S&P cuts Japan debt rating while US waits for Bernanke rate rise hint
Posted on 27 April 2011 with 4 comments from readers
Global bond markets are once again a focal point for investors today with Fed chairman Ben Bernanke about to face the press for the first time in an open conference, and interest rates most likely the top question, while S&P has cut its rating of the outlook for Japanese debt to negative, heralding the possibility of higher interest rates in the world’s third largest economy.
Interest rate rises are soaring up the economic agenda as signs of inflation appear all over the world in consumer price levels. This is a direct consequence of money printing by central banks to prevent a deeper recession two years ago.
Inflation, inflation
The problem is that the cure may turn out to be worse than the disease. Inflation erodes the value of money and savings when it is higher than inflation. It also creates bubbles in stock markets.
Indeed, the low interest rates of the past two years have created an asset price complex that only stands up because of these low rates. Start to adjust them upwards to keep bond holders from selling, and you put pressure on the price of equities and real estate.
It is a difficult path to tread. Japan knows all about this having suffered a huge stock and real estate bust in 1990 that left the country with a huge debt burden that continues to be a massive drag (click here). The S&P not unreasonably notes that Japan will have to print money to pay for earthquake rebuilding.
Ben Bernanke has been more aggressive in pumping money into the US economy than the Japanese in the early 90s. But with unemployment way above where it should be if this was working, and house prices still falling, S&P has also recently downgraded the US debt outlook.
Bond king
Key US bond investors are dropping out. ‘Bond king’ Bill Gross is actualy shorting US bonds (click here), while the strength of silver while Western markets were closed on Monday points to Asian redeployment of money into precious metals; and equally to silver market manipulation by investment banks when the market reopened on Tuesday.
Wise investors want to be in anything except US bonds with precious metals top of the list, and even dollars are a better asset to hold as bond prices will fall when interest rates go up while cash will keep its nominal value and pay higher interest.
The wider worry is surely that the global bond markets reach a tipping point when investors exit en masse and there is a total loss of confidence in the financial system, a bigger version of the scare of late 2008 and the first three months of 2009.
Did the central banks just kick this problem down the road in the global financial crisis, and not actually solve anything. If the cure put the disease into remission and it now returns in an even more virulent form then that would be the obvious conclusion.
4 Comments posted by readers:
Bernanke will NOT give any hint of rate rise. Please do not day dream. This man is disillusioned and dangerous. He will say that the recovery is weak and it is not time yet to tighten money supply. He will print money to solve slight problem ad infinitum until the total collapse of the dollar or World War 3.
Please wake up! End the Fed.
I am reading the Dark Valley by the Cambridge academic, Piers Brendon, and I am amazed at the suffering of the American people in the 1930s. Hoover allowed the banks to go bust and the Great Depression hit many people very hard indeed.
Whilst the Hoover administration was not putting money in to keep the banks afloat, the victorious allies were pulling money out of Germany as retribution for the First World War. As a result, Germany suffered more than any other country in the Depression except for the USA.
Bernanke is doing it differently this time! He is putting money in! Why repeat the history of depriving banks of money when it led to the Great Depression? Why not try the opposite this time?
Since the Great Depression led to Hitler and Naziism, then why risk repeating that again and a further Great War?
Bernanke was not in office when his predecessors at the FED kept interest rates so low that banksters looked for “novel” ways of making money.
He is faced with doing something about it, and has chosen the opposite of what they did in the 1930s. Why? Because he knows more about the economics and mistakes of that period than any of us, and because he is not prepared to repeat the Hoover administration’s “let the banks go bust” policy again.
After all, we’ve not hit Depression yet and may not do so or, if we do, may not do so for as long as in the 1930s. Maybe the jury is still out on Bernanke, but I believe that historians will be kinder to him, much kinder, than they are to Hoover.
Ed Note: You may be right though printing money also has very poor historical precedents and none for success!
ron, I’m in total agreement with you.
Rate rise. Are you kidding. He said steady as she goes and we all know what that means. Do you see gold, silver and the dollar. They tell you what he is thinking.