Sunday, April 7, 2013

Today's links

1---Investor frenzy over housing has peaked, CNN Money

2--Obama spearheads economic slowdown, American Prospect

3---‘They want me dead!’ Venezuelan president claims US murder plot, RT

The US plot to kill Chavez replacement Nicolas Maduro

4---Japan's brave new monetary era, Bloomberg

Kuroda’s program of additional quantitative easing is enormous. The BOJ’s balance sheet is scheduled to expand by 30 percent of gross domestic product between now and the end of 2014. For comparison, since the U.S. Federal Reserve embarked on QE, its balance sheet has grown by less than 15 percent of GDP - - and it took almost five years, rather than less than two, to do so.

No less important is the announced shift toward buying long-term debt. Up to now, the BOJ’s bond buying has been not just small but also confined to short maturities. Short-term public debt isn’t much different from money, and swapping one kind of money (short-term bonds) for another (reserves at the central bank) is mostly pointless. The new bond-buying program, like the Fed’s, will focus on longer-term debt -- raising long- term bond prices and suppressing long-term yields, thus encouraging investors to buy other long-lived assets instead, including equities. That way, the stimulus is much stronger...

When Abe, the new prime minister, began pressuring the BOJ to raise the inflation rate, he said this was just one of three “arrows.” Abenomics was also to include further fiscal expansion and a program of supply-side reforms to spur private investment and growth. He needs to think again about the second and get moving on the third.

Abrupt fiscal contraction would be unwise but Abe should put much greater emphasis on medium- and longer-term restraint. After years of indecisive and ill-timed fiscal stimulus, Japan has become far too vulnerable to a fiscal calamity, and even now rising debt-service costs are a threat to more productive forms of government spending. Abe has said fiscal expansion isn’t forever, but he should signal greater resolve to address the debt issue. An increase in the sales tax due later this year should go ahead, and plans for longer-term spending cuts should be announced and, so far as possible, enacted promptly

5---Austerity bites?, Economist

6---Protecting Yourself From Japanese Insanity, zero hedge

let's look at what Japan intends to do:
  • It will double current stimulus to 7.5 trillion yen (US$81 billion) per month. This means buying the equivalent of 70% of the total long-term government bonds in markets.
  • It will buy Japanese government bonds with maturities of up to 40 years, seeking to push the average duration of Bank of Japan (BoJ) bondholdings to seven years, from the current three years. 
  • It will increase purchases of financial instruments linked to the stock and property markets to lift the prices in those sectors and encourage other investors to buy them. More specifically, the BoJ will increase purchases of exchange traded funds (ETFs) by 1 trillion yen per year and real-estate trust funds (REITs) by 30 billion yen per year.
  • The BoJ put a timeline of two years on its prior promise to achieve 2% inflation. 

To put this into some context, Japan's stimulus of US$81 billion a month compares to the U.S.' own US$85 billion program. But Japan's economy is much smaller than the U.S.. Adjusted for GDP, Japan's stimulus will be twice as large as America's. It makes Bernanke look like a patsy....
 
The velocity of money is one of the best indicators that deflation is getting the better of the Fed. Since the financial crisis, the Fed has flooded the economy with printed money, trebling the so-called monetary base. That base consists of highly liquid money, such as coins, paper money and commercial bank reserves with the central banks.  
US monetary base - Mar2013
Under normal circumstances, increasing the monetary base to this extent would be highly inflationary. But the problem is that this money is not making its way into the economy or changing hands (money velocity). That's why money velocity in the U.S. has dropped to a more than 60-year low.  
money-velocity1-13
Rising money velocity indicates that the same quantity of money is being used for several transactions. It's turning over, signalling a robust economy. Declining velocity, on the other hand, indicates money isn't changing hands and that the economy is anything but healthy.
 
 
 
Japanese Prime Minister Shinzo Abe has revealed a plan that aims to spend around $100 billion on infrastructure in the next 15 months. The amount is criticized as ‘too much’ for Japanese economy
 
11---Koo on BOJ's massive QE, pragmatic capitalism
 
Timely commentary from Richard Koo of Nomura here who says that the currency markets are misunderstanding the impact of QE.   Given the BOJ’s open-ended commitment to QE that was just announced, it’s interesting to see how the markets are indeed responding to the big talk out of BOJ.  Whether they can deliver is a whole different matter.  Koo clearly thinks they can’t:
“I worry that recent moves in the forex market have been driven solely by announcements regarding quantitative easing and not by the relative changes in actual money supply.

This is an indication that many forex market participants remain unaware that the relationship between the money supply and the monetary base has since 2008 (and since 1990 in Japan) morphed into something very different to what the textbooks predict.

Prior to these bubbles, base money and the money supply tracked each other almost perfectly across the industrialized world. Knowing one of these variables, it was easy to assume what had happened to the other. Since the bubbles burst, however, this relationship—like the one between base money and inflation—has collapsed.
Behind the breakdown of both these linkages is the fact that the private sector, which is dealing with balance sheets impaired by the collapse of an asset bubble, has not only stopped borrowing but has also been paying down debt, prompting the money multiplier to turn negative at the margin at times.

That is why central bank monetary policy has lost so much of its potency in Japan and other developed economies in the postbubble era.” 
 
 
 

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