Thirty Year Retread

What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway]

 

Japan’s prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America’s new CiC in the somewhat ostentatiously appointed Trump Tower. They look happy.

Photo credit: Reuters

 

Indeed, these topics are unlikely. Rather, what they’ll be discussing is cooperative trade, growth, and employment policies between their respective national economies. They’ll also talk about currency debasement opportunities.

Soon enough, perhaps by the time you read this, you’ll be able to peruse the headlines and garner soundbites of their discussions. Maybe a new partnership will be announced. Anything’s possible.

Regardless, what follows is a brief review – a thirty year retread – that’s intended to put the meeting within its proper context. This is the back story you won’t hear anywhere else…

To begin, it was precisely the wrong thing to do at precisely the wrong time. But that didn’t stop the best and the brightest from attempting to improve upon the natural order of things.

By 1985, fourteen years after Nixon severed the last tattered threads tying the dollar to gold, floating currencies had resulted in grotesque distortions to the global economy. Clever fellows were called upon to remake the world in their image.

As far as we can tell, none of the officials from West Germany, France, the United States, Japan, and the United Kingdom, who gathered at New York’s Plaza Hotel on September 22, 1985, knew they were letting another genie out of the bottle.

 

The Plaza Hotel in New York, anno 1912.

Photo credit: The Plaza Archives / Sharpy

 

The U.S. dollar had appreciated 50 percent between 1980 and 1985 against the Japanese yen, West German Deutsche Mark, and British pound – the currencies of the next three largest economies at the time.

Not unlike today, American manufacturers said they couldn’t compete with the dollar valued so much higher than the currencies of America’s trading partners. In addition, the U.S. trade deficit had ballooned to 3.5 percent of GDP as foreign imports became vastly cheaper for American consumers. No doubt, a new policy fix was in order.

 

The players who hatched out the Plaza accord in 1985. It didn’t take long for the then still relatively new system of floating fiat currencies to provoke one intervention after another. From left to right: Gerhard Stoltenberg of West Germany, Pierre Bérégovoy of France, James A. Baker III of the United States, Nigel Lawson of Britain, and Noboru Takeshita of Japan.

Photo credit: Fred R. Conrad

 

One Ominous Sign

The Plaza Accord sought to devalue the dollar to bring global trade back into balance. More importantly, the Plaza Accord was the first time central bankers executed a coordinated intervention into foreign exchange markets, where the global economy took prominence over national sovereignty.

By all policy maker accounts, the Plaza Accord was a great success. The dollar declined by 51 percent against the yen between 1985 and 1987, as intended. In fact, in early 1987 these countries met again, this time in Paris, to stem the dollar’s further decline.

 

DXY, weekly, 1980 – 1988. Regarding the Plaza accord, note that these geniuses met when the new downtrend in the dollar was already several months old and well established. On Saturday October 17 1987, treasury secretary James Baker called the German minister of finance and demanded from him to force the BuBa to rescind its most recent rate hike. He then threatened that the US would unilaterally devalue the dollar even further if the German authorities failed to comply. On the following Monday, the stock market crashed by 22%, to this day the biggest one day plunge in history – click to enlarge.

 

The resulting Louvre Accord allowed the Bank of Japan to freely supply yen for dollars. Magnificent, unintended consequences soon bubbled up in Tokyo.

The recessionary effect of a strengthening yen and the subsequent Louvre Accord fueled Japanese money and credit growth. These expansionary monetary policies resulted in the massive Japanese asset price bubble of the late 1980s and long multi-decade deflation after the bubble popped.

For instance, in 1989 property in Tokyo’s Ginza district sold for $20,000 per square foot. By 2004 prices had fallen over 90 percent. The stock market bubble and bust was equally absurd…

In September 1985, at the time of the Plaza Accord, the Nikkei 225 traded for about 12,667. By December 29, 1989, the Nikkei 225 closed at 38,916 – up over 207 percent. Presently, the Nikkei 225 is at about 19,300 – down over 50-percent even more than 27-years later.

 

The Nikkei, 1987 – today. “Buy stocks for the long term”, they said. “Never, ever sell”, they said, “that’s always a mistake”. When the Nikkei peaked at the end of 1989, its average trailing P/E ratio was over 80. No other broad-based big cap index in a large developed market has ever reached such a nosebleed valuation (SPX in 2000: trailing P/E of 44). In 2008, almost 20 years after the bubble’s peak, the Nikkei traded well below 8,000 points, a decline of approximately 81%. It remains 50% below its 1989 peak even today, after a 160% rally from its low – click to enlarge.

 

The unfortunate souls who bought stocks in December of 1989 and held on to them will see most of their adult lives pass by before getting back to even – if ever.

After Japan’s asset prices blew up, Japan’s economy went into a multi-decade slump. Despite mammoth amounts of government stimulus and deficit spending, pioneering experiments in quantitative easing, direct stock market purchases via ETFs, negative interest rates, and more, Japan’s economy has never achieved “escape velocity”.

Of course, no one could have known in 1989 how long this slump would last. But early on, for the shrewd observer, there were gloomy warning signs for everyone to see…

For example, on January 8, 1992, following the mass decline of Japan’s protracted credit induced asset bubble, President George H.W. Bush, while visiting in Japan, leaned over to Prime Minister Kiichi Miyazawa.

