The Impact of Japan's Negative Interest Rates

The grenade that economist Joseph Stiglitz threw from left field at the euro (EUR) yesterday, was a one-day hit. You see… The euro is back to moving higher versus the dollar this morning. More on that, and the RBA leaving their powder dry, in today’s issue, so let’s go!

OK… I guess I have to crawl like a viper through these suburban streets, and try not to get hit with a shovel, as my tea leaves were all wrong on the RBA’s rate decision… Recall, that originally, I said the RBA would not raise rates at this month’s meeting, but then began to drink the Kool-Aid that was being served by the recent data coming from Australia, with the most important one being that inflation was above their target rate; I said that I was 2/3rds in on a rate hike…

Well… The RBA left their interest rate powder dry last night. That disappointed the many that had bought the Aussie dollar (AUD) and driven the price higher on the expectation that the RBA would hike rates. The Aussie dollar was sold BIG TIME after the “no hike” decision. Now, not all is lost here, as the RBA did retain their tightening bias, and hinted about a rate hike… So… Like I said yesterday, “Don’t expect their OCR to go back to 7.25% in the near future… But 4.5% is going higher, and if not tonight, then the next time the RBA gets together!”

And so it is… I truly believe that the RBA will hike rates at their November meeting, unless things go really south on them, economic data-wise…

Alrighty then… It appears that the Bank of Japan (BOJ) was in the markets again last night attempting to manipulate the yen (JPY) lower. And get this! The BOJ announced a rate cut! I know… You’re saying, “But aren’t rates almost zero there?” Yes, you would be correct, rates were 0.10%… But the BOJ cut them to -0.10%!!! Negative interest rates! And… On top of that, the BOJ also announced that they were setting up a pool of funds for quantitative easing…

Talk about doing everything they can to introduce inflation to their economy! But, Shoot Rudy, the Japanese have been doing these types of things for years, now… Hey! How do you think rates got to 0.10% in the first place? These guys are rearranging the deck chairs on the Titanic.

The currency guys and gals weren’t swayed into believing that they should back off their buying of the yen, and so it is that Japanese yen is barely weaker this morning than it was yesterday before the BOJ did all these “wonderful, economically and fundamentally sound, creative moves”… (I sure hope you understand that I’m being facetious with those descriptions; for in my real words, the BOJ did bonehead moves!)

Well, once again this morning, I came in and saw 1.38 in the euro, only to see that wiped out almost immediately after turning on the screens… Hey! Maybe if I don’t come in tomorrow, and my screens don’t get turned on, the euro will remain above 1.38? Hey, Frank… HA!

Anyway… The euro got some wind in its sails overnight when Eurozone manufacturing reported a rise in September. The Eurozone manufacturing index (like our PMI), saw the index rise to 54.1 from 53.6.

The euro also saw some strong statements about the single unit from ECB members who were speaking around the Eurozone. The ECB members took the opportunity to follow up on the strong vote of confidence the Chinese Premier, Wen, gave the euro the previous night. (We talked about that yesterday)

The Irish Eyes are not smiling on the euro, though… Just about every time the euro gets its legs under it, news from Ireland cuts the euro’s legs right out from under it! Last night it was the ratings agency (Geez, Louis, again with the ratings agencies! These guys have become persona non grata with me!) Moody’s, saying that Ireland’s rating of Aa2 will “most likely” be downgraded… UGH!

And the price of oil continues to rise, further underpinning the Canadian dollar/loonie (CAD)… And the Swiss franc (CHF) continues to push further past parity to the dollar… Pretty amazing move by the franc, folks…

And what do we have here? Gold is up $11 this morning to $1,326.90!!!! And silver is following with a rise to $22.26 this morning! Oh! And the S&P Agriculture Index is at a two-year high, folks… Food prices are rising – which is inflation, whether the government tells you this or not. You should know one of the reasons people/investors are rushing to protect their wealth with gold and silver…

So… Did you see where the final figure on the US deficit for 2010 was… Drum roll please… $1,641,083,866,542.37 … That’s shameful… $1.6 trillion added to our national debt, bringing it to… Drum roll please… $13.548 trillion… And that doesn’t even take into consideration the unfunded liabilities, but I can’t even bring myself to type that number… But if you promise to put away all the sharp objects first… You can click here. But don’t go there if you don’t want to get depressed!

Oh… A new feature of the Debt Clock is the US population data… In this data, you will see the thing that I talk about all the time… The “Official Unemployed” total: 15,166,627… But the “Actual Unemployed” total is: $26,204,754… And the total number of Food Stamp recipients is now: 42,762,385…  Of course, these numbers are real time, and change instantly, so when you go the link, the numbers will be different than what I just recorded!

And why do I care about all this deficit stuff? Ahhh, grasshopper… Deficits are the root of economic evils…

Hey! I see where Cartel Chairman, Big Ben Bernanke is thinking clearer these days… Big Ben called on lawmakers to consider rules limiting federal spending and deficits, and accumulated debt. Big Ben believes that by controlling these lawmakers can curtail the risk of a fiscal crisis…

Ahem… Hello? Can you hear me? OK… I’m a long time listener, but first time caller, and want to ask Big Ben just what he calls what we’re in right now, if it isn’t already a fiscal crisis?  Thank you for taking my call, I’ll hang up now, and listen for the answer…

OK… I can be a little hard on the Beaver… I mean Cartel Chairman… But, he did say something recently that’s right up my alley of things I truly believe… Bernanke said, “unless the US makes a strong commitment to fiscal responsibility, the country in the long run will have neither economic growth nor fiscal stability”… Right Arm Ben! Farm out Ben! Outta State Ben!

Then there was this… Well… The Bloomie had a great story this morning, which I’ll give snippets of… But first… It seems that world-renowned economists are coming over to the Chuck Butler way of thinking regarding global growth being able to be sustained even with the US in recession…

Just three years since America began dragging the world into its deepest recession in seven decades, Goldman Sachs Group Inc., Credit Suisse Holdings USA Inc. and BofA Merrill Lynch Global Research are forecasting that this time will be different. Goldman Sachs predicts worldwide growth will slow 0.2 percentage point to 4.6 percent in 2011, even as expansion in the US falls to 1.8 percent from 2.6 percent.

Underpinning their analysis is the view that international reliance on US trade has diminished and is too small to spread the lingering effects of America’s housing bust. Providing the US pain doesn’t roil financial markets as it did in the credit crisis, Goldman Sachs expects a weakening dollar, higher bond yields outside the US and stronger emerging-market equities.

This is the same stuff I’ve been telling people for months now… That as long as the financial meltdown doesn’t occur, and the US just continues to be swallowed by recession, that there will be global growth, thus proving that the reliance on the US and the dollar, for trade, is dwindling…

To recap… The BOJ intervened last night, announced more quantitative easing, and cut their interest rate to a negative -0.10%! The RBA left rates unchanged, much to the dismay of traders, and the Aussie dollar suffered big time from this disappoint. And Eurozone Manufacturing rose in September, pushing the euro higher.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning