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Japan announced Wednesday the “plan” to double their money supply over 2 years.  DOUBLE it?  To what end?  They have had a stagnant economy with “deflationary” pricing since 1990.  The hope is that they will finally see some “inflation” of asset prices.  Notice that I put the word “deflationary” in quotation marks.  I did this because over these past 22+ years they have not actually had “deflation” as their money supply steadily increased at an increasing rate but asset prices did languish.  Now, they have gone “all in” hoping that prices rise (in nominal terms of course).

A little bit of history here will help to put the “deflation” that they’ve experienced in perspective.  They had such a bubble in both stock and real estate prices that prices had nowhere to go but down.  I can still remember in 1989 when the Emperor’s Palace in Tokyo was valued at more than ALL of California.  This of course was an impossibility but… it was the way it was.  The distortion of price HAD to be corrected which Mother Nature did while the Bank of Japan fought her tooth and nail all these 22 years.  This doubling of money supply is a last ditch hay maker designed (with hope) that they can “reflate” their system.

Will it work?  To put it bluntly, it doesn’t matter one way or the other because capital will be destroyed and further mis-allocated whether asset prices “rise” in terms of Yen or not.  What they are doing (as the rest of the world has and is doing) is levering their Treasury to levels that are completely unsustainable.  They can never pay the debt back (in real terms) and any rise in yields will destroy their ability to pay debt service.  …which may already be in play only 2 days after announcing their new plan.  As Zero Hedge points out the yield on 10 yr Japanese bonds DOUBLED in just one day’s trading (from .32 basis points to .65) …causing their bond market to CLOSE.  Now, only 2 days after the announcement, JGB (government bond prices) have not only given up all of their gains of yesterday but yields are actually higher now than before the announcement.  Call it “bond vigilante-ism” or whatever you’d like, it looks like investors did the mental math that I put forth yesterday and figured out that less than 1/2% interest is not compensation for anything, especially when the government basically announced that the Yen will be “halved” within 2 years.

This is truly an inflection point, a very scary one at that.  Of course we will need to see whether this reversal move continues but were rates to even trade above say 1% it will be viewed as a “failed experiment.”  This is VERY important as Japan was first to “quantitative ease,” have done it the longest and done it the largest in relation to their economy.  If their move of going “all in” fails (it will) or is even perceived to fail… ALL markets everywhere will front run their own failures (creating the collapse) and sell bonds!

I have said all along that “bond prices” (low yields) were in THE biggest bubble in the history of history.  A failure here will mark the top and lead to the biggest bust of all time AND for the fist time include all sovereign treasuries as victims.  Please understand and remember that the derivatives market totals over $1 quadrillion in size.  “Debt” (bond pricing and interest rates) represent roughly 65% of this market ($650 trillion+ with a CAPITAL “T”!!!), a collapse in this market will bankrupt every financial entity everywhere on the planet (including the pretty little pieces of paper in your wallets).  Laugh all you’d like, this is about the paper system going to zero and thus “real stuff” like cups of coffee, bags of rice (and yes Gold included) going to “infinity” in terms of fiat currencies.  “Stuff” will be valued in terms of “other stuff” as fiats implode like dominoes during an earthquake.  Be ready for this as it will happen very quickly once begun… and it may have begun in Japan last night!