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By Ronald-Peter Stoferle, Incrementum AG Liechtenstein

June 23 (King World News) - After Tripling, Japