear power plants) they buy cost 20% more (woo hoo that’s an inflation target!). Hope those salary increases offset that. This inflation targeting can only come from people who think too much.
Japanese Yen vs US Dollar – 1 Year Chart (Yahoo Finance)
Now we see Japanese government bonds teetering. Kyle Bass (whom I featured 2 weeks ago and at other times on this blog) says amusingly, that Japan is already past the point where they could pay off their debts and now that they’re within a market move of having 100% of their tax revenues going to interest payments, it doesn’t matter. Internally, many Japanese bonds are owned by pension funds and Japan is much farther into the cash-out/payout stage with pensions than the accumulation stage, so these pensions will be selling Japanese government bonds. So I am not sure who will buy the bonds of a country paying <1% interest, with the currency collapsing and not much overall demand.
The PhD Standard
All of this reminds me of an amusing quip from noted Fed expert Jim Grant. When asked (fairly recently) a question regarding central bank policies, he said that we have replace the gold standard with the “PhD Standard.” He was discussing the idea that central bankers fool themselves into thinking they can control price levels and precisely tune an economy to get exactly the amount of inflation, unemployment, and interest rates that they desire. That in fact, there was no “standard” behind the price of money (like gold), the standard was now the intellectual brilliance of the economists running central banks. See Jim outline this lack of “common sense” in this interview (the other guest on the show asked if “Phd” stood for “Piled High and Deep?”):
History Lesson
Manipulating currency has never worked long term to help “grow” an economy. Empires and more modern nations have tried and it has turned out terribly. I am not going to list them all – it’s part of your education to go do this research!
USA On the Same Path
We’re a bit behind and slightly different, but our debts both out in front and behind the scenes (future social insurance liabilities) are enormous. We (they) are also printing money, borrowing money and manipulating interest rates to try to spur “growth.” We will experience pain for this also, though I’m not sure when and how it all plays out.
Anywhere to Hide?
Logic says gold. I’m not sure where all of the Japanese money will go (likely Australia) but the knee-jerk move is to US dollars. Why anyone would want all of their wealth tied up in paper money of any issuer that’s on the “PhD standard” I don’t know. It makes to me to diversify among sounder currencies and physical precious metals. But sense is mostly non-existent (look how long people hung on to stocks as Lehman, Bear, and countless mortgage firms blew up in 2008).
Perhaps people will not rush to gold if disaster strikes in the government bond/currency world. It seems from a couple of the “test incidents” over the past two weeks, that US treasuries are still a primary go-to vehicle in times of stress. The reports of the demise of ultra low rates in the US have been a bit premature. We got a sniff of that in the past few months but the recent renewal of crisis concerns in Europe and the upheaval in Japanese bond and currency markets have sent many back to US treasuries.
Shorting stocks is one way to diversify risk. Shorting is however, quite the art. It takes practice to keep costs/losses low when shorting. I should know – I have had a test fund for the past 7 months and in it, I am testing with real money, both long and short trading strategies. I am using real money so that I feel the real emotion of gains and losses. It is very important to channel emotions properly in trading and I need work in that area. Don’t worry though – I am using smaller position sizes and risk control so losses on losing trades have been small. Nonetheless, if you want to use this strategy, it will require some work.
Puts on markets or stocks could be used too. The risk is more controlled (a purchased put’s loss is limited to what you pay). Success with puts still requires some skill in the market.
Buying stocks is another diversification tool. Marc Faber has pointed this out many times using Germany and Mexico as examples. In both countries (Weimar Germany and Mexico from 1982-1995) which experienced massive currency devaluation, you would have kept some wealth by being in stocks. You still would’ve lost some wealth but not the 100% wipeout experienced by government bond holders and bank depositors.
Real estate might work as real assets seem to never go to “zero.” However, if rates rise, as they would under this scenario, what does that do for assets?
Foreign currencies from countries that have been more responsible (Singapore, Sweden, Chile perhaps?) could be another option though the forex markets are often considered another area of higher expertise in the financial markets (funny since many immigrants, who are not currency traders, learn this skill as a matter of course).
Summary
Unfortunately, these diversification techniques require some knowledge of markets. It is very unfortunate for unsophisticated investors that they’d have to consider learning shorting, put buying and strategic stock purchasing in order to protect themselves from the foolishness of the PhD Standard. But it is what it is. I don’t have a better answer for you other than that gold and other precious metals may yet arise as bastions of net worth defense. But diversifying among currencies, precious metals, stocks and real estate could be the only way to protect yourself.
