Japan: Lessons of a debauched currency

Everything happening in the US today happened in Japan in the 1980's. And when their bubble burst, they fell into a decline from which they've never recovered.

Keynes was right about one thing…

Peace talks broke down last weekend. Observers had expected the IMF meeting on the weekend to result in the equivalent of the Peace of Amiens or the Surrender at Appomattox. But Treasury secretaries and central bankers went home, unpacked their bags, and resumed their premeditated mischief.

The dollar went down. Why would anyone pay 100 cents for an old, worn out greenback when the Fed promises to create trillions more of them, brand spanking new? Europe and Japan resumed firing with their new QE guns. Asian nations sent out snipers to intervene in the currency markets directly. And China and the US resorted to “trench warfare,” reported The Financial Times, neither apparently ready to give up an inch; that is, neither was prepared to allow its currency to buy more today than it did yesterday. In America, China has become an election-year bogeyman. The electorate seems convinced that any nation that stockpiles $2 trillion worth of America’s I.O.U. greenbacks must be up to no good.

So, the war goes on. But it is an ersatz war. All the combatants really want the same thing – to debauch their currencies at the expense of savers and creditors. Sooner or later, they’ll conspire to get the job done. A full 93% of US financial professionals believe the Federal Reserve Bank is on the case. It is expected to launch major debauch in November. Investors have run up almost all asset classes in anticipation. The Dow passed 11,000 on Friday. Soft and hard commodities hit new highs. And if, on a given day, gold does not set a new record, it is probably because the markets are closed.

What a remarkable period in financial history! We can hardly believe our luck. Absurd things are happening. John Maynard Keynes was wrong about practically everything. But he was right about this:

There is no subtler, surer means of overturning society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a way that not one man in a million is able to diagnose.

And we get to see it live. And probably dead. The US dollar fell under the control of the debauchers, partially, in 1913…when America’s central bank was formed…then fully, in 1971, when gold backing for the dollar was completely eliminated. In the 100 years before the Fed was formed, the dollar lost not a penny of its value. In the almost 100 years since, it has lost almost all of them. If the greenback were to lose another 5% of its 1914 value, there would be nothing left at all.

Such slow larceny bothered no one. As long as the dollar slid gradually, and peacefully towards worthlessness it seemed almost natural, even healthy. Central bankers could mix with polite company and hold their heads up. None was arrested, as far as we know. None was so tormented by his crime that he had to be restrained or sedated. But now central banks are committing their felonies in broad daylight. Economists argue for more. But investors are confused and worried. Today, they buy gold. Tomorrow they may buy shotguns.

But what else can the managers do? After increasing for 61 years, the volume of credit in the US – and hence, the volume of sales – is no longer expanding. This leaves householders with debt to pay down and exporters with no alternative but to fight for market share. What to do about it? Lower the value of the currency! But in a correction, the natural thing is for prices to go down with a decline in demand. So, money tends to become more upright just when the managers would most like to see it slouch.

The poor central bankers. They are victims of their own delusions of competence. They have never actually managed anything successfully. When the economy is expanding, they exacerbate the boom. When it is contracting, they slow down the correction. And now, they fight a currency war not of their own choosing, but of their own making. The war is their response to the correction, which results from the bubble, which was caused largely by the managers themselves.

And now they’re looking for a hotel where they can do it again. It was at the Plaza Hotel in New York in 1985 that they managed their Treaty of Versailles. It ended the currency war of the early ’80s…and prepared the way for an even bigger war later on. Back then, Japan was the go-go economy. Like China today, Japan was the world’s leading exporter. It wanted to keep the yen low. The US meanwhile, was losing market share. James Baker and the other US managers threatened sanctions. Japan gave in. By early the following year, the yen was 40% higher against the dollar and Japan’s GDP growth rate had been cut in half. But the managers fixed that problem as they fix them all. In Japan, they cut rates 4 times in 1986, creating a flood of hot money. Four years later, Japan was the envy of the entire world. In January of 1990, the Nikkei Dow hit a new record – 4 times higher than it was when the Plaza Accords were signed. Then, the bubble popped. You don’t need to be reminded of what happened next. The Nikkei crashed. Real estate crashed. Everything crashed. The economy went into a 20-year tailspin, failing to create a single new job in two decades. Neither stocks, nor real estate, nor the economy ever recovered.

No one wants to follow the Japanese down that road. Ben Bernanke manages the dollar, desperately trying to avoid it. And Premier Wen of China said it would be “a disaster for the world” if Western nations tried to force China in that direction. He’s right. But he needn’t worry about it. Disaster is coming anyway. The managers will make sure of it.

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