Economists Are Watchful as Tokyo Ends Loose-Money Policy

[It’s hard to say exactly how this major move by Japan is going to play. My initial thought is that – along with the Fed now hiding all the data on the M3 money supply, any reversal of cash flows ending cash back to Japan risks a global liquidity crisis that would hit the US hardest. So I sense a likely connection between this move in Japan and the Federal Reserve’s recent decision. But then the Fed has many reasons to be concerned about liquidity. Japan is only one of them. But massive inflation remains an imminent peril waiting just outside the door. My guess is that 2006 monetary moves by the EC, Russia, China, Japan and the Bank of International Settlements will determine which side of the global mountain the economic system will slide down as Peak Oil flexes its muscles. We’ll be watching for developments closely. – MCR]

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Economists have dismissed such fears as alarmist. But a decision by Japan's central bank on Thursday, by a vote of 7-1, to scrap its unprecedented super-loose monetary policy has raised concerns about the possible fallout on the global economy.

The central bank's decision was seen as a first step toward an eventual rise in short-term interest rates in Japan from near zero and seemed to reflect the bank's confidence that deflation was under control.

But because no major central bank has ever had such a loose policy, no one knows for sure how to end it smoothly. Some economists say making the decision to end the loose-money policy might have been the easy part; the bank must now avoid sending shock waves through the country's recovering economy and through world markets.

"These are uncharted waters for a central bank," R. Glenn Hubbard, dean of Columbia University Business School and a central banking expert, said. "Exiting with minimal disruptions will be a difficult exercise."

In a statement, the bank said it would no longer set a target for the amount of surplus funds in the money market, but would adopt a more traditional tactic of guiding the unsecured overnight call rate, which has been at around 0.001 percent for several years.

The world has been awaiting the decision because the tightening by the bank will end one of the biggest financial free rides in modern history. The policy was adopted in 2001 as an emergency measure to inflate prices and prop up the country's teetering banks. But it also had the unintended side effect of turning the country into a huge pot of free money for the rest of the world.

That is because half a decade of near-zero interest rates has driven Japanese investors, from retirees to megabanks, to buy foreign stocks and bonds in search of higher returns. Global markets have also gotten a boost from the so-called carry trade, in which investors borrowed cheaply in Japan to invest elsewhere.

The fear is that this flow could suddenly reverse if interest rates start to rise. That could spell trouble for overseas markets like New York and London because Japanese investors could start selling stock and bond holdings to repatriate their money.

While most economists call these concerns overblown, they do acknowledge that there is some basis for them, because Japan is a huge buyer of foreign securities. They also warn that the anxieties could end up becoming a self-fulfilling prophecy if nervous investors start pre-emptively pulling out of financial markets.

"There is a risk of people overreacting," said Richard Jerram, a Tokyo-based economist for Macquarie Securities. "The five-year free ride comes to an end, or at least that's the fear."

The focus of all this attention has been the Bank of Japan's governing policy board, whose nine members began a two-day meeting in Tokyo on Wednesday. On Thursday, the board ended the current policy, called quantitative easing, which essentially stuffed Japanese banks with cash to help them write off huge bad loans accumulated during the 1990's.

The policy also kept short-term rates near zero in the hope of ending a downward spiral in prices. Concerns of a tightening have already been felt as long-term rates in Japan's bond market have jumped since mid-January.

One reason for all the anxiety about the behavior of Japanese investors is the size of their holdings overseas. Japanese individuals and companies held overseas assets worth 107.7 trillion yen, or $915 billion, at the end of 2004, according to the Finance Ministry, the most recent data available.

The pace of Japanese investment overseas has also been quickening in recent years. According to Bank of Japan, Japanese investors bought foreign securities worth about 9.9 trillion yen in the three months that ended in Sept. 30, three times as much as a year earlier.

A reversal of these huge flows of cash could have even broader ripple effects in the global economy, some economists say. If money grows scarcer in the United States, interest rates could rise there, too. Economists say this could lead to a situation — far-fetched but not entirely implausible — in which the Bank of Japan deflates the American real estate market, as homebuyers face more expensive mortgages.

"It probably won't happen, but there's always the possibility of unexpected consequences," said Atsushi Nakajima, chief economist at the research arm of Mizuho Financial, which is based in Tokyo.

The bank's decision could also have huge consequences for Japan's own $4.6 trillion economy, which is finally growing again. This has fueled a political debate between bank supporters, who caution against undermining its independence, and detractors, who warn that tightening too soon could hurt the recovery.

The Bank of Japan feared that maintaining easy money for too long could cause the reviving economy to overheat, possibly creating inflation or a stock market bubble. The Bank of Japan's governor, Toshihiko Fukui, has repeatedly said that he would like to return policy to a more "normal" footing as soon as consumer prices show sustained gains, a sign that deflation is over.

That now seems to be the case, after the government said last week that consumer prices in January posted their third consecutive gain. Adding to the weight of the evidence, the central bank reported Wednesday that Japan's banks increased lending in February for the first time in more than nine years.

[When Indonesia (suffering from massive decline rates), having become a net oil importer, moved to eliminate subsidies for domestic fuel consumption last summer, the population and economy were devastated. Indonesia remains a basket case and will never recover completely. Iran has obviously watched and learned from riots and civil unrest in Indonesia, Zimbabwe and other countries where soaring oil prices have compelled governments to end fuel subsidies or go bankrupt. How Nigeria handles these issues will be a key determinant in how quickly West Africa descends into deeper chaos and unrest. Iran’s problem is (for the moment) not a lack of oil but a lack of refinery capacity. Again we come back to the fundamental question of why new refineries are not being built anywhere (with a few exceptions in China). The answer is still the same. New refineries are not being built because “the return on investment is uncertain”, In other words, there won’t be enough future oil production to pay off what it cost to build the refineries in the first place. – MCR]

Iran’s Parliament has decided to limit drivers’ access to subsidized fuels beginning March 21.

The legislators voted to support an administration initiative to put the brakes on domestic gasoline consumption by limiting drivers’ access to subsidized fuel, the Financial Times said Thursday.

The plan stipulates that car owners be provided with “smart cards” that fix a subsidized gasoline allowance and forces drivers to pay full price when they exceed the ration.

[Remember that, in one way or another, the US Empire needs two billion dollars a day in foreign investment to protect our various bubbles and to keep the weight of crushing debt from killing off the Empire. A sure sign of the terminal illness in the US economy is the fact that investment dollars that once came here are flooding into other countries. Two of the top investment choices for foreign trans-national capital over the last year have been Iran and India. What does that tell you? – MCR]

DUBAI - Petrodollars from the Gulf Arab region that once flowed directly into U.S. Treasuries will increasingly head to rapidly growing markets in India, the chief executive of a hedge fund investing in India said.

In the 1970's oil boom, producing nations spent lavishly and concentrated investment in U.S. Treasuries. Now the United States is still a big recipient, but so too are Europe and the growing economies of the Middle East and Asia.

"The U.S. is no longer the default preference for Middle Eastern money," said Paresh Patel of Boston-based Sandstone Capital on the sidelines of a hedge fund conference in the emirate of Dubai, part of the United Arab Emirates.

"There's a lot of Gulf interest in investing in India in hedge funds, in real estate, and in private equity."

Patel said lower bond yields, rising liquidity, and a changing political dynamic in the United States have pushed governments and wealthy investors in the world's largest energy exporting region to diversify their portfolios.

"People are looking for different places to make their money and India ... is a developing country with huge infrastructure development and a lot of investment in capital goods industries," he said.

With oil prices soaring, the amount of Gulf Arab funds available for investment in foreign assets is expected to increase by about $130 billion a year until 2007.

Patel said Sandstone Capital was likely to open an office in the Dubai International Financial Centre, a tax-free zone, in a bid to attract more money from the Gulf into the company's hedge fund, which focuses on long-term investments in public securities in India.

Patel said massive government spending on airports, road projects, and ports combined with an expected surge in consumer spending and growth in Indian companies will create opportunities for hedge funds and mimic the rapid expansion of Gulf markets.

"India is creating opportunities that look similar to those in Dubai, so a lot of the Dubai money is looking at India," he said. "A lot of money from the Middle East is coming to India. The hedge fund community is going to get a big piece of that."

Patel said with money pouring into hedge funds in the United States and Europe and fewer market inefficiencies, investors are looking to alternative markets such as India for hedge fund investments.

"The Indian market is a classic hedge fund opportunity where it is a target rich environment, there's a lot of inefficiency, there's a lot of information asymmetry, the markets aren't deep in research and it lends itself to investment that creates a lot of (return)," he said.

