Global Competitive Debasement; Currency Wars Begin; Message of Gold

The Bank of Japan is leading the way to new measures of stimulus insanity with a plan to buy a wide variety of assets including real estate investment trusts (REITs) and asset backed commercial paper (ABCP).

Please consider Factbox: BOJ to set up fund to buy JGBs, corporate debt

The Bank of Japan on Tuesday decided to set up, as a temporary measure, a 5 trillion yen ($59.9 billion) pool of funds to buy assets ranging from government bonds to corporate bonds.

Following are key points about the new measure:

-- The programme will consist of a fund totaling 5 trillion yen to buy assets anew as well as the existing 30-trillion-yen fixed-rate fund-supply tool that will hold designated assets as collateral.

-- The programme is a temporary measure aimed at encouraging declines in long-term interest rates and risk premiums.

-- The fund is designed to cover Japanese government bonds, treasury bills, commercial paper (CP), asset-backed commercial paper (ABCP), corporate bonds, exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs).

-- The BOJ will not apply its self-imposed ceiling on its outright JGB buying to the JGBs to be purchased with the new fund.

-- The BOJ will aim to bring the balance of assets purchased using the new fund to 5 trillion yen in one year, with about 3.5 trillion yen assigned for JGBs and treasury bills and about one trillion yen for CP, ABCP and corporate bonds.

What About Paintings and Shellfish?

Why not paintings, equities, and shellfish? Given enough time, perhaps it comes to that.

Meanwhile, I am pleased to report that the global recovery has gained so much traction that numerous countries feel obliged to join the US/Japan sponsored stimulus party.

Global Competitive Debasement

Bloomberg reports BOJ May Have Acted First in Renewed Round of Action

The unexpected decision by the Japanese central bank yesterday to drop its interest rate to “virtually zero” and expand its balance sheet follows the U.S. Federal Reserve’s move toward more unconventional easing. Bank of England officials will consider further stimulus tomorrow, while the central banks of Australia, Canada and New Zealand are among those now holding fire on further interest-rate increases.

The renewed push for easier monetary policy comes as the International Monetary Fund warns growth in advanced economies is falling short of its forecasts ahead of its annual meetings in Washington this week. The dilemma for policy makers is that their actions may do little to revive growth and end up roiling currency markets.

Bank of Japan Governor Masaaki Shirakawa may not be alone for long in taking action and Daiwa Institute of Research argues he’s now engaged in a “vicious spiral” of monetary easing with the Fed as both compete to bolster their economies.

“The irony is that the Fed is creating all this liquidity with the hope that it will revive the U.S. economy. It is doing nothing for the U.S. economy and causing chaos for the rest of the world,” Joseph Stiglitz, a Nobel Prize-winning professor at New York’s Columbia University, said today in New York.

The ECB will be forced to postpone tighter policy as European exports fade and investors continue to fret about peripheral euro-area economies such as Portugal and Ireland, said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Inc. in London.

“The ECB’s exit strategy is fully on, but the business cycle will turn against them,” said Peruzzo. “The communication will then be adjusted to consider downside risks greater than what they have anticipated.”

The ECB last week stepped up its government bond purchases as the cost of insuring against default on Portuguese government debt surged to a record and Irish bond spreads soared to euro- era highs.

Another risk is that the use of unconventional monetary policy is viewed as an effort to weaken currencies to boost exports, rising competitive devaluations and protectionist responses, said Eric Chaney, chief economist at AXA Group in Paris. Japan, Switzerland and Brazil are among the countries that have already intervened in markets to restrain their exchange rates.

“This is close to a currency war,” said Chaney, a former official at the French France Ministry. “It’s not through exchange-rate manipulation, but through monetary policies.”

Currency Wars

This is not "close to a currency war" this IS a currency war.

While I have had numerous differences of opinion with Joseph Stiglitz, he is absolutely correct when he says “The irony is that the Fed is creating all this liquidity with the hope that it will revive the U.S. economy. It is doing nothing for the U.S. economy and causing chaos for the rest of the world.”

Moreover what Stiglitz says about Bernanke and the Fed, applies equally to the Bank of England, the Bank of Japan, and the central banks of Canada and Australia as well.

Message of Gold

The competitive currency debasement can be seen in the price of gold and silver.

None of these central bank measures are doing a damn thing for the real economy (in the US or anywhere else), but it sure has ignited a fire in gold and silver.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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