"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Tuesday, January 11, 2011

Finally!!! Some International Cooperation!!!

It's absurdity.  It wasn't that long ago that China committed to keeping the Euro strong, and started increasing its purchases of EU debt.  Now Japan wants in:
Japan plans to buy bonds issued by Europe’s financial-aid funds, its finance minister said, joining China in assisting the region as it battles against a debt crisis that prompted bailouts of Ireland and Greece.
“There is a plan for the euro zone to jointly issue a large amount of bonds late this month to raise funds to assist Ireland,” Finance Minister Yoshihiko Noda said at a news conference in Tokyo today. “It’s appropriate for Japan to make a contribution as a leading nation to increase trust in the deal. We want to buy more than 20 percent.”
The euro gained against the yen as the statements of support showed that the country with the world’s second-largest foreign-exchange reserves, after China, may help stem the risk of the crisis spreading. Portugal’s borrowing costs jumped last week as concern deepened that nation may be unable to avoid tapping the European Union’s rescue fund.
“This signals that the world is coming together” to save Europe, said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “But it’s unlikely the euro will maintain its current strength. It’s unclear whether the market will be able absorb all the bonds being issued by the problematic euro-zone nations.”

Followers of this blog know that I am a pessimist when it comes to the ability of the major nations of the world to cooperate in the face of the ongoing global financial crisis.  The recent photo opportunity ridden yet non productive G20 meetings are examples of global disarray.  So too is the ongoing currency war.
So what gives with this recent announcement by Japan?  It's self-interest.  It's keeping the Japanese Yen low. It's ensuring their exports to Europe.  It's also an unsustainable vendor financing scheme.  It's a desperate attempt at keeping the fragile global paper debt-based monetary system afloat - but make no mistake about it - Japan and China's policies are driven by self interest FIRST.  
Debt is the problem, and what are the major nations of the world doing about this global, enormous, burdensome debt problem?  They are printing ever more amounts of funny money to... get this... BUY MORE DEBT!!!!
It's hilarious in a depressing way when one realizes that the sovereign debtors are already struggling to manage their existing debts, let alone manage new debt.  But what other choice do they have?  Just look at the quote below this blog's title and you get the idea.  Ending the debt game now ensures a global deflationary debt collapse.  Delaying it by adding more debt risks currency collapse.  Which door do you choose? 
Jim Rickards recently tweeted a good summary of what is transpiring:
#ECB prints to buy #Eur & #Japan debt. #China prints to buy Eur,#US & Japan debt. US prints to buy Eur & US debt. Got that?#Priceless
And around and around we go with the debt game...  Yes, I am in awe at the governments of the world reaching out to each other to selflessly extend a hand.


Jim Slip said...

Let's say it like it is.

Some economies (for whatever reasons) are calibrated towards producing stuff and exporting them.

Other economies not so, so they import stuff.

But everyone wants to have his economy functioning (well, maybe the Eurozone doesn't).

So, under MMT, governments are not revenue constrained, but their citizens are. Under MMT, the exporters desire to save in foreign currency. The importers (assuming they have an account deficit), if they desire to maintain their purchasing power, need either to have a big enough government deficit, or leverage.

It worked so far, but now things have changed. Western household are not credit worthy anymore, so we see de-leveraging.

What is there to do?

Under MMT, either Western governments pursue deficits big enough to make up for the de-leveraging. Then it's up to the exporters if they still want to accumulate foreign currency.

Or we have a deflationary adjustment. But supposedly this will damage both the economies of the exporters and the importers.

I for one wish to see the facade of government debt issuance being stopped.

Misthos said...

Jim - that's an excellent summary.

But I'm torn between the reality of the system, that is, the need for more and more debt to keep it afloat and "running," and the reality of the endgame - that an unsustainable system always ends.

How it ends is the big question. I just don't see the global economy and the accumulation of lopsided global debts and surpluses gradually re-balancing themselves...

Wage disparities between East and West are too great, and I just don't see non-exporting countries magically turning into little German exporting powerhouses overnight.