NEW DELHI: India is discussing signing a maritime agreement with Brazil and South Africa besides working out modalities to implement the framework agreement in civil aviation, a top official said on Friday.

Such agreements would help reduce transportation cost among the three countries and increase the trade and commercial relations, Rakesh Kumar, Special Secretary in Ministry of External Affairs, said at an Assocham seminar here.

India had already signed a preferential trade agreement with Mercosur, which includes Brazil and three other Latin American countries, and a framework agreement with South African Customs Union to enhance trade ties, he said. This could double India's trade with the two countries to over $10 billion in the next four to five years, he added.

Mr. Kumar, however, said a trilateral Free Trade Agreement among the three countries was difficult to work out within the IBSA framework since Brazil and South Africa were members of two different customs unions namely Mercosur and South African Customs Union (SACU).

Speaking during the seminar, High Commissioner of South Africa to India Francis Moloi favoured an India-SACU FTA before a trilateral FTA was evolved.

Brazilian ambassador Jose Vicente De Sa Piemtel said the issue was likely to be discussed during the third Ministerial level Joint Commission meeting at Rio De Janeiro, Brazil, on March 28-29. The India-Brazil-South Africa business council and working group on trade meetings would also take place simultaneously, he said.
- PTI

[The man’s as good or better than his word. He said he would stay on Peak Oil and he sure is keeping his promise. – MCR]

Congressman Roscoe Bartlett to Mark First Anniversary of Peak Oil Special Order Speeches with his 16th
On Tuesday, March 14, 2006
Via C-SPAN

Washington, DC - Congressman Roscoe Bartlett will mark the first anniversary of his first Peak Special Order speech with his 16th Special Order speech on that topic. The estimated start time will be between 7:30 pm Eastern and 8:30 pm Eastern. C-SPAN will broadcast it LIVE on cable and the Internet. Streaming video on C-SPAN can be accessed on the Internet at http://www.cspan.org/watch/. The C-SPAN toll-free number for copies of floor speeches is 1-877-662-7726.

Other upcoming events concerning Peak Oil:
March 11, 2006 - 2:00 pm Central - World premier of Oil Crash documentary featuring Rep. Bartlett at the South by Southwest (SXSW) International film festival in Austin, Texas
http://2006.sxsw.com/film/screenings/film/F4149.html
March 18, 2006 - 8pm & 11pm Eastern - Premier of CNN Presents documentary, We Were Warned

Congressman Bartlett said, "Fifty years ago, American scientist M. King Hubbert predicted that the United States would peak in oil production in 1970. He was right on. Oil production in the United States has declined every year since then. Hubbert predicted the world would peak in 2000. 33 of 48 major oil producing nations have now peaked. Today, experts differ only on the timing of global peak oil, but many predict it is imminent. With world demand for oil increasing exponentially and no ready substitute of comparable energy density, the prospect of future and continuing declines in world oil production will inflict unprecedented pressures upon our people and national and international social, economic, and political institutions."

In the past year, Congressman Roscoe Bartlett has discussed global peak oil extensively in a series of 15 Special Order speeches. He also hosted an Energy Conference on September 26, 2005 featuring national energy experts that was taped and distributed by C-SPAN. An index is below. A number are posted on Congressman Bartlett's website at http://www.bartlett.house.gov. Congressman Bartlett is the co-founder with Congressman Tom Udall of the U.S. House of Representatives Peak Oil Caucus. They introduced H.R. 507, which expresses "the sense of the House of Representatives that the United States, in collaboration with other international allies, should establish an energy project with the magnitude, creativity, and sense of urgency that was incorporated in the `Man on the Moon' project to address the inevitable challenges of `Peak Oil'." Congressman Bartlett testified at a hearing on H.R. 507 held on December 7, 2005 by the Energy and Air Quality of the House Energy and Commerce Committee.

Congressman Roscoe Bartlett
Peak Oil Special Order Speeches
U.S. House of Representatives
Congressional Record
March 14, 2005 - February 8, 2006

Separately, Congressman Bartlett's Peak Oil Energy Conference held in Frederick, Maryland on September 26, 2005 was also taped by C-SPAN
Three Hours - Two Panels, Q and A is on the Second Panel
www.c-span.org
Forum
Energy Efficiency and Alternative Sources
U.S. House of Representatives, Bartlett, R. (R-MD
Roscoe Bartlett, R-MD
Kenneth S. Deffeyes, Princeton University
Matthew Simmons, Simmons Investment International