The most widely-reported result of the recent G-7 meeting was Japan’s attempt to convince the other major economies to admit that a crisis is imminent and take appropriately radical steps. The response seems to have been a bunch of blank stares. As India’s Business Standard noted:

G7 pact offers minimal cover for Abenomics reset

A Group of Seven compromise offers minimal cover for Shinzo Abe. The Japanese prime minister’s plan to revitalize the world’s third-largest economy needs fresh impetus. Abe didn’t get as much international backing as he might have liked from hosting the rich nations’ club. But, the summit communique can, just about, be spun his way.

Abe’s counterparts, understandably, do not share his view that the world risks another Lehman Brothers-style financial crisis. That is important because Abe has inexplicably committed to raising the country’s sales tax next April, a surefire way to choke off recovery – unless a shock of this scale emerges.

So Japan — which, remember, has already borrowed eye-popping amounts of money, increased its central bank balance sheet by more as a percent of GDP than have either the Fed or ECB, and pushed interest rates on most of its government bonds into negative territory, all to no avail — has decided to act on its (manifestly justified) sense of panic by starting a new round of deficit spending: 

Japan’s Abe Plans Up to $90.7 Billion Stimulus, Nikkei Says  (Bloomberg) – Japan Prime Minister Shinzo Abe plans to propose a fiscal stimulus package of as much as 10 trillion yen ($90.7 billion) after warning Group of Seven leaders that the global economy faces significant risk of another crisis, according to the Nikkei newspaper.

Abe will seek a second supplementary budget worth 5 trillion yen to 10 trillion yen after July’s upper-house election, the Nikkei reported Saturday without attribution. Proposals will include accelerating the construction of a magnetic-levitation train line from Nagoya to Osaka, issuing vouchers to boost consumer spending, increasing pay for child-care workers and setting up a scholarship fund, the Nikkei said.

“When you want to get the economy going, as long as demand in Asia is weak, you need additional public spending,” Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo, said by phone. “Since private spending is still not picking up, the government is simply taking up the slack.”

The stimulus package would be the second this fiscal year after Japan approved a 778 billion yen supplementary budget this month to aid recovery from earthquakes in the Kumamoto region.

And about that tax increase…

Japan Abe set to delay sales tax hike by one-three years – sources

(Reuters) – Japanese Prime Minister Shinzo Abe will postpone a sales tax hike planned for next year, perhaps by as much as three years, government sources say, a move he will justify as part of G7 efforts to avert another global financial crisis.

While the tax hike was seen as critical to reining in Japan’s massive public debt, Abe and his aides have signalled the chance of deferring it as Japan’s economy skirts recession and a threat of deflation re-emerges ahead of summer upper house elections.

“We’ve reached a global agreement to cooperate to avoid another big crisis from erupting … As G7 chair, Japan will spearhead such moves to contribute to the global economy using all policy tools available,” Abe told reporters after the Group of Seven (G7) leaders’ summit in western Japan on Friday.

“We must reignite powerfully the engine of Abenomics. That undoubtedly would include a decision on what to do with the sales tax hike,” he said, offering his strongest hint yet that next year’s tax hike will be delayed.

What does this mean? In a nutshell, the next phase of the global economic crisis has begun. First, governments responded to the 2000 tech stock crash with lower interest rates and big deficits. Then they responded to the housing/banking/derivatives bust of 2008 with even lower interest rates, bigger deficits and experiments like QE. Then they responded to the resulting anemic recovery with negative interest rates and more QE. 

None of the above has produced the kind of growth in the US, Europe or Japan that slows the upward march of debt/GDP, which means everyone is still digging their own financial graves. Since this is not an acceptable long-term strategy (eventually the sides of the hole cave in and bury you), something else has to be tried by the people who hope for re-election a few years hence. So now we’re back to massive deficits, but with a negative interest rate twist. Think about it: When a government issues negative-rate debt, it earns a profit on the transaction. And when it sells its debt to its own central bank it in effect owes the money to itself. A site called Forex Live just published an interesting analysis of this unprecedented situation: 

A paradigm shift is under way on deficits

If you can print your own money, you can issue unlimited amounts. The only risks are inflation and a decline in the currency.

It just so happens that inflation and a decline in the currency are exactly what many governments want.
In the developed world, inflation is non-existent and the currency war rages. The trump card in that game is default via monetization and it’s coming.

