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Musings Report #44 11-1-14 Japan's Monetary Pearl Harbor
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Japan's Monetary Pearl Harbor
The Bank of Japan's surprise expansion of financial stimulus strikes me as the monetary equivalent of Pearl Harbor--not in the sense of launching a pre-emptive war, but in the sense of a leadership extending a self-defeating Grand Strategy because they have no alternative within their intellectual framework.
In the years before Pearl Harbor (Dec. 7, 1941), Japan's Grand Strategy was simple: conquer all of Asia and the Pacific and bring the entire region under the control of the Japanese Empire.
That this Imperial Project would necessarily lead to conflict with the United States was baked into the project from the first moment of its inception.
The Japanese military had embraced the notion of the Decisive Battle as the core war-fighting doctrine. The idea is self-explanatory: the goal is to draw one's opponent's main force into a battle where that main force could be decisively destroyed. With their military power reduced to tattered shreds, the opponent would be forced to sue for peace.
This strategy served the Japanese navy well in its unexpected victory over the Russian Navy in 1905--a victory that heralded the advance of Japan into the ranks of major powers in Asia.
The strike on Pearl Harbor was intended to be a decisive blow that defanged the U.S. Navy in the Pacific. The Japanese expectation was the attack would be followed by a mop-up campaign against remaining U.S. bases and assets in the Pacific. After the mop-up, the Japanese High Command anticipated that the U.S. would sue for peace, in effect accepting Japan's control of China, Southeast Asia and the western/central Pacific.
War rarely unfolds precisely as planned, and the critical U.S. naval assets--two aircraft carriers--happened to be on patrol when the Japanese forces struck Pearl Harbor. The Japanese planners inexcusably failed to target the fuel depots near Pearl, leaving the two most valuable assets--fuel and two aircraft carriers--untouched.
The turning point in the Pacific War was the Battle of Midway in June 1942. The Japanese battle plan was to draw the three remaining American aircraft carriers into a decisive battle north of Hawaii. Once the three carriers were sunk, the U.S. Navy's last offensive threat would be eliminated, and the war would end on terms favorable to Japan.
Unbeknownst to the Japanese High Command, the U.S. had broken the Imperial Navy's secret communications codes, and Admiral Nimitz had a basic outline of the Japanese plan and order of battle: six aircraft carriers and a massive invasion fleet bound for Midway Island.
The odds did not favor the Americans: the Imperial Navy had six carriers to the U.S. Navy's three, and the Japanese aircraft were superior in quality and quantity to the aircraft fielded by the U.S.
The complexity and rigidity of the Japanese plan, combined with some sheer luck (bad for the Japanese, good for the Americans) and daring, left four of Japan's finest carriers sunk or afire and dead in the water in a matter of minutes (hence the book title, "Miracle at Midway"), and the cream of its naval aviation destroyed. The U.S. Navy lost one aircraft carrier to a last strike by the remnants of Japan's naval air wings.
The Bank of Japan's massive expansion of its bond-buying program--quantitative easing in the parlance of central banking--appears to follow the same script of seeking a Decisive Move in a Grand Strategy that vanquishes the enemy--in this case, a stagnant economy and deflation--once and for all.
The Grand Strategy of Imperial Japan--expansion that guaranteed conflict with a superior foe--was visibly self-defeating from inception. Yet Japan pressed on to Pearl Harbor and the near-total destruction of its industrial base and major cities, as if there were no alternatives to its self-destructive strategy.
It is Japan's stubborn allegiance to a self-destructive monetary strategy that reminds me of Imperial Japan's absolute devotion to expansion, even if the strategy predictably led to the destruction of the Empire and the Japanese homeland. In the 25 years since the 1989 apex of Japan's bubble triumphalism, these same policies--monetary easing, zero interest rates and fiscal deficits to fund Bridges to Nowhere--have only exacerbated the stagnation of Japan's economy and social adaptability.
