The world needs to find the ‘Global Economic Reset’ button and Japan could be first to find it, argues Clem Chambers – CEO of leading investment site ADVFN.com and author of Amazon best-selling investment guides ‘101 Ways to Pick Stock Market Winners’ and ‘A Beginner’s Guide to Value Investing’.
Japan may be on the edge of a massive change.
The Bank of Japan effectively rules Japan because it controls the purse strings and its main strategy is deflation. Inflation steals from the old and gives to the rich whilst deflation steals from the young and gives to the old.
It’s no mistake that Japan has deflation. With an ageing demographic in an over-populated country, it makes sense to service the old at the short- term cost to the young. When the population finally drops to a sustainable level then the young will inherit the consequences.
The strategy makes sense on paper.
Politicians would prefer a buoyant, inflationary economy. They would like to see young people driving Japan into the new world rather than have it sucked dry by the non-innovative old. The reality is politicians have no say in the matter. The Bank of Japan, (BOJ) is independent. It can’t be told to make inflation.
The expected new government is threatening to take away the BOJ’s independence and force through inflation.
Any idiot can create inflation. Ask Robert Mugabe if you really can’t figure it out. I’m sure the old despot would be happy to oblige for a cheque of $50m. In fact I’ll do it for Japan for just $10m.
If the new government doesn’t strip the BOJ of independence, nothing will change.
If the BOJ’s independence is removed however, and inflation of 2-4 % created, then the economy will grow explosively, boom massively, the Yen falling to sensible levels.
Global Economic Reset Button
In this case, a blueprint will have been created for Europe, meaning the ECB will likely take the same route of government control. Even the politically tainted US Federal Reserve and the crypto-political Bank of England will follow the lead.
This will be the mechanism for ‘global economic reset’ that will end the current period of forever trying to forestall the inevitable.
In the meantime, the US fiscal deal and Greek debt issues will create a new volatility which, in the short term, looks bad for markets.
Once these problems are sorted France will be the next “crisis point” yet, ironically, all this pain will ultimately see the market grind upwards – admittedly against a string of violent mini-crashes and corrections.
In the UK, the senior partner in the government coalition looks likely to try to win the next election via a promise to hold a referendum on an EU exit. If they win a majority, which is likely as it would be a very popular move, they’d keep power against a backdrop of clear revolt against the idea by the other parties. This too, would see markets wobble but not for long, and buying opportunities will be created when the wobble comes.
The death grip of politics is going to start to weaken next year, as economics takes back the controls
This will increasingly put markets back into the driving seat.
Bond Market to Collapse
The bond market is going to, at some stage, collapse back to normality.
Money will either flood from sovereign debt or be annihilated. The recent new norm of zero per cent interest will morph towards the new model of Spain and Italy at 5%. It’s a case of going ‘forward to the past,’ i.e. to a world most of us knew – one in which there was an interest rate!
That flush of money out of bonds will then flood into equities. This long chain of events is on the rim of ski jump; 2013 looks set to see this wild ride begin. It sounds like bad news but it could be good.
In the end, the world economy must return to equilibrium – the sooner the better.