In this article I will explore some new economic data coming out of Japan that I have never seen before.
This was originally a presentation I gave to my YouTube subscribers that had the subtitle “The end of central banking and the beginning of decentralized money”.
Let’s Start With The Natural Rhythm Of Markets
The natural rhythm of markets is one of expansion and contraction.
An economy starts at an arbitrary size like the first circle in the diagram above. It moves into a phase of economic expansion, which in turn gives way to a phase of economic contraction.
The important point here is that the contraction doesn’t take the economy back to the size it was at the start. Like a rubber band it becomes permanently stretched by the expansion.
Repeat this cycle a few times and you have the makings of an ever growing economy. One that is sustainable.
The rub (friction point) here is that current economic thinking is that these natural economic contractions should be avoided at all costs. That includes (ironically) the destruction of the economy itself, which of course makes no sense at all.
The Current Paradigm Of Central Banking and Government Fiscal Policy
Instead of allowing the natural rhythms to play out and ensure the sustainability of economic growth for the long term central banks such as The Federal Reserve, The Bank Of England and The European Central Bank believe that we should go through a phase of economic expansion…
Followed by a phase of economic expansion…
Followed by a phase of economic expansion!
I look at that and I ask “What do we call a biological cell when it doesn’t know when to stop growing?”
This obsession with economic growth at all costs has got so bad that economics have coined the term “negative growth”. They simply dare not even think of the possibility of an economic contraction.
Central Banking – The Black Hole For Assets & Currency Value
Now let’s get out of the hypothetical and into the actual. The above diagram illustrates a process that is going on right now in the Japanese economy that is systematically transferring the wealth of Japanese citizens to the Banks Of Japan.
On the far right of the illustration we have the humble Japanese stock holder who is not feeling confident in the state of the economy and decides to sell some of his equities. He receives cash in turn.
The problem now is that there is every chance that (a) the Bank of Japan is on the other side of this trade and (b) they are buying his shares with newly printed currency.
The central bank of course has an infinite supply of currency that lies out of the black hole that every central bank keeps in its back pocket for a rainy day… or every day.
The State Of Japan’s Equity Markets – How Bad Is It?
As a result of this process repeating itself for a “few” cycles, The Bank of Japan has now become a top 10 shareholder in 49.7% of ALL public companies that trade on the Tokyo Stock Exchange.
This is up from 40% a year ago to now almost half. This is what happens when the Bank of Japan purchases $53 billion a year in assets.
The real trouble is that they cannot now sell these assets without putting downward pressure on a market that already wants to deflate (contract). That is the very downward pressure they are trying to combat with their purchases. They want to keep asset values inflated.
This is also not confined to the Japanese equity markets either, they are buying international stocks too.
The incentive now for the leaders of publicly traded Japanese companies is to focus on getting their company stock into the top indexes in order to attract some of that infinite money flowing out of the central banks black hole.
There is a much greater incentive to do this to get the easy money than doing the hard work of innovating value for consumers in the real economy. Ironically doing the hard work of innovation is the very thing that creates natural economic expansions.
Before and After Bitcoin: The World Economy
This is the perfect time to refer back to a previous video that I created entitled “How Bitcoin Can Repair The World Economy” which contrasted two economics systems, one functional and the other dysfunctional.
Now is the appropriate time to watch it again in the context of what we have been exploring:
Japan Is Further Down The Road America Is On
I have noticed how we use the lexicon of air and air containers when speaking of economies. Bubbles, expansion, deflation etc.
I like to compare the current economy to a balloon. The more air that is blown into the balloon, the louder the bang when it inevitably reaches the limit.
If the free market mechanism (the natural rhythm of markets) was allowed to function in 2008, the economic contraction would have balanced the system, but that wasn’t allowed to happen.
All systems have a point at which they become useful and a point at which they are no longer useful.
As per Mike Maloney’s research every 30-40 years the world moves to a new monetary system and we are well overdue.
We had the classic Gold standard, the Gold exchange standard, the Bretton Woods System and now the US dollar standard, where international trade and all non-dollar currencies are backed by the dollar.
Perhaps the 2008 crisis was a sign that our current system is no longer fit for purpose.
So What’s Our Next Monetary System Going To Be?
The Bitcoin Standard, a book by Saifedean Ammous provides a great tour of economic history and puts forward some suggestions as to how a Bitcoin standard economic could work.
To bring it back to the start then. Why has Bitcoin adoption been happening in Japan more readily than other developed economies? And why do I think that will continue?
I have likened the Japanese economic to a balloon, a hot air balloon in this case. It wants to deflate. The central bank wants to avoid that at all costs so it hooks up a giant pump to keep the balloon inflated as air escapes out the various holes.
The problem is that there is tension in the balloon and the harder you pump the more the hole tears open, leading to air escaping faster… leading to faster pumping and more intense pumping etc.
The Bitcoin economy operates on a foundation of hard money with a fixed supply that no one can change. This creates a boundary around the economy such that there is no escape from the natural rhythms.
The fixed supply of BTC provides a ground state, an anchor, something solid and certain that can be counted on absolutely. That degree of certainty makes it the perfect foundation to build everything else on top of.
What we don’t want is to be building anything on a foundation of sand that can easily shift and destablize everything on top.
Why Will Americans And Other Western Economics Join Japan Sooner Or Later?
Simply because Japan is further down the road than everyone else and thus can provide a view of the future if staying on the current trajectory.
Since no one knows which will be the first domino to fall, what are we supposed to do?
In a book The Black Swan: The Impact Of The Highly Improbably (available in paperback and audiobook), which I have recently read for the second time, Nassim answers the question of how to deal with unpredictability with this simple advice…