Japan's Economic Model Leads Way In Nationalizing Debt

  brucewilds.blogspot.hk / By: Bruce Wilds

Recently articles have surfaced exploring how the central banks and governments have controlled markets making a strong case that it was nothing more than a new model of nationalization. By this, I mean taking or transferring a major branch of industry or commerce from the private-sector to state ownership or control. The key word here is "ownership," because while the state may not choose to exercise control over various decisions a company makes the fact is the person or entity that owns the stocks can control perceived valuations by being the market maker that sets prices. This path to economic prosperity by stealth nationalization is filled with moral hazards.

Japan Leads The Way In This Experiment

Years ago before the "Bernanke has all the answers" era, many of us criticized Japan for failing to own its problems. Many people thought Japan should have faced up to the mess it had created and done the right thing. Broadly accepted was the concept that only by letting its zombie banks and industries fail could Japan clean out the system and move forward. Instead, the Government of Japan ran huge deficits and ran up massive debt. For decades Japan languished and avoided disaster only by the fact that it enjoyed a large trade surplus year after year. Today much of that trade surplus has vanished but Japan's massive debt remains.  

By Jumping Into ETF Market The BOJ Supports Stocks

Japan is the poster child and living proof that low-interest rates do not guarantee economic growth and prosperity. After 2008 Japan made the decision to put itself on the leading edge of an experiment to propel its economy forward. This includes the BOJ not only expanding their balance sheet but pumping up the market by jumping into the ETF market, what the country is not doing is taking big steps toward economic reform. All this has morphed into a program that seems to share a key focus on doing "whatever it takes" to keep the economy moving forward.

Years ago what became known as the Plunge Protection Team or PPT, a group given the job of swooping in and supporting the market and stabilizing them whenever a sell-off occurred, found that such a policy was a slippery slope and risked incurring huge losses if not successful. The answer in this flawed policy was to never let the market slip but put on a path ever upward until everyone doubting the strength of the market finally capitulates. Needless to say over the years this has greatly distorted stock prices and valuations bringing us new high after new record high.

The BOJ Soaring Presence In Market Equals Fraud

What I want to make perfectly clear is that to accomplish this and keep the illusion alive that central banks must all continue expanding credit and debt so the wheels do not come off the economy. It would be rather hard to sell the illusion all is well if unemployment soars and defaults skyrocket. This means the central banks remain trapped in a box Ben Bernanke built and that Janet Yellen has reinforced.

A while back I outlined in an article how central banks through a stealth move were slowly buying equities and corrupting true price discovery. An interesting twist is that because money can easily flow across borders not all this is taking place in only the country where the credit originates. While a person can interpret all this as proof the markets are indeed rigged it also signals that any fall in prices is merely a signal for central banks to double down and rush in to buy more. It is easy to see how this feeds into a self-fulfilling loop of speculation. This falsely accomplishes two things, it bolsters and supports current holdings while reinforcing the image markets are climbing higher because our economic future is getting brighter which is a narrative mainstream media is glad to provide.

The Yen Is Very Vulnerable To A Fall As More Is Printed

This all started as a "short-term solution" but Ben Bernanke upped the ante by setting the bailout and money printing machines on high and flooding America and the world with QE. When other central bankers embraced this solution we embarked on an experiment that never really gained traction. Real momentum seems to ebb shortly after each new wave of stimulus and another fix seems to constantly be needed. With porous borders the money created by any of the central banks flows into distorting global markets.

In simple terms, the whole world is on a path that mirrors the same unsuccessful path taken by Japan since its bubble economy popped decades ago. It is a path that avoids real reform and bails out the very people that caused many of our problems. We are not creating real productivity growth or real wealth but simply driving up the value of certain markets and assets. This benefits those who own or have assets but does little or even hurts the poor or those who have nothing. You could say this lessens or reduces the relationship of debt but in reality, this is only true if we see massive inflation causing wages and income to soar. It is important to remember this is indeed a "high stakes" game and a strong incentive for central banks to continue on this course is that pension funds around the world are in serious trouble and any fall in their assets would be a disaster.

As we continue down the path to nationalizing debt two enormous problems exist, the first is the economic growth lacks any real quality and the second even bigger issue is that under this policy eventually central banks will control or pretty much own everything at a distorted value they determine best suits their narrative or purpose. The good or bad news depending on how you look at it is that the plan may not work and it may come crashing down around those in charge of this great manipulation. All this is akin to a doctor telling a patient to double or triple his dosage when the medicine does not work. Policymakers across the world have entered uncharted waters that are full of peril.