In reading the financial news I see articles like this one nearly every day, and I wonder what these interviewees must be smoking. Or more importantly, I wonder what their “clients” must be smoking; but I suppose some might be more interested in being told what they want to hear instead of something more useful.
This particular article claims to have insight about the outcome of Japanese monetary easing program with this demagogic headline: “Sliding Yen Could Herald New Asian Currency Crisis: Albert Edwards”
I must be a glutton for intellectual abuse because even after seeing that “tantalizing” headline on the main list of stories, I just had to click on it to see what it said even though I already had a pretty good idea.
Here’s the main paragraph:
The falling yen coupled with a fall-off in Chinese investment inflows “increasingly resembles” the run-up to the 1997 currency crisis, said Albert Edwards, Societe Generale’s ultra-bearish strategist.
“It seems investors may have forgotten that yen weakness was one of the immediate causes of the 1997 Asian currency crisis and Asia’s subsequent economic collapse,” Edwards wrote in a global strategy note on Wednesday.
It’s followed by this rather amazing claim:
Edwards, who recently returned from meeting clients in Hong Kong and Singapore, forecast the Bank of Japan will lose control of its recently launched program of aggressive monetary easing, leading to spiraling inflation and an increasingly unsustainable debt position.
And this justification:
“If the market really believes the Bank of Japan is committed to the 2 percent inflation target (and I certainly do), then Japanese bond yields will quickly attempt a move above 2 percent,” he said.
“If the Japanese government bond yield begins to rise, then an unsustainable debt position becomes even more obviously unsustainable and the government will be obliged to ramp up its quantitative easing operations to pin yields at low levels.”
“I certainly expect accelerating quantitative easing to undermine the yen further, and the market to anticipate this,” he added.
I think what he is saying here is that easing will cause bond yields to rise. But then he says that will beget more easing to keep yields low to avoid a debt crisis. I might be wrong, but it seems like fuzzy logic compared to the real “cause” of the ZLB; and I wonder how, if following this logic, one ever expects Japan to overcome deflation. The short answer it is never could.
The longer and more complicated answer is that deflation targeting makes the debt load unsustainable. What we see in the case of Japan is the Sumner critique in action – monetary policy is so tight in Japan that the government has been spending wildly to try to revive the economy. But that doesn’t work if the central bank is targeting deflation… I mean inflation. All the public ends up with at the end of the day is more debt with nothing to show for it because fiscal policy cannot overcome a deflationary environment unless the central bank adjusts its target to allow it. And in Japan, that hasn’t happened.
So basically what Mr. Edwards is saying here is that Japan is too far gone and will have to live with deflation or get hyperinflation and take down the rest of Asia with it.
But I think that is a choice between absolutes which is pretty wrong because it fails to take into account that most debt is nominal; deflation, not inflation, amplifies the burden of nominal debt, and a boost to economic activity that comes with boosting NGDP results in more revenue for the state – not less. There is also no indication that markets believe the BOJ will lose control of easing; but to my self-educated eye, it looks more like there is skepticism that even the 2% inflation target will be hit by the end of 2014.
If I were the suspicious type, I would say that Mr. Edwards is not an objective commentator on this matter. And I’d suggest that a closer examination of motivation for wishing more lost decades on the people of Japan, and perhaps even the people of rest of the world on the part of Mr. Edwards is warranted.
In a nut shell, I am a cynical type; but I am rational enough to understand that Mr. Edwards is looking out for his clients and isn’t paid to care about quality of life issues for any given nation. Of course I wonder why CNBC is trying to pass this off as credible news when it is obviously agenda-driven. Shame on them.