Self-defense

FINANCE MINISTER Noda Yoshihiko announced at a press conference that Japan intended to use its foreign exchange reserves later this month to buy “more than 20%” of the bonds issued by the Euro zone to pay for the second Irish bailout. The Chinese will be chipping in too.

One wonders why they would spend so lavishly to invest in money of the mind issued by a political entity made of the same material. The reality, however, is that it is not a bailout of Ireland. It is a bailout of Euro banksters and bond holders paid for by the Irish taxpayers as the result of their membership in an unworkable monetary regime:

This isn’t about rescuing Ireland; it’s about rescuing the euro. On any objective interpretation, Ireland has been ruined by the single currency. The ECB’s policy of ultra-low interest rates forced Ireland to pursue a catastrophically pro-cyclical monetary policy, with real interest rates of minus one per cent between 1998 and 2007. The subsequent crash was utterly predictable – and widely predicted.

The EU then forced Dublin into a bail-out which, while calamitous for Ireland, was thought to be necessary to save the European banking system…(I)t was the EU’s insistence that a bail-out was necessary which hiked Ireland’s rate to borrow ten-year money from 6 to 9 per cent. To make sure that Dublin caved in, the ECB then threatened to withdraw liquidity from Irish banks. Ireland has now been forced to accept the package on ruinous terms. Its repayment obligations, combined with the inability to devalue, will condemn its people to a generation of deflation, debt and emigration.

Indeed, it has taken an Irish member of the Socialist Party, Joe Higgins, to call out the MEPs to their face. (There’s a short and worthwhile YouTube video here.)

Why is Japan getting involved in this charade? Pater Tenebrarum of the site Acting Man thinks he knows the reason–self-defense. First:

(A) collapse of the euro, or even just a crisis that threatens to spiral out of control and thus weakens the euro significantly, would clearly be bad for the business of these major exporters to the euro-area.

But also:

(W)e are surprised that nobody thought about something that strikes us as rather obvious. Two words: distraction – and contagion.

Let us say, hypothetically, that the euro-area’s sovereign debt problems do lead to a panicky, out-of-control crisis at some point…What would the markets in such a situation be likely to soon focus on next? Could it be the country whose fiscal debt is the by far highest relative to economic output in the industrialized world?…That country has a name, and it is – Japan. By helping to arrest what increasingly looked like a death spiral lately, Japan can achieves inter alia a degree of distraction from its own budding debt problems.

Why might this have become a sudden concern?…In today’s strongly interconnected and highly interdependent financial markets, contagion has a habit to show up in the unlikeliest places.

We have previously noted how CDS spreads on Japanese JGBs have suddenly vaulted higher into what may be described as ‘mild concern’ territory. In essence, they have begun to move in sympathy with CDS spreads on PIIGS and other European sovereign debt. This is unlikely to be a coincidence – far more likely is that the buyers of these CDS have adopted a very similar chain of reasoning as the one we just mentioned…So by offering to buy EFSF bonds, Japan kills several birds with one stone, or at least renders them momentarily dazed.

The mention of stones brings to mind the Japanese proverb, Yakeishi ni mizu, or “Water on a hot stone”. In other words, Japan’s foreign exchange expenditures could wind up evaporating as quickly as the water tossed on the rocks in a sauna.

In contrast, there is a different theory regarding the Chinese purchase of the debt: While they’re propping up the Euro with one hand, they’re simultaneously converting some of their foreign exchange holdings of the Euro to American dollars and making money on the deal.

There’s no word whether Japan is doing the same, though they are surely aware of the rumors. If they were also working that angle, it would cover more bases than throwing good money after bad in Europe to buy goodwill and prevent the contagion from spreading. Feathering one’s nest to safeguard against hard times is an excellent means of self-defense.

Then again, one wonders how Japan and China will defend themselves if or when banks in the United States implode? Or if the men and women wearing the chalk-striped suits are forced to switch to a work uniform with a broader pattern.

Here’s an observation that is not mine, though I concur. What we’ve been seeing since 2008 is not the failure of free market capitalism. It is rather Phase Two of the failure of socialism. Phase One started with the collapse of the extreme variant of socialism as symbolized by the removal of the Berlin Wall. Phase Two is the collapse of the diluted variant of social democracy.

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At least cash on the barrelhead still remains a viable option. For now, anyway.

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