Monday, January 04, 2010
Ambrose Evans-Pritchard was calling for the sky to fall on the global economy during much of the year last year, figuring the entire world would be drawn down into the deflationary black hole from which there is no escape. It didn't.
He appears to be starting 2010 right where he left off in 2009 based on this commentary in the Telegraph, this time around with the added twist that Japan will someday this year wake up to find itself in the middle of an inflationary supernova, assuming of course that deflation is to inflation as black hole is to supernova.
The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system.The part about Ben Bernanke being caught off guard is something that all too many have already forgotten. Is there any reason to think that he'll be any better in seeing the next crisis coming, one that will probably look completely different than the last one, for which the central banks are undoubtedly prepared?
As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan's Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era. The surplus regions (China, Japan, Germania, Gulf ) have not increased demand enough to compensate for belt-tightening in the deficit bloc (Anglo-sphere, Club Med, East Europe), and fiscal adrenalin is already fading in Europe. The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of GDP sits near record levels in two-fifths of the world economy. Our long purge has barely begun. That is the elephant in the global tent.
Here's the part about Japan, where a Weimar revival is on tap for later this year.
Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.It's not all good, apparently, with the important exception of a buying opportunity that will make the prices seen last March look expensive.
Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China's yuan in the beggar-thy-neighbour race to the bottom. By then China too will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while, but only at the price of an asset bubble. Beijing must hit the brakes this year, or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-2008.
By the way, if anyone knows what to make of the subtitle in this story as it appeared at the Telegraph, please fill me in. Milton Keynes?
According to Wikipedia, Milton Keynes is a town in Buckinghamshire, but he probably meant Milton Friedman - something about money and inflation, most likely.