The balance of power now rests with Japan, according to the bank, as Japan’s policy-makers’ more dovish approach looks set to bring the world a step closer to a currency war.
The Bank of Japan doubled its inflation target to 2 percent in January and made an open-ended commitment to continue buying assets from next year. This follows a leadership change, with new Prime Minister Shinzo Abe openly calling for aggressive monetary stimulus from the country’s central bank.
“While a currency war is not our base case, the new-found commitment of Japan’s policy-makers does raise the risk of retaliatory action to keep the yen weak,” he said.
“The experience of the 1930s suggests to us that such large currency crises are likely triggered by domestic issues, and that they do create distinct winners and losers. EM (emerging market) policy-makers are already gearing up to make sure they remain on the winning side, but the balance of power for now rests with Japan.”
Yesterday we presented a simplistic analysis of why for Japan “This Time Won’t Be Different“, a preliminary observation so far validated by the just announced Japanese December current account deficit which was not only nearly double the expected 144.2 billion yen, printing at some 264.1 billion yen, but was only the first back-to-back monthly current account deficit since 1985.
In short – at least in the first month of Abe’s great reflation attempt, not only did trade post another whopper of a deficit, but so did the broader current account implying that much more Yen weakness will be needed to generate the structural reforms sought by the new Prime Minister.
(CNSNews.com) – So far this calendar year, the Federal Reserve has bought up more U.S. government debt than the U.S. Treasury has issued.
On Dec. 31, the total debt of the U.S. government was $16.4327 trillion and then-Treasury Secretary Tim Geithner announced that the government had hit what was then the legal debt limit. Last week, however, Congress enacted a law to suspend the federal government debt limit until May 18, 2013, and allow the administration to resume increasing the debt.
By the close of business on Wednesday, Feb. 6, according to the U.S. Treasury, the total federal debt had climbed to $16.4799 trillion—an increase of $47.2 billon for the calendar year.
With Abe picking his new dovish playmate, and Draghi doing his best to jawbone the EUR down without actually saying anything, it is becoming very clear that no matter what level of bullshit histrionics is used by the politicians and bankers in public, the currency wars have begun to gather pace. Japan’s more open aggressive policy intervention is the game-changer (and increasingly fascinating how they will talk around it at the upcoming G-20), as if a weaker JPY is an important pillar of the strategy to make this export-oriented economy more competitive again, it brings into the picture something that was missing from earlier interactions among central banks of the advanced economies – competitive depreciation. The last time the world saw a fully fledged currency war was in the early 1930s. Morgan Stanley’s Joachim Fels looks at what it was like and what lessons can be drawn for the sequence of events - there are definite winners and losers and a clear first-mover advantage.
Via Morgan Stanley, Back to the 1930s? What Would a Currency War Look Like?
What did the currency war of the 1930s look like?
The backdrop for the currency war of the 1930s was the Gold Standard and the Great Depression (many economists blame the former for the latter). By fixing the value of the currency to the price of gold, the Gold Standard prevented a country from printing too much money. If it did, people would simply exchange it for gold (or for other currencies pegged to gold). Yet, this rigid ‘rule’ also denied policy-makers any flexibility to deal with shocks to their economies. This was the reason why the UK abandoned this regime, setting off a volatile chain of events:…
[SHANGHAI] China’s central bank injected a whopping 450 billion yuan (S$89 billion) into the money markets yesterday. the largest single-day injection on record, showing Beijing’s increased confidence in its ability to use short-term precision tools to manage the money supply.
Traders told Reuters that the infusion of cash was made during ordinary open market operations, using 14-day reverse bond repurchase agreements, which will drain money back out of the system in two weeks. Sure OK !
KWN: Today one of the brightest men in the financial world warned, “Shadowstats has estimated that the annual Federal deficit for last year was really about $6.6 trillion when one included all of the accruing liabilities and expenditures not included in the $1+ trillion estimate for the deficit … Some estimates are as much as $220 trillion in unfunded debts … There was even a call last week to print $30 trillion (and $100 trillion prior to that in 2011). It is out of control.” Below is Robert Fitzwilson’s exclusive KWN piece which discusses the troubling reality the West faces going forward and how investors should positions themselves ahead of the coming chaos.
“We have all heard the saying that markets are driven by fear and greed. The way in which this manifests itself, is that investors become fearful of things that are priced low and greedy for things that are priced high. It is the only area of our life that people seek to purchase overpriced goods and shun underpriced goods….
Gold and silver may be off their highs but that hasn’t hurt demand for gold and silver coins. Sales ofsilver eagle coins hit a new record last month and gold coin sales in January reached their highest level in almost 19 months.
“You can’t get [silver coins]. They sell out,” says legendary investor Jim Rogers. “Several mints have run out of coins…because everybody’s worried about the future of the world.”
Rogers, chairman of Rogers Holdings and author of the new book, “Street Smarts: Adventures on the Road and in the Markets,” tells The Daily Ticker that he “wouldn’t rush in right now” to buy more coins, but he’s not selling them either.
KWN: The man who in 2009 amazingly called the bottom of the bear market to the day and announced the world would see a new bull market, legendary Mark Mobius, has some extraordinary thoughts on where he believes gold and other commodities are headed in the future. Below are the legendary fund managers thoughts on what to expect.
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