Tokyo deflation before Harare hyperinflation - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 10 March 2015
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- By Bill Bonner

Bill Bonner
Gualfin, End of the Road, Argentina

Dear Diary,

Stocks recovered about half of Friday's losses. Gold was unmoved.

"It's the end of the supercycle. It's the end of the great debt cycle," said Ray Dalio, taking the words out of our mouth.

Bill Gross adds context:

"In the past 20 to 30 years, credit has grown to such an extreme globally that debt levels and the ability service that debt are at risk... Why doesn't the debt supercycle keep expanding? Because there are limits."

Neither Mr. Dalio nor Mr. Gross nor we know precisely where those limits are. But both the Europeans and the Japanese seem to be rushing towards them.

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In Europe, interest rates are lower than they've ever been, with $2 trillion actually trading at negative real yields. We don't need to tell you; it is unnatural and perverse for lenders to accept a poke in the eye in return for giving up their valuable savings. But that's just part of the perversity of the present system - no real savings are involved. The money never existed in the first place. Getting a negative yield seems almost appropriate, if nevertheless incomprehensible.

Today, central banks create "money" out of nothing. The reserve requirement for member banks is only 1% -- effectively, nothing. So, they can create as much as they want. No risk of mining accidents. No need for anyone to sweat or strain. No self-discipline or forbearance required. Savers can eat their cake. And borrowers can have it too.

Economists who still have their wits about them - if there are any left - are baffled. The lowest rates in history...and along comes the European Central Bank with a plan to drive them lower. What is the sense of it? No one can explain it. Rather, no one wants to admit that the real idea is to relieve the big banks of their bad debt. They've bought the debt of European governments. Everybody knows there is no way that debt will be repaid. When central banks buy government debt, it is effectively canceled...forgotten forever. The ECB helpfully prints the money to buy it from them before the public catches on.

Over in Japan, meanwhile, the government has been running deficit after deficit, for 25 years, funded largely by Japanese salarymen who think they are saving money for their retirements. What a disappointment it will be when they discover that the money was not saved at all, but spent by their own government. And now, the debts have grown so large that 43% of tax receipts are required just to service past debt, to say nothing of the amounts needed for current and future deficits. You can imagine how far you'd get if you tried this at home. Try living on 57% of what you earn (the rest goes to pay your creditors)...while still spending more than your income. See how long that would last. The Japanese are too polite to mention it, but their public finances are doomed. And it can only be a matter of months - okay, maybe years - before the whole thing blows up.

We have been saying - since '09 - that our itinerary was likely "Tokyo...then Harare." By that, we meant that we were probably going to experience a Japanese-like slump...and then a Zimbabwe-like hyperinflation.

We are now in year 6 of that slumpy, lumpy, bumpy ride. The US economy has been growing, but it is the weakest 'recovery' ever recorded. And what little growth there was was bought with more stimulus than was ever seen before -- $8 trillion. Few people realize it, but this 'stimulus' actually retarded real economic growth.

You can see that for yourself by looking at the difference between what has happened in the financial markets and what has happened in the real economy. Wall Street is as bubbly as ever. But Main Street has gone flat. Real wages, real consumer spending, real business investment - all the things that mark and measure genuine prosperity are as limp as a Tokyo noodle. Why?

Real prosperity depends on savings and capital formation. You have to devote real resources to new output capacity. You have to hire people and find new and better ways of doing things. But real business investment has actually gone down since '07. Based on figures from Q4 of '07 and '14, annualized, $400 billion was invested in business development in '07 against only $300 billion in '14.

Meanwhile, businesses borrowed, net, about $3 trillion more. Where did all this money go? It appears to have gone into stock buybacks, mergers and acquisitions, bonuses, fees and other speculator payoffs. These things benefit the 1% of the 1%, the insiders who are in on the deals; they do nothing for the real economy, except deprive it of the capital it needs to make real progress.

In 2000, we had a bubble in tech stocks. In 2007, we had bubbles in finance and housing. Now we have bubbles in corporate bonds ($14 trillion)...and student loans ($1.2 trillion outstanding).

Pop...pop...pop...that's what will happen to these bubbles. And when it does, it will complete our travel to Tokyo. In other words, that is when our slumpy ride turns into a terrifying train wreck.

Yes, Tokyo deflation before we get to Harare hyperinflation.

Stay tuned...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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