Gold and Silver Soar as Bank of Japan Commits 10 Trillion Yen ($115 Billion) to Combat Deflation

Commodities are soaring today, especially gold and silver, in the wake of news that the BOJ will Provide 10 Trillion Yen in Emergency Credit.

The Bank of Japan said it�s ready to pump more money into the financial system after unveiling a 10 trillion yen ($115 billion) program to help an economy battered by falling prices and the yen�s surge to a 14-year high.

�If there is a shortage of liquidity we are prepared to provide more funds,� Governor Masaaki Shirakawa said after an emergency board meeting in Tokyo today that decided to offer three-month loans at 0.1 percent to commercial banks.

Bond yields fell the most in 13 months, lowering borrowing costs for companies whose profits are being threatened by deflation and the yen�s advance. Today�s action constitutes �quantitative easing in the broad sense� said Shirakawa, who earlier today faced demands from government ministers to complement a stimulus package that Prime Minister Yukio Hatoyama will release this week.

�The BOJ was facing a lot of pressure from the markets and the government, so it wanted to show that it was being proactive,� said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. �The BOJ�s understanding is that deflation risks have increased.�

Unlike the unlimited lending facility, which required private-sector debt as collateral, the bank will accept a wider range of assets including government bonds as well as debt issued by local governments. The program has no time limit.

The measure will �further spread the strong effect of monetary easing and encourage a further decline in longer-term interest rates in the money market,� the central bank said.

Prime Minister Hatoyama welcomed the decision.

�I�m very happy that the BOJ and government share the same view� on the economy, said Hatoyama, who is scheduled to meet with Shirakawa tomorrow. �I applaud their efforts to show their resolve to stop deflation and spur the economy.�

BOJ Spawns Speculation and Carry Trades

While correlation is not the same as causation, I would suggest that a new round of �quantitative easing" by the BOJ would likely fuel further speculation in commodities and various carry trades.

One thing that QE is not going to do is help Japan out of its mess.

Japan's Public Debt Nightmare

Japan' public debt is 170 percent of GDP, the highest in the G20. Increased debt is all that has been accomplished by Keynesian silliness and Monetarist nonsense.

Over 10 years ago, the advice from Greenspan and the Fed to Japan was to write off the debts so that a recovery could begin. Japan did not do so and now has a dramatically escalating government debt to GDP problem, virtually guaranteed to blow sky high.

I talked about that at length in U.S. Faces Second Lost Decade "Because" of Misguided Stimulus.

Illusions of Stimulus

My friend "HB" has the following thoughts I wish to share.

There is nothing, absolutely nothing, that government intervention can achieve in terms of 'fixing' the economy. The choice was in either abandoning the unsound policy and the unsound investments it produced, or careen toward a complete destruction of the currency system.

Once again, I stand amazed at how people can look at this, and look at Japan, and look at the housing bubble/bust sequence, and still believe that monetary pumping and deficit spending are viable tools of economic policy when a bust occurs. It really boggles the mind, reminding me of Einstein's definition of insanity, 'doing the same thing over and over again and expecting a different result'.

Cause and Effect

Final analysis shows the U.S. Faces Second Lost Decade "Because" of Misguided Stimulus, not as a result of pulling stimulus too early as Koo, Krugman, and Romer suggest.

If that sounds wrong then just take a look at how we got here: Hoping to end the recession of 2001-2002, the Fed slashed interest rates, held them too low, too long, we had the mother of all housing/credit booms and the global economy crashed.

The US has nothing to show for all that stimulus other than a wrecked economy, massive debt that needs to be written off, and extremely wealthy parasite bankers bailed out by consumers after contributing to these problems.

Japan has an aging xenophobic demographic problem in which retirees need to draw down on their savings in retirement.

The BOJ responds by slashing interest rates to zero and the politicians run up budget deficits thinking it will spur demand. It can't, so it won't. All Japan has accomplished by its QE efforts (a Monetarist mistake), and its fiscal stimulus spending (a Keynesian mistake), is to spawn various carry trades while running up the national debt.

Interest on that nation debt will have to be paid back, and at the same time retirees need to draw down on their savings. Mathematically that simply does not work. And when long term interest rates rise in Japan (they will) Japan is going to blow sky high, more than likely before the US in my estimation. The only thing unknown is when, as global imbalances continue to grow.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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