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Currencies

Is Japan About to Fire the First Shots in a 1930s Style Currency War?

Chances are you've heard about the so-called "race to the bottom" in which various industrialized nations are gradually allowing their currencies to depreciate in an attempt to maintain competitive parity.

Forget about it…the real risk right now is an all-out 1930s-style currency war. I know it's not front-page news yet, but I have a sneaking suspicion it will be shortly.

It's going to blindside Washington and most of Europe, where central bankers, politicians, and more than a few economists fail to recognize that events from nearly 100 years ago are now primed to repeat themselves.

Worse, it will devastate an entire class of investors who have put their faith in the current economic dogma of endless bailouts and money printing.

Ironically, this currency war won't start because of international problems. Instead, it will be touched off in earnest because of domestic concerns– only they aren't ours. My guess is Japan fires the first shots.

Here's why:

  1. Japan's newly elected Prime Minister, Shinzo Abe, is calling for unlimited stimulus and more aggressive financial intervention in an effort to boost Japan's flagging economic situation and eviscerated domestic economy.
  2. The Bank of Japan has doubled its inflation target to 2% while also promising to buy unlimited assets using a page from Bernanke's playbook. Bear in mind that Japan's combined private, corporate and public debt is already nearly 500% of GDP, which is much larger than the 250% that's commonly bandied about in the media.
  3. Japan has one of the strongest fiat currencies on the planet, which means it has the most to gain and everything to lose if somebody beats them to the punch. An expensive yen holds back Japan's exports by making them more expensive in global markets, while the debt I just mentioned hobbles future economic development by robbing the private sector of capital it needs for an actual recovery.

Top News

Early Exit from Bank of Japan Governor is Good for Abe

Bank of Japan Governor Masaaki Shirakawa told Prime Minister Shinzo Abe yesterday (Tuesdsay) that he will step down a few weeks early, on March 19, in order to align his term, which expires on April 8, with those of the two BoJ deputy governors.

"I told the prime minister that I will resign on March 19 so that a structure with a new governor and two deputy governors can start simultaneously," Shirakawa said at a press conference called after a meeting of the Council on Economic and Fiscal Poicy.

This will enable Abe to replace the entire central bank leadership all at once with people who are more sympathetic to his policy of unlimited easing.

Although some press reports have highlighted the apparent unenthusiastic support Shirakawa is giving to Abe's policies, Shirakawa's resignation is really just putting the Bank of Japan leadership transition process back to normal.

The Bank of Japan governor must be approved by both houses of the Diet. Back in 2008, former deputy governor Toshiro Mutoh was nominated for the top spot by the ruling Liberal Democratic Party (LDP) which held a majority in the Lower House but not in the Upper House, where the opposition Democratic Party of Japan (DPJ) held sway.

The DPJ rejected Mutoh's nomination and it took three weeks of political infighting before Shirakawa was approved as a compromise candidate and took office on April 9.

The situation is exactly the same today. Abe's LDP has a super majority in the Lower House but must get some opposition support to get their nominee approved by the Upper House.

By resigning as governor effective March 19, Shirakawa is undoing the delay caused by political wrangling five years ago.

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Global Trends

How the Pentagon Aims to Stop China's Cyber-Hacking of America

Given the deficit fears and budget skirmishes that are focus of the moment down in Washington, it's tough to get excited about defense-related investments right now.

Defense outlays are destined to shrink.

But there's one area where spending is slated to go up …

And I mean go way up.

I'm talking, of course, about defense-related spending that will promote cybersecurity and combat cyber-terrorism.

Global Economy

Eichengreen: Eurozone Debt Crisis To "Heat Up Again in 2013"

Contradicting optimism at the World Economic Forum in Davos, Switzerland, that the worst of the Eurozone debt crisis is over, U.S. economist Barry Eichengreen warned that it would "heat up again in 2013."

While the pledge of European Central Bank (ECB) head Mario Draghi to buy short-term debt from struggling EU members has eased worries of an imminent Eurozone meltdown, Eichengreen contends it hasn't fixed the problem.

"None of the underlying problems have been solved. There is no economic growth in Europe. Germany itself is on the verge of recession," Eichengreen told The Associated Press while attending the Davos conference.

One flash point in particular, he said, is the lack of progress toward a banking and fiscal union.

"The banking union doesn't exist. There's less consensus on completing it than we thought last year, so the markets are going to lose patience at some point and the crisis will be back," said Eichengreen, who has written books on international finance, the European Union and the Great Depression.

