Japan: An Economy Of Zeros

The red sun on the flag of Japan symbolizes its position as the land of the rising sun. However, during WWII that round shape was pejoratively referred to as a zero. And now, since Japans economy is emitting so many zeros it can, unfortunately, once again be referred to as the land of zeros.

Prime Minister Shinzo Abe’s economic plan known as Abenomics consists of three arrows. The 1st Arrow is aggressive money printing known as QQE in order to bring about yen depreciation. The 2nd arrow is massive deficit spending. And the 3rd arrow is structural reform, which is political claptrap for feckless growth proposals like increasing workforce diversity.   

Therefore, the core strategy of Abenomics is to derive growth by increased government spending and flooding the world with the yen. If Abenomics were only about yen depreciation it would be considered a huge success. The yen lost 35% of its value between 2012-2015. Likewise, if the goal were to run huge deficits Abenomics has also achieved its goal. Since December of 2012 fiscal deficits have ranged between 6-8% of GDP.

What did the Japanese citizens get for losing 35% of their purchasing power? A ten year note that has hovered around 0% for most of this year. Inflation that has been stuck around zero percent and growth that has been virtually zero for years. But most importantly, in an example of how addicted asset prices have become to Japan’s perpetually increasing stimulus, The fact that BOJ president Kuroda didn’t expand on his 80 trillion yen annual bond buying spree caused the Nicki Dow to drop over 1100 points in the 2 trading days following his announcement.

Japan isn’t the only nation with a zero economy.

The Fed printed 3.7 trillion dollars since 2008 and has artificially pushed short-term rates near zero percent for almost 90 months. Yet, all we have to show for this massive intervention in markets is 0.5% annualized GDP growth in Q1. And Q2 doesn’t look any better. The usual Wall Street predictions of a Q2 rebound don’t look all that promising as the Philly Fed (-1.6), ISM Manufacturing (50.8), Productivity (down 4 of the last 6 quarters) and ADP employment data (156k) all disappointed the Street and pointed to an economy that is merely bouncing around that anemic 0% level. The weak US economy has caused the Dollar Index to fall below 94; a place where it has found support 6 times in the past year.

The weak data in Japan, China, Europe, the United States and the rest of the world should be clear evidence that interest rate manipulation and money printing cannot produce viable growth. Therefore, the big surprise for dollar bulls still lies ahead. While short-term rates are near 0% across the globe, the U.S. is the only nation in the developed world that has been able to produce core inflation of 2.2%. Therefore, real interest rates in the United States are the most negative among all our major trading partners and the level of real interest rates is the primary driver of currency values.

That key 94 support level on the DXY was recently breached and there is no real support until it retreats back to 80 from where it first bounced in July 2014. The main point is while there are no central bankers in the world that are anxious to raise nominal interest rates, the US is the only nation that has been able to achieve CPI above the new 2% goal universally adopted by Keynesian central bankers.

We have a condition of stagflation here in the US.  This is occurring in the context of a record $45.2 trillion total non-financial debt, which is growing at an incredible 3.44 times GDP. This is the truth as to why the Fed cannot normalize rates. If it did bring the Fed Funds rate back towards the pre-Great Recession level of around 5%, asset bubbles would collapse along with the tax base of the economy. This would make that already unsustainable ratio of debt to GDP growth explode even higher. You and your portfolio should be on high alert, the market chaos has just begun.

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Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”