Japanese Practically Gave Away Money to Anyone Who Would Borrow It

"I'm Brazilian. I have gold. And I've just arrived from Rio richer anyone..."

Thus sang one of the characters in an operetta by Jacques Offenbach. But that was in the mid-19th century.

But hey...what goes around...

Guess what happened last year? According to a study from Boston Consulting Group, the only area of the world that got richer last year was Latin America...led by Brazil!

The rest of the world got poorer by 11%, according to BCG. Down in the rum and sun zone, on the other hand, they got 3% richer.

So maybe our investments in South and Central America will turn out all right after all.

Meanwhile, back in the developed world...what's going on? There are two main schools of thought. Ours. And theirs.

Who's right? You decide.

'They' say, 'The crisis is over.' We can thank our lucky stars - and the feds.

Now, we're getting back to 'normal'...or maybe a 'new normal,' with lower growth rates than before. Janet Yellen, San Francisco Fed governor, says the recovery will be 'tepid.' Others say it will be weak...soft...drawn out.

"The slowest recovery since 1945," says a Bloomberg report.

It may be slow, they say, but it's sure. The stock market proves it.

Stocks are up 65% worldwide, with the United States a laggard...stocks in the US are up barely 40%. The Dow rose 21 points yesterday - still a long way to go to get to the 50% rebound mark, at 10,300.

Gold closed down, but still over $1,000. And the dollar continued falling - reaching $1.46 per euro.

In our view, there is no recovery. None. All of the improvement in the economy can be traced directly to bailouts. None of it - not a single penny - is organic, natural or durable. When the subsidies for new cars goes away, for example, so do auto sales.

We wrote a book, Financial Reckoning Day with Addison Wiggin, in 2003. In it, we predicted that the United States would follow Japan into a long slump. We thought it would begin after the tech crash of 2000. We were wrong about that. But it seems to be beginning now. And the government, predictably, is doing the same things the Japanese government did - despite Bernanke's assurances that he won't allow the country to fall into the Japanese deflation trap.

One thing the Japanese did was to reduce interest rates...practically giving away money to anyone who would borrow it. But Japanese consumers didn't want to borrow; they wanted to save. They had speculated on the bubble and lost money. Then, with retirement approaching they wanted to replenish their savings and rebuild their balance sheets.

So, the Japanese government put out money...and it was taken up by speculators, not by the real economy. The speculators borrowed yen, at very low interest rates, and then reinvested the money in go-go sectors elsewhere - such as the US dotcom bubble. The yen became the world's "financing currency." If you wanted to build a factory in China or speculate on Argentine bonds, you could begin by borrowing cheap money from Japan. Thus, Japan contributed to a huge boom all over the world. But not in Japan. The land of the rising sun never seemed to get up in the morning. Property investors lost 80% of their money. Stock market investors lost as much. Even now, nearly 20 years later, they're still 75% down.

And now, along comes the United States of America with super-low lending rates. But who's borrowing? Not the moms and pops of Middle America. They don't have anything to borrow against. And the banks won't lend to them. The banks need money for themselves. Besides, everybody knows the average household in America is losing income.

What's more, mom and pop don't want to borrow. They've been through 10 years of losing money on Wall Street. Stocks are no higher now than they were a decade ago. And their houses - on whose rising prices they had counted for their retirements - have gone down 20-40%. And they're still going down.

The poor moms and pops can't seem to get a break. They're now desperately saving for retirement - at the worst possible moment, when jobs are scarce and wages are falling. But what else can they do?

So, the feds push money into the economy, but it's hot money. It's money that speculators use to place bets on gold...or on Brazilian bonds...or on oil exploration companies. The money never ends up in consumers' hands. It never bids for consumer goods. It never pushes up consumer prices.

As in Japan during the '90s, America's hot money may go all over the globe. It may turn the entire world into a casino. But it won't bring about a real recovery...

..if cheap money from the government were all it took to bring prosperity, Zimbabwe would be richer than Switzerland. Obviously, it doesn't work that way.

But here's the shocker. While we know easy money policies don't create prosperity, you may be surprised to learn that they don't necessarily cause inflation either. In other words, government may be incompetent, even at what it does best.

So, why is gold rising?

Ah...we were afraid you were going to ask. We've been doing a lot of thinking about it. Partly because our Family Office partners are smart people who ask smart questions. And partly because we're wondering what to do with our own gold. Buy? Sell? Do nothing?

We spent half the night drinking and meditating on the subject. Finally, we're not sure we had a clearer idea...but at least we were able to sleep.

We've already unveiled the idea to you. The feds can cause speculation in gold; but they can't easily cause consumer price inflation. As explained above, they can get cash into the hands of speculators, but not into the hands of consumers. Not in the middle of a major consumer retrenchment.

The Roosevelt Administration was faced with the same problem. But back then, gold and the dollar were linked. Roosevelt could devalue the dollar by edict. The Japanese couldn't do that. Nor can the Obama Administration.

In a deflationary credit cycle, you may only be able to cause consumer price inflation by resorting to extraordinary Zimbabwe-style money printing. You can drop money from helicopters, as Ben Benanke promised. But as Zimbabwe demonstrated, that cure is far worse than the disease it is mean to heal.

All of that said...gold can rise...partly because people are betting on it as an antidote to inflation (not realizing that consumer price inflation may be a long way off)...and partly for other reasons.

Lately, one of those other reasons may be heavy buying by the Chinese. The Middle Kingdom wants to diversify out of the dollar. It also has a central bank with very little in gold reserves. What better to do than to diversify out of the dollar by adding gold to its central bank reserves? Word on the street is that it is buying steadily.

The Chinese have made a number of announcements on the subject. We don't really know who's in charge there, so we don't know whose comments to weight most heavily. One Chinese official has said that the government is buying gold and intends to buy more. Another says they will buy "when people don't expect it." Another says the Chinese expect gold to go to $3,000 an ounce.

The Chinese have the money and the motive. They alone could move the price of gold to $3,000 if they wanted to. And maybe they do.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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