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Insider 03-12-2006 08:47 PM

Central Bank Tales
by Bill Bonner

"Tokyo ends loose-money policy," says a NY Times headline.

After 16 years of slump, deflation, bust and aimless chopping, Japan's economy seems to be stirring. It seems to be coming back to life. So, central bankers are taking down the I.V. drips of cash and credit that have kept the failing banks alive and encouraged bad investments. The patient is recovering and no longer needs constant medication.

Henceforth, borrowers will have to pay for money in Japan just like they do everywhere else. And henceforth, speculators may not be as flush. For several years now, they have been able to borrow from Japan at practically zero interest and re-deploy the money elsewhere. The world took to this easy money like a panda to bamboo shoots. The credit goosed up emerging markets in the Mid East, built factories in Asia and even contributed to the boom in consumer spending in North America.

So much so, that the boomers we mean, the consumer boomers now seem to think they no longer need to save money. In January, the savings rate in the U.S. fell to negative 0.5%, for the first time in history. Yet, more Americans than ever before are preparing to retire. What will they retire on? We don't know. They have houses. They have credit cards. There is always that ready money in Asia to draw on, just in case.

"Trade balance hits new record," runs another headline.

In January, Americans spent $68.5 billion more from foreigners than they earned from them. At this rate, in a year's time, the trade balance will reach negative $822 billion not too far from $1 trillion. It's close enough to the point where the entire scheme blows up in our faces, though how much closer we don't know.

Americans have always been famous for parting with money rather than saving it, but these days, they are parting with so much that their own incomes aren't enough for it. They need other people's income to keep parting with cash at the same pace. When they buy a new Toyota, for example, they have to borrow the money from a finance company that also borrows at the lowest rates it can get. So, the rate they pay to buy their car depends on the rate the finance company can get, which mostly depends on the low rates set by the Bank of Japan and the Bank of Bernanke. It is thanks to easy credit from these two worthies, that the American lumpenhouseholder is able to buy his car at all or even his house without any money of his own. The sale brings dollars and profits to the Japanese, which are then recycled back to the United States as debt so the American consumer can dig himself into an even roomier hole.

And here in Britain this morning, the press has this headline: "Courts swamped with bad debt cases."

It could have been a headline from the United States. On both sides of the Atlantic, the proles are getting squeezed. In order to maintain his illusion of financial progress, the average working stiff has to borrow against his house or on his credit cards. Borrowing has become easy, thanks to the aforementioned central bankers. Paying back may not be so easy, because the same waves of globalized commerce that throw up glittering aisles full of tempting gadgets and gizmos in Long Beach and London the same currents of trade that bring him automobiles from Asia and bananas from Latin America are lapping against his own earning power and washing chunks of it away. Wages in rich countries are slowly being eroded...reduced to sea-level...brought down to the lowest common denominator the world labor market can produce.

And meanwhile, the rich grow richer.

"World gains 102 more billionaires," says the Houston Chronicle. There are now 793 of them and their wealth grew 18% last year. Currently, they have about $2.6 trillion, according to the Forbes estimate.

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