Negative developments in the Eurozone debt crisis typically drag down U.S. markets, as the EU
is a chief U.S trading partner. Fresh problems in 2013 would be bad news for U.S. stocks.

Efforts of EU leaders to tame the Eurozone debt crisis succeeded in calming European stock markets in the later part of 2012, and have given some bond market relief to such debt-plagued nations as Greece, Ireland, Italy and Spain.

But as Money Morning Global Investing Strategist Martin Hutchinson pointed out in December, the bond market isn't always the best judge of a nation's fiscal health.

"Don't be fooled by those bond yields," Hutchinson said. "In 2006, after all, they were trading Greek bonds at less than 0.5% yield above German bonds. So much for rational markets."

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Global Economy

French Internet Tax Should Have U.S. Web Giants Very Worried

A proposed French Internet tax is just the latest sign of an increasing desire among the major European Union economies to do more to force the big U.S. tech companies to pay their "fair share" of taxes.

The French Internet tax, an option proposed in a 150-page report released last week, would attempt to tax the collection of personal data. It's directed at such U.S. tech titans as Google Inc. (Nasdaq: GOOG), Amazon.com Inc. (Nasdaq: AMZN), Facebook Inc. (NYSE: FB) and Apple Inc. (Nasdaq: AAPL).

All four companies collect massive amounts of personal data. Google collects information via its free search engine; Facebook, through the activities of users on its social network. Amazon and Apple collect credit card data and customer habits via their retail operations.

"We want to work to ensure that Europe is not a tax haven for a certain number of Internet giants," France's digital economy minister, Fleur Pellerin, told reporters in Paris last Friday.

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Weak French Economy Threatens Anxious Eurozone

Fears that the socialist policies of French President François Hollande would make a weak French economy worse appear now to have been well-founded.

France announced Thursday that growth for the third quarter was a mere 0.2%. The French economy shrank 0.1% in the previous quarter, and most economists expect that contraction to resume in the current quarter.

Meanwhile, unemployment has risen to 10.2%, its highest level in 13 years.

Since Hollande won the French presidential elections in May, he has increased the minimum wage, lowered the retirement age for some workers (which his predecessor has just raised in an attempt to reduce government costs), created tens of thousands of education jobs and, of course, announced big tax increases.

But instead of reviving the weak French economy as Hollande promised, all indications are that his policies are making a French recession in 2013 more likely.

"The third quarter is probably the result of a temporary rebound at the European level," Michel Martinez, an economist at Societe Generale in Paris told Bloomberg News. He added that business sentiment indicates France's "economy is heading to a moderate recession or at best remaining flat."

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What Hope Means in Japan These Days

[Kyoto] – Frustrated by a system that has trapped them in decades of low to no growth, an entirely new generation of Japanese may be working with the most precious of all resources – hope.

They're taking matters into their own hands and going around the traditional Japanese way of doing things.

That's good.

The so-called "Lost Decade" is now entering its 3rd lost decade following 8-10 separate bailout failures, depending on how you count the various initiatives over the years.

Growth remains a paralyzed version of its former self with the nation's GDP roughly the size it was in 1990.

Worse, many Japanese companies like Panasonic and Sony, once at the vanguard of innovation, now find themselves scrambling to keep up with clever rivals who have taken the lead and who now threaten to push them out of the global industries they once dominated for good.

Combined public, private and corporate debt now approaches 500% of GDP.

Roughly 35% of the working population here remains trapped in arubaito, or part- time work. T hat's a far cry from the vision of lifetime employment that once dominated the corporate landscape.

Some, like Tadashi Yanai, who founded and heads the Japanese brand Uniqlo (pronounced yu-ni-klo), are deemed "young thinkers" bent on change through the sheer force of will and the economic means to bring it about. Yanai is actually 63 years old.

Speaking Truth to Power

Others are truly young, like Osaka's controversial mayor, Toru Hashimoto. At 43, he's as frank as they come in the staid world of Japanese politics where change is nearly impossible to come by.

To give you an example of what I am talking about, consider Hashimoto's recent observation that the Japanese political system is "crap." Not "difficult," not "worth consideration," not deserving of "careful thought," as would be the traditional ways the hyper- polite Japanese have expressed their opinions — but "crap" as in the four- letter variety.

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China's Pyramid of Power

China celebrated another achievement last week, as Mo Yan became the first Chinese citizen to win a Nobel Prize for literature.

The selection of Mo was praised by a Chinese nationalist tabloid as a sign that mainstream China could "no longer be refused by the West for long."