Presumably, Bush intended to whisper some vital Yankee secrets for orchestrating a financial bailout. But, then, in an ominous and profound sign of things to come, he barfed on his lap. Japan’s economy has yet to recover.

 

The infamous “bad sushi” moment – shortly after Japan’s prime minister Myazawa’s crotch is bathed in a generous helping of elder Bush vomit, the latter’s wife jumps at the chance to get rid of her husband by suffocating him with a napkin. Vigilant secret service agents enter the fray and prevent the assassination attempt from succeeding. As always, they remain unsung.

 

When Trumponomics Meets Abenomics

In effect, Japan’s economy has continued to throw up all over itself. If you didn’t know, Japan’s government debt is 230 percent of GDP, which is the largest debt to GDP percentage of any industrialized nation in the world. By comparison, the government debt to GDP ratio of the United States is 104 percent.

 

Drowning in debt: since the bursting of the great bubble, successive Japanese governments have implemented the Keynesian recipe to a T. The country has absolutely nothing to show for it, except the largest debtberg in the developed world. This is easily one of the most expensive government boondoggles in history – click to enlarge.

 

However, contrary to the United States, Japan has financed its debt domestically. The way Japan has been able to get by without borrowing from foreigners is through its positive trade balance. With the exception of 2012 through 2015, Japan has consistently exported more than it imported. Last year, Japan’s trade surplus widened 361.6 percent to JPY 641.4 billion as of December of 2016.

If you recall, Prime Minister Abe, the brainchild behind the Bank of Japan’s Abenomics, has pursued a reckless policy to boost exports by trashing the currency. A weak yen, Abe believes, should give Japan a competitive advantage. By devaluing the yen, Abe believes Japan should somehow be able to export its way to wealth.

 

After impoverishing Japan’s citizens by devaluing their currency’s external value, Japan finally achieves a trade surplus again. Unfortunately, a trade surplus is completely irrelevant as a measure of prosperity. Obviously, no country has ever devalued itself to riches. Not to put too fine a point to it, the mercantilist doctrines favored by both Japan’s post WW2 governments and Mr. Trump are long-refuted utter hogwash. Why do these nonsensical policies remain so popular? We suspect a mixture of economic ignorance and the desire to serve special interests is at work – click to enlarge.

 

Who knows, maybe Abenomics is working – for now? Japan has been able to move its trade balance back into the black. Nonetheless, the cost of devaluing the population’s wealth will ultimately outweigh any short term economic gains.

In the meantime, the long-term trade deficit the United States has had with Japan causes steam to come out of President Trump’s ears. It goes counter to the objectives of Trumponomics. Rather than importing goods made in Japan, Trump wants to return the jobs back to the U.S. and then export goods.

Hence, when they meet today, he’s looking to cut a deal with Prime Minister Abe like he’s cut deals in the past with New York cement contractors. “You scratch my back, I’ll scratch yours.” But what deal is there that can really be cut?

A Plaza Accord Part II is a nonstarter. But there are other ideas we’ve come across. One idea is for Japanese companies to invest in Trump’s infrastructure projects. Another idea is for Japan to increase energy imports from the U.S.

Will such agreements work? Will they bring wealth to both the U.S. and Japan? Your guess is as good as ours. What is known is that today’s predicaments, manifesting in ridiculous trade imbalances, are the consequences of unbacked fiat money. Things have gone absolutely haywire in the absence of natural limits.

Certainly, in the futile effort to correct the distorted trade imbalance, the meeting of Trumponomics with Abenomics will make an ample contribution to the madness. You can damn near count on it.

 

Charts by: StockCharts, BigCharts, TradingEconomics

 

Chart and image/video annotations and captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

2 Responses to “When Trumponomics Meets Abenomics”

  • jks:

    Visiting a weird foreign country like Japan is fraught with protocol and etiquette hazards. Bush went to all the trouble of blowing chunks on the prime minister and then, come to find out, it’s considered impolite in Japan to spew on the host of a dinner party. Who knew?

    Obama rankled folks in India by chomping on chewing gum during their solemn and important Republic’s Day Parade. It’s funny what foreigners find insulting.

  • tj33a:

    What a fabulous article. Thanks for posting this.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • From Fake Boom to Real Bust
      Paradise in LA LA Land More is revealed with each passing day.  You can count on it.  But what exactly the ‘more is of’ requires careful discrimination.  Is the ‘more’ merely more noise?  Or is it something of actual substance?  Today we endeavor to pass judgment, on your behalf.   Normally, judgment would be passed on a Thursday, but we are making an exception. [PT]   For example, here in the land of fruits and nuts, things are whacky, things are...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • Russian Gold Rush - Precious Metals Supply and Demand
      Goldfinger Strikes, Sort Of This week, we saw a tweet from a prominent goldbug. He said, "Russia added another 9 tons of gold to its reserves in March. The hits just keep coming." How many errors in this short quip? We count six, exactly one error for every two words.   This one's got everything: Smersh, Spectre, Putler and Pussy Galore! [PT]   One, we call this the fallacy of the famous market actor. Russia is famous. Its purchase of 9 times is therefore imbued with...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist