CA - Weekly Commentary: Failed
2024-03-16 05:58:43 ET
Summary
- Rising consumer prices will invariably upset the public, business community, politicians, and central bankers.
- Asset inflation is universally relished, viewed generally as validation of sound underlying fundamentals.
- Japan's deep structural issues can be traced directly back to the nation's spectacular eighties asset Bubble.
I often find my thoughts returning to the great German economist, Dr. Kurt Richebacher. This week, it was his analysis that inflation comes in various forms, with his argument that asset inflation was the most pernicious. It was such a minority view, seemingly unique. As he would explain, consumer price inflation is commonly recognized as destructive. Rising consumer prices will invariably upset the public, business community, politicians, and central bankers. Sure enough, there was overwhelming support for the Fed's effort to rein in consumer price pressures.
Meanwhile, asset inflation is universally relished, viewed generally as validation of sound underlying fundamentals. There is no anti-asset inflation constituency to exert influence over policy. Especially these days, there is nothing to suggest the Fed would adopt tighter monetary policy to thwart assets inflation, speculation, and Bubbles. Indeed, at this last cycle stage, it's assumed that supporting rising market prices is a primary responsibility of the Federal Reserve and global central bank community.
History teaches that the greatest crises unfold after the bursting of major asset and speculative Bubbles. The bursting mortgage finance Bubble and "great financial crisis" are not yet distant history. Even greater Credit and financial excess - and resulting deep structural maladjustment - were responsible for the Great Depression.
Another historic asset Bubble calamity is top of mind. The Bank of Japan (BOJ) meets next Tuesday. The market has a 56% probability of the BOJ boosting rates above zero, effectively ending the negative rate experiment with the first rate increase since 2007.
Japan's deep structural issues can be traced directly back to the nation's spectacular eighties asset Bubble. As is typically the case, Japanese asset inflation and speculative Bubbles unfolded in a low policy rate environment, with tame consumer price inflation having deluded central bankers into a false sense of prowess and control.
After 25 years of post-Bubble stagnation, the BOJ in 2013, under the leadership of Governor Haruhiko Kuroda (and Ben Bernanke prodding), adopted an experimental policy course of radical inflationism. Having ended 2012 at 158 TN yen, Bank of Japan assets inflated 379% to 759 TN yen, or $5.162 TN. If negative rates weren't enough, the Kuroda BOJ also imposed a yield curve control (YCC) regime that pegged government bond yields to near zero percent....
Weekly Commentary: Failed