Enter the Piper

SUBHEAD: When things run off the rails again what's the Fed to do to get people back into the markets? Add more debt?

By Raul Ilargi Meijer on 10 March 2014 for the Automatic Earth -

Image above: Illustration to "Stairway to Heaven". From (http://citinews.net/giai-tri/nhung-album-ban-chay-nhat-trong-lich-su-am-nhac-OKLDR7Y/).
There's a lady who's sure all that glitters is gold
And she's buying the stairway to heaven
When she gets there she knows, if the stores are all closed
With a word she can get what she came for
Ooh, ooh, and she's buying the stairway to heaven...
...And it's whispered that soon if we all call the tune
Then the piper will lead us to reason
And a new day will dawn for those who stand long
And the forests will echo with laughter.
- Stairway to Heaven by Led Zeppelin
Both Japan and China have poured huge amounts of stimulus into their banking systems lately (yeah, sort of like the US). What they have to show for it is the – fully predictable – in Japan a disaster of the born-of-despair, three-arrowed Abenomics (fiscal stimulus, monetary easing and structural reforms). And in Chinese a financial system that grew from $10 trillion to $24 trillion in just 5 years. Enter the Piper, stage left.

Japan’s current account deficit widened to a record $15 billion in January, most since records began in 1985. That’s right, the country that was once the world’s producer and exporter just had its worst current account deficit. Ever. Even as the value of the yen has plummeted – it lost 25% against the USD in Q2 2013 compared to Q2 2012. That was supposed to have lifted exports. And it did do temporarily and partly (Toyota did well). No more though, the party’s over. In January Japan’s trade deficit also rose to a new record, up 71% (!) to $28 billion.

None of this should come as a surprise, as explained by Patrick Barron of the Ludwig von Mises Institute of Canada, quoted by Tyler Durden:
… why Japan’s trade deficit seems to be increasing rather than decreasing after massive monetary intervention to reduce the purchasing power of the yen: Monetary debasement does NOT result in an economic recovery, because no nation can force another to pay for its recovery. [..] Eventually the monetary debasement raises all costs and the initial benefit to exporters vanishes. Then the country is left with a depleted capital base and a higher price level. What a great policy!

Japan’s economic growth numbers were also revised downwards. Its economy grew by 0.7% in 2013, down from an estimate of 1%. In Q4 2013 Japan’s economy grew by just 0.2%, against an estimate of 0.3%. That is even more disappointing because people were expected to buy more, especially big ticket items, ahead of the April 1 sales tax raise. Now that’s evaporated too. Consumer spending rose just 0.4% in the Q4 2013.

Obvious questions: How much longer will Shinzo Abe be PM of Japan? How much worse can the domestic economy get? Abe lost his fight against deflation, it cost Japan a ton of money, it has huge energy issues, and its currency debasement will make all imports much more expensive than they were pre-Abenomics.

As for China, it announced over the weekend that its exports plunged a mind-numbing 18.1%. Analysts’ estimates were for a 7.5% increase… And China had a $22.98 billion trade deficit in February. That’s today’s no 1 world exporter for you.

It had a surplus back in February 2013, but there are still analysts claiming the difference was due to the Chinese Lunar New Year holiday. And if not that, US weather perhaps?! Chinese producer prices fell 2%, and consumer prices rose 2% in February, the slowest rate in 13 months. No more spunk.

As I said a few days ago, the US economy has no more resilience, no more flexibility left. If what is happening right now in Asia continues - (and what would stop it?)  - all that’s needed is one little spark, either in Ukraine or in economics somewhere, Japan, China, Europe, and things can unravel in a split second with no turning back.

What is the Fed going to do when things run off the rails this time that would get people back into the S&P, or the housing market? More debt?

It doesn’t work for anyone else.

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