Mo grew up in Shandong province in northeastern China, and during the Cultural Revolution, he left school to work in the fields, finishing his education in the army, according to The Guardian. The author draws upon his rural upbringing in his novels, mixing historical perspective with mythical elements.

His real name is Guan Moye, but he chose "Mo Yan" as a pen name meaning "don't speak," to reflect the culture in which he grew up.

The new Nobel laureate is of the same generation as the new leaders set to take over the Politburo Standing Committee next month after the convening of the 18th National Congress of the Communist Party of China.

This group of men (and one female contender) are "old enough to remember the suffering of the Cultural Revolution, but also young enough to fully experience how China has grown through Deng [Xiaoping]'s opening of the economy to market forces," says CLSA China Strategy research.

They've seen vast political reforms take place, transforming China "from a country ruled by the contradictory personal whims of Mao to one ruled through institutions and rules," says William H. Overholt in The Washington Quarterly.

During these decades, "freedoms blossomed, affecting everything from clothing to haircuts to job or marital choices to social and political speech," says Overholt.

As a result of these policies, they've been able to witness China's incredible growth, with GDP averaging 10 percent per year and more than 500 million people moving out of poverty over the past 30 years.

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Iran's Currency Collapse Has All the Markings of a Full-Blown Crisis

Matters are beginning to come to a head in Iran.

So far, the impact of Western sanctions – an EU embargo of oil purchases, European and U.S. restrictions on Tehran's access to international banking, and a new move to intensify the trading restrictions even further – have had a devastating impact.

Iran's currency, the rial, has collapsed.

Riots have begun. Its government has rapidly lost its authority. And the Iranian economy is unraveling.

This has all the markings of a full-blown crisis.

It will have an uncertain impact on the region and the wider oil market. This could get very unpredictable and very nasty.

Let me explain…

Sanctions Paralyze Iran's Economy

Indications are emerging from several quarters that the current sanctions regime has dealt a major blow to the Iranian currency. The developments are prompting foreign initiatives to paralyze the regime in Tehran.

"The current perception is that the sanctions may have to be increased before Tehran will show clear signs of relenting," a source in the EU Energy Commissioner's office told me on October 6.

Still, it remains too early to determine how far EU members are prepared to go in strengthening anti-trade restrictions.

Nonetheless, several policy sources in Brussels, London, and Paris, confirmed last week that a rising consensus believes something additional is warranted.

A complete EU embargo of Iranian oil imports took effect on July 1. That action had widely been expected to put upward pressure on Brent prices in London. While some of that pressure has materialized, continuing demand concerns from the ongoing credit crisis and sluggish employment data have dampened the impact.

Still, a widening of the rift with Iran, coupled with the deteriorating situation on the Syrian-Turkish border, is certain to bring the problem to center stage.

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The Consensus in Europe is Simple, Oil Prices are Headed Higher

My latest trip to London may have centered on the briefings I gave on Iranian oil sanctions, but I also did a number of media appearances.

As I have mentioned before, questions from European interviewers are generally more knowledgeable and to the point than in the states. This may be because places like London are much closer to the events directly affecting oil prices.

However, there was a surprising element.

Nobody – be he/she a commentator, journalist, analyst, or expert – expected a fall in oil prices. The entire market environment in Europe is looking in the other direction.

In London, my predictions of $130 a barrel for Brent and $115 for WTI (West Texas Intermediate, the benchmark crude traded on the NYMEX) by the end of 2012 were considered on the low side.

My further suggestion of $150 for Brent and $130 for WTI by the end of 2013 have caused some disagreement in the states, but are par for the course averages for what people are saying over in Europe.

In fact, the overwhelming consensus in Europe is that oil will rise, absent exogenous economic or financial problems.

In other words, the price can go down, but such a move would be a result of another bout with credit crises, intra bank problems, or currency weakening.

In such situations, the lowering of oil prices has nothing to do with oil, or its supply/demand balance, or its trade. Rather, economic constriction results in concerns over short and medium-term demand and those translate into a lower price.

Left on its own, the consensus over here is simple. Oil goes up.

Concerns Grow in Europe Over Oil Prices

Now, unlike in the U.S., the conversation does not then immediately move to prices at the pump.

Gasoline is less of an issue for the simple reason that a combination of heavy taxation, lowered usage and a far better mass transit system has made driving more of a luxury than in the U.S.

Paying the equivalent of $7 a gallon tends to have that effect.

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