Loading ...Elliot wave analysis strongly suggests we are in the very early stages of a Cycle degree 3 rd wave up in Au and the Shares, which will last years. So if TA is massively bullish it would be good to have some fundamental backing…..well there is, as there is increasing talk that as QE ain’t working, the CB’s are going to have to use Helicopter Money…..
The notion of helicopter money – having a central bank issue new money to pay for government spending – could also be used to finance the US deficit, and eventually, to fund a budget surplus that could pay down the national debt.
This idea – often associated with economic basket cases such as Venezuela and Zimbabwe – has until now been left untested in the modern era.
It may get such a trial next month, when Japanese policymakers meet to discuss their next salvo against deflation in June.
“There has been more and more talk about what central banks could do should a recession come”Toby NangleJapan’s central bank, which has already experimented with mass quantitative easing and negative interest rates, is viewed as being on the cutting edge when it comes to unleashing monetary stimulus.
George Saravelos, a Deutsche Bank strategist, says that “with Japan fast approaching the limits of its existing reflation project, it is a canary in the coalmine for the next global policy innovation”.
Japan Is First To Panic; Won’t Be The Last
What does this mean? In a nutshell, the next phase of the global economic crisis has begun. First, governments responded to the 2000 tech stock crash with lower interest rates and big deficits. Then they responded to the housing/banking/derivatives bust of 2008 with even lower interest rates, bigger deficits and experiments like QE. Then they responded to the resulting anemic recovery with negative interest rates and more QE.
None of the above has produced the kind of growth in the US, Europe or Japan that slows the upward march of debt/GDP, which means everyone is still digging their own financial graves. Since this is not an acceptable long-term strategy (eventually the sides of the hole cave in and bury you), something else has to be tried by the people who hope for re-election a few years hence. So now we’re back to massive deficits, but with a negative interest rate twist. Think about it: When a government issues negative-rate debt, it earns a profit on the transaction. And when it sells its debt to its own central bank it in effect owes the money to itself. A site called Forex Live just published an interesting analysis of this unprecedented situation:
A paradigm shift is under way on deficits
If you can print your own money, you can issue unlimited amounts. The only risks are inflation and a decline in the currency.
It just so happens that inflation and a decline in the currency are exactly what many governments want.
In the developed world, inflation is non-existent and the currency war rages. The trump card in that game is default via monetization and it’s coming.
The dominant ethos of the past 25 years has been a drive towards fiscal discipline. Politicians and political commentators have built their reputations and careers as misers. There is something inherently, almost pathologically wrong about defaulting.
That will all change.
The idea of default sounds like it would create panic; if not in the streets then in markets. But it’s easier than you might assume and it will happen sooner than you think.
The hard part is already done. It’s simply a matter of taking the debt the central bank already owns and writing it off. To ease the shock value of it, the debt will simply be converted into bonds the central bank will continue to ‘own’ but will have 0% coupons and no maturity.
Japan will be the first to do it
Japan is a demographic nightmare and has been unable to stir inflation for the past 20 years despite zeroed out rates. The debt-to-GDP ratio is a mind-blowing 227.9% with a fresh stimulus budget coming. There is no way out.
At the moment, the BOJ owns 35% of Japan’s government debt and at the current pace of buying it will hit 63.3% at the end of 2020. With the stroke of a pen, all that could disappear.
I don’t even think it would be disruptive. The central bank could launch a new round of QE at the same time as the announcement and keep control of what’s left of the bond market. At the moment, Japanese 10-year are yielding -0.11%. The means you have to pay interest to the government just so they’ll give you your money back in 10 years. Almost everyone who owns Japanese bonds is an insurance company or pension fund that has no other choice.
How do markets react
Governments face hard choices but they will find that monetization is far easier than Eurozone-style austerity (how many governments won re-election after that?) or stalled out growth.
Certainly in the first episode there will be some worries in markets. Gold will undoubtedly rally and the currency will decline. It may even create some inflation.
But like QE, the first forays will be small and governments will quickly fall in love with the ability to spend in ever-larger amounts.
This is disturbing on a lot of levels, but it’s also quite conceivable. When governments figure out that in a world of deflation (caused by the industrial overcapacity and bad debt from their previous policy mistakes) they really can borrow and spend whatever they want — and if it causes inflation, well, great, they win the currency war — then the floodgates will open.
Japan, as it has with past monetary and fiscal insanities, is leading the way. And if history is any guide the rest of us will follow along shortly.
http://www.zerohedge.com/news/2016-05-31/japan-first-panic-won%E2%80%99t-be-last
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