The dominant ethos of the past 25 years has been a drive towards fiscal discipline. Politicians and political commentators have built their reputations and careers as misers. There is something inherently, almost pathologically wrong about defaulting.

That will all change.

The idea of default sounds like it would create panic; if not in the streets then in markets. But it’s easier than you might assume and it will happen sooner than you think. 

The hard part is already done. It’s simply a matter of taking the debt the central bank already owns and writing it off. To ease the shock value of it, the debt will simply be converted into bonds the central bank will continue to ‘own’ but will have 0% coupons and no maturity.

Japan will be the first to do it
Japan is a demographic nightmare and has been unable to stir inflation for the past 20 years despite zeroed out rates. The debt-to-GDP ratio is a mind-blowing 227.9% with a fresh stimulus budget coming. There is no way out.

At the moment, the BOJ owns 35% of Japan’s government debt and at the current pace of buying it will hit 63.3% at the end of 2020. With the stroke of a pen, all that could disappear.

I don’t even think it would be disruptive. The central bank could launch a new round of QE at the same time as the announcement and keep control of what’s left of the bond market. At the moment, Japanese 10-year are yielding -0.11%. The means you have to pay interest to the government just so they’ll give you your money back in 10 years. Almost everyone who owns Japanese bonds is an insurance company or pension fund that has no other choice.

How do markets react
Governments face hard choices but they will find that monetization is far easier than Eurozone-style austerity (how many governments won re-election after that?) or stalled out growth.

Certainly in the first episode there will be some worries in markets. Gold will undoubtedly rally and the currency will decline. It may even create some inflation.

But like QE, the first forays will be small and governments will quickly fall in love with the ability to spend in ever-larger amounts.

This is disturbing on a lot of levels, but it’s also quite conceivable. When governments figure out that in a world of deflation (caused by the industrial overcapacity and bad debt from their previous policy mistakes) they really can borrow and spend whatever they want — and if it causes inflation, well, great, they win the currency war — then the floodgates will open. 

Japan, as it has with past monetary and fiscal insanities, is leading the way. And if history is any guide the rest of us will follow along shortly.

related: The Inevitability Of Unintended Consequences

Goldman Sachs CEO Lloyd Blankfein has one word to tie together everything happening on Wall Street and in the global economy right now.

At the firm’s annual meeting Friday, when answering how businesses are affected by things like Fed policy and market volatility Blankfein said right now it all comes down to confidence.

…continue reading HERE

related: Fed’s Lacker: “Markets Took Wrong Signal From Fed In March And April”

Fed official makes 6 key points clarifying to investors what he thinks they can expect. Includes a shocker on the number of interest rates hikes he’s comfortable with in 2016. Flat out he thinks the markets have “overestimated how likely we were to pause”….

...read the 6 comments  HERE

more on the Fed: Bond King Bill Gross Calls For Trillions In Fed Money Printing

Why central planning efforts will ultimately backfire

“When credibility in central bank omnipotence snaps, buckle up. Risk will get re-priced, markets will fall apart, losses will mount, and politicians will seek someone (anyone, dear God, but them) to blame.”

Anyone involved with managing projects, people or systems knows that the only thing that can be planned with absolute certainty is that things will never go 100% according to plan.

History is full of examples where governments’ best-laid plans failed in spectacular fashion, exacerbating the very problems they were intending to solve. Below are a few of our favorites”

…read on HERE

related by Larry Edelson:

The Seeds of War Are Now Everywhere …

In many previous columns and many other publications, I’ve shown you how the war cycles turned violently higher in late 2012. I also addressed the issue of war, and its implications for the markets, at the Weiss Wealth Symposium in January 2014 — telling you in no uncertain terms — how vitally important it is that you understand these forces to protect and grow your money going forward. 

It’s a topic that no one likes to talk about. Yet I’ve studied the history and cycles of war in detail, and I do not like what I see happening now in the least bit.

As I’ve also previously told you, I do not expect a war between China and the United States, or between China and Taiwan, or Russia and the United States.

But it’s clear to me that there are many seeds of war now being sown, in many different areas. And the amplitude and frequency of the events related to them are increasing, almost exponentially.

First, we have the rising military might of China, and its territorial expansion into the South China Sea and the Spratly Islands. 