What is needed is structural reform of the real causes of that stagnation--real political and financial reforms that dismantle the structural causes of Japan's failure. But such a strategy is not even discussed, much less actively considered, because it would upend the powerful elites and vested interests who benefit from the status quo stagnation.
The same could be said of the Imperial High Command's Grand Strategy: dissent was suppressed, lest the truth step on powerful toes. And so the voices within the Establishment who were skeptical of the Grand Strategy were ignored or silenced.
Admiral Yamamoto, architect of Pearl Harbor and Japan's early victories in the Pacific, was one such voice of caution: "In the first six to twelve months of a war with the United States and Great Britain I will run wild and win victory upon victory. But then, if the war continues after that, I have no expectation of success."
Despite his reputation and position of command, his influence within the Power Elite was limited. The Grand Strategy of self-destruction played out with all the hubris and inevitability of a classic tragedy. Now the Bank of Japan is pursuing its own self-destructive tragedy.
Summary of the Blog This Past Week
Home-Grown Potatoes and Lovage 11/1/14
How Long Can the Top 10% Households Prop Up the "Recovery"? 10/21/14
Why We're Poorer: Inflation and Deflation Are Now Globalized 10/30/14
Globalization = Permanent Instability 10/29/14
Forget "Free Trade"--Focus on Capital Flows 10/28/14
We Don't Have One Problem--We Have Three Interlocking Sets of Problems 10/27/14
Best Thing That Happened To Me This Week
The sense of history in the making when Japan's Central Bank declared monetary war on Japan's currency and deflation. The experiment will fail, and on a scale few can imagine at this point.
Market Musings: Two Crazy Charts
Back in mid-October, when stock markets were plunging, I sketched out a megaphone pattern on a chart of the S&P 500 (SPX) which suggested (if the pattern played out) that the SPX could rebound to new highs in the 2020 area.
Alas, I did not profit as much as I should have from this chart that appeared crazy/impossible at the moment I prepared it.
Now I wonder if the euphoric rally that has reached my target area in a mere 13 trading days will follow the megaphone pattern and drop back to the 1800 level.
At this moment, with the charts wildly bullish, this looks as crazy/impossible as the chart I prepared in mid-October.
To state the obvious: this is not a normal or healthy market. There are 5 unfilled gaps in the SPX, starting with one at 1863. There was an unfilled gap at 1998-2000, and that has now been filled by the rally. Now the lower gaps beckon.
Some TA types claim breakaway gaps don't have to be filled, but in my experience gaps eventually get filled--and the more plentiful the gaps, the quicker they get filled.
Let's see if the megaphone plays out. If the market reverses, it would be one of the greatest shocks in recent history, as confidence that this rally has much further to run is extremely high.
From Left Field
Learning New Words Activates The Same Brain Regions As Sex And Drugs -- otherwise, learning is no fun...
Fears grow over QE’s toxic legacy (Financial Times)
The Secret Dual Lives of People Living With Mental Illness
How to fix Britain’s broken workplaces -- half-measures, but what else is left?
Oxford Real Farming Conference: power, lies, and the need for agrarian resistance (via John D.)
Everyone is leaving China. Here's Why. -- young ex-pat tells it like it is...
The Great paper Caper--story of counterfeiter Frank Bourassa
Silicon Valley will destroy your job: Amazon, Facebook and our sick new economy -- sour grapes, or truthiness? You decide...
Couch potatoes have killed the internet dream -- passivity doesn't account for open-source successes...
Teacher spends two days as a student and is shocked at what she learns -- sitting passively is a killer. But that's the model, so that's what we do....
While You Were Getting Worked Up Over Oil Prices, This Just Happened to Solar -- scaling up while nobody's looking?
The Decline of California Agriculture Has Begun -- no reliable water, no food growing...
Incredible Photos Of A Little Girl Who Grew Up Alongside Wild Animals in Africa (via John S.P.) wonderful photos...
"I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve." Isoroku Yamamoto
Thanks for reading--
charles |
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