Japan officially says farewell
to the decade long financial crisis. Five years ago the Bank
of Japan
began aggressively pumping money into their banking system
to resuscitate their flagging economy. This allowed the cost
of borrowing to drop virtually to zero. The result has been
a steadily improving economy. In addition, loans at commercial
banks rose last month for the first time in eight years, helping
banks write off a great number of bad loans that had accumulated
during the financial crisis. But now the story becomes curious.
Consumer prices rose in January for the third consecutive
month, apparently signifying the end to a decade long deflation.
So now the central bank wants to keep consumer price increases
in a range from zero to 2% a year, thus trying to manage the
economy.
The Bank of Japan (BOJ) has indicated that they will probably
not raise interest rates until the end of the year. They raised
interest rates in 2000 as the economy appeared to be on the
road to recovery. The recovery, however, stopped short and
the BOJ was forced to reduce rates again. Then they found
the magic elixir – the money supply. Now they want to
throw that away and start managing the economy with interest
rates and targeting inflation. Will they end up killing the
goose that is laying the golden eggs? And does all of this
sound eerily familiar?
At the start of this century, we were faced with a very serious
threat of deflation and recession or
worse. The Fed wisely recognized this and began lowering interest
rates but more importantly began increasing the money supply.
This stimulated the housing market and then spilled over into
the economy in general and averted a financial crisis. In
1987, we faced a financial crisis as the stock market collapsed.
The Fed stepped forward with a massive influx of cash and
averted what would have been a financial crisis. Once again
the key was the money supply and that was the purpose for
the creation of the Federal Reserve in 1913 – to make
sure there was always enough money in the system to avoid
the financial panics that occurred on a regular basis in the
1800s. So, all this micro-managing of interest rates and targeting
inflation most times causes more problems than it solves.
James Carville came up with the campaign slogan that helped
elect Bill Clinton in 1992. That slogan was “It’s
the economy stupid.” We might refine that to “It’s
the money supply.” It wasn’t that many years ago
(or was it?) that investors waited with bated breath for the
Thursday report on the money supply, and now the Fed would
like to doaway with money supply reports entirely. We suspect
the money supply is growing much faster than the Fed indicates.
Which would mean the economy is growing faster than some economic
data would indicate. Since he left office, Greenspan was quoted
as saying, “The US economy is in much better shape than
I had previously thought.”
There seems to be a conundrum here. If the money supply is
increasing at a healthy rate, that would stimulate the economy
and bring on some inflation. On the other hand, the Fed keeps
raising interest rates in their attempt to hold down the economy
and inflation. Well, we can’t have it both ways. We
believe the Fed is still somewhat concerned about deflation
mainly because of
cheap goods entering the US from China. Therefore, they would
like to see a floor under inflation.
Bottom line? The economy is strong; enjoy the ride.
Latest from China: The bloom is slowly fading from the real
estate industry. The real estate market has collapsed in Shanghai
and is spreading elsewhere. China has over-built in order
to put their
best foot forward for the 2008 Olympics. It is mind boggling
to see American corporations throwing
money into China in hopes of cashing in on the huge potential
consumer market. However, the vast majority of the Chinese
people have no funds with which to buy these products.
More distressing is seeing giant American banks investing
in state-owned Chinese banks. Two big American rating services,
Fitch and Standard & Poors, have said it would take $170
billion to bring
just two of the large state owned banks up to a level that
would justify investments by US banks.
And, of course, you have Google. In their attempt to cash
in on the huge “potential” market, they
appear to have mortgaged their soul or at least their integrity.
To give in to Chinese demands for
censorship runs counter to democracy. Shame on you Google.
So there are still obvious growing pains in China, but it
would not do anyone well if they fail.
Random thought for March 2006:
“The taxpayer: That’s someone who works for the
federal government but doesn’t have to take the civil
service examination.”
- Ronald Reagan
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