Beijing wants control over the vast oil reserves in those regions, which could turn out to be the biggest in the world. Beijing also wants to exercise control over the vast, hugely important shipping lanes in the South China Sea, another reason we should all be concerned.

Make no mistake about it, China is becoming a military giant. It now has the largest number of active-duty troops in the word, at 2.28 million soldiers.

It has 7,400 tanks. 44 attack helicopters. 71 submarines. 2,004 combat-ready aircraft. And a brand-spanking new, state-of-the-art aircraft carrier.

Beijing is upping its military budget over 10% this year, increasing its military spending to $146 billion.

Second, we also have rising cyber espionage, all over the world. Much of it instigated by China and North Korea. The media call it “hacking.”  I call it “spying.” Either way, there’s a good chance we may one day, not too far into the future, see a full-scale cyber war break out.

Third, we have Iran and Israel, the Middle East. Always a problem, my models show this year could be the year that a full-blown war breaks out in the Middle East. The Arab Spring was merely a prelude, one that has sown the seeds of war and uprisings and rebellions all over the Middle East.

And then there’s ISIS, of course, and Boko Haram, not to mention all the other, smaller, but nonetheless, dangerous terrorist and separatist groups running rampant all over the world.

But the area that worries me the most is none other than Europe, where the demons of previous wars are still very much alive.

Europe is a cesspool of rotten politics, inept leaders and a monetary system that was flawed from the outset.

It’s gotten so bad now in Europe, the rise of neo-Nazi parties is astounding.  

In Greece, the neo-Nazi “Golden Dawn” party has risen in popularity from 0.3% of the Greek people polled in 2009 to as much as 7.0% late last year. A 23-fold increase in just three years.

Germany’s Angela Merkel is now being portrayed in many European publications in Nazi garb.

From the north of Europe to the Mediterranean in the south, fascist and neo-Nazi parties are growing at an alarming rate. As EU Home Affairs Commissioner Cecilia Malmström recently stated, “Not since World War II have extreme and populist forces had so much influence on the national parliaments as they have today.” 

Will Europe See a Civil War?

Yes, it will. Bavaria is gearing up to secede from Germany. Scotland from Great Britain. Great Britain from the European Union (next month). Northern Italy from Southern Italy.

Catalonia from Spain. And more. 

So unless the Troika (the International Monetary Fund, the European Commission and the European Central Bank) back off of the weaker, heavily-indebted countries, which is not likely, yes, I believe Europe is headed toward massive civil unrest and war.

Then there’s Russia, whose latest maneuvers in the Baltics — even taunting U.S. military aircraft and a naval fighter — are sure fire signs Putin is still intent on taking back previous Soviet satellite states. 

Also keep in mind that while there are no clear estimates on how much Russian money, legally or illegally, is spread out over Europe, it’s safe to assume there are boatloads. In 2012 alone, an estimated $56 billion left Russia, much of it going into Europe. 

Then there’s the European energy sector, largely controlled by Russia. The European Union depends on Russia for more than 32% of its crude oil, and nearly 39% of its natural gas needs.

Germany depends upon Russia for as much as 36% of its energy needs.

Sadly, based on my work on the war cycles and what’s happening now in the next phase of the great financial crisis and Europe’s sovereign debt crisis — war and massive civil unrest in many parts of the world is a very real threat, and it’s already starting to impact the financial markets.

It’s a major geopolitical reason why the dollar bottomed last week and is now heading back up to new record highs above 103 on the Dollar Index.

It’s all a major part of gold’s initial rally, which is now — just as I had forecast — correcting, pulling back and testing support, and getting ready to blast off again, in June. Ditto for mining shares.

And, it’s a major reason behind my longer-term forecast for a much higher U.S. equity market. Frightened capital from all over the world will pour into the U.S. and emerging markets of Asia.

The rising tide of the war cycles and geopolitical tensions are also patently obvious in the presidential election cycle right here in the streets of the great U S of A. Establishment versus anti-establishment. Rich versus poor. Independent wealth versus PAC money. And more. 

Bottom line: The war cycles and geopolitics are the driving forces behind almost all markets these days. Not central banks. Understand that single force — and all its implications — and you are well on your way to not only protecting your money, but also growing it in spades.

Best wishes, as always, and stay tuned …

Larry via MoneyandMarkets