Notes From Underground

Over the weekend Mario Monti decided not to run for the Prime Minister position through joining any party’s list for the election to be held in February. Mr. Monti was never elected to his present position but was parachuted into the job by the Eurocrats in Brussels. It seems that PM Monti fears facing the electorate as so many Italians are angered by the slash-and-burn techniques of the supreme technocrat–both left and right have criticized the present Monti government. Monti resigned after Silvio Berlusconi pulled his support from the Monti regime, but now it appears that Berlusconi would renew his support for a Monti-led coalition. The dramatic fall in bond and stock prices following Monti’s resignation caught the attention of the monied groups in Italy.

The fear of losing an election is preventing Mr. Monti from running and undermines his ability to maintain the policy of continues austerity. Invoking the General Sherman decree: “I will not accept if nominated and will not serve if elected.” But if the powers that be realized my importance to restructuring Italy I will serve if ANOINTED. In a Financial Times article Mr. Monti is interviewed while feeding his white horse. “Pressed to clarify whether he would run in the elections, Mr. Monti made clear that as a senator for life he could not be listed as a candidate, but that he might be willing to be nominated as prime minister.” Wow! The Italian bond markets should react favorably to the possibility of the coronation of a financial emperor … from senator for life to Caesar.

***Over the weekend, newly elected prime minister of Japan Shinzo Abe, pressed BOJ Governor Shirakawa for the banks’ policy to be for a new inflation target of 2%. Mr. Abe let Governor Shirakawa know in definitive terms that failure to heed the new PM’s demands would result in a move to curtail the BOJ’s independence. Mr. Shirakawa may defy the intrusive demands of PM Abe but the sitting head of the BOJ will be replaced in the spring by the newly elected regime regardless. The Japanese PM noted that higher inflation targets have been set by the world’s other central banks resulting in the Japanese being the global recipient of haven funds.

Deflation in Japan has meant that even with ultra-low interest rates the monetary authorities have succeeded in maintaining the highest real yields in the developed world. By keeping interest rates low and the inflation target at 2%, the Japanese want to create negative real yields and thus make the YEN a global funding vehicle and HOPE for its currency to be in vogue for a return to the carry trade.Mervyn King warned of the possibility of currency wars in 2013–newly elected PM Abe wants Japan to join the battle.

***I want to alert readers to a speech given by Norman Chan, Chief Executive of the Hong Kong Monetary Authority (Hat Tip J.A.). The speech was given at the Hong Kong Economic Summit on December 10 and is a wonderful summation of the current state of “Global Deleveraging:The Right Track.” The theme is similar to many points raised by Richard Koo in his analysis of the “Balance Sheet Recession,” but because Mr. Chan has a major role in policy decisions it is worth a read. Point 14 raises the issue of the outcomes for all the Quantitative Easing programs:

1. Deleveraging is not affected by QE and asset prices continue to drop as the headwinds of balance sheet reductions are too powerful;

2. QE is effective in raising asset prices and buys time for the authorities to work through the deleveraging process and economic fundamentals are restored to balance; and

3. As he states that what bothers him the most is that the deleveraging process is disrupted by QE and the economic fundamentals are never supported by the transient wealth effect, thus households never increase spending and businesses do not expand for fear of the failure in future demand. Asset inflation may be accompanied by systemic inflation, which will cause monetary authorities to begin rising rates while the economies are still very fragile. Overall, I recommend a read of the short, concise speech.

***I wish to thank my readers for a very productive year and hope Notes From Underground provided you with some insight into the global financial system and aided you in the quest for profitability. Wishing all of you a joyous holiday season and a happy, healthy and prosperous New Year. From my house to your house, all the best, Yra Harris

Tags: balance sheet recession, BOJ, deflation, Hong Kong Monetary Authority, Italy, Japan, Mario Monti, Norman Chan, QE, Shinzo Abe, Shirakawa

This entry was posted on December 23, 2012 at 7:23 pm and is filed under Italy, Japan. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.