Richard Duncan,
author of The Dollar Crisis (reviewed: here) writes today in The Financial Times of
London (paid subscriber section),
Japan's monetary alchemy
may not yield gold
The most aggressive
experiment in monetary policy ever conducted is now under way. Japan is printing yen in order to buy dollars in such extraordinary amounts that global
interest rates are being held at much lower levels than would have prevailed
otherwise. In essence, the Bank of Japan is carrying out the unorthodox
monetary policy that the US Federal Reserve intimated it was considering in
mid-2003. In other words, the BoJ is creating money and buying US Treasury
bonds, which is helping to drive down US interest rates and underwrite US
economic growth - and, by extension, global growth.
It is inconceivable
that economic policymakers in Tokyo and Washington do not understand the
impact that this unprecedented act of money creation is having on global
interest rates and economic output. The amounts involved are staggering.
Since the beginning of 2003, monetary authorities in Japan have created Y27,000bn with which they have acquired approximately $250bn - that amount is
equivalent to more than 4 per cent of Japan's gross domestic product. It also
represents $2,000 for every person in Japan. In fact, it would amount to $40
per person if divided among the entire population of the world. Most
importantly, it is also enough to finance almost half of America's $520bn budget deficit this year.
The amount of new yen
that Japan "printed" and converted into dollars during January 2004
alone was enough to finance 13 per cent of the US budget deficit. The
investment of those dollars into dollar-denominated debt instruments clearly
explains why the yield on the 10-year US Treasury bond fell last month in
spite of the 10 per cent upward revision in the Bush administration's budget
deficit projections.
By accident or by
design, Japan is carrying out the most audacious endeavour to conjure wealth
out of nothing since John Law sold shares in the Mississippi Company in 1720.
So far, the results have been impressive. Japan's monetary alchemy has been
the most important factor in allowing the US government to finance a $700bn
deterioration in its budget over the past three years without pushing up US
interest rates to levels that would pop the wealth-creating property bubble
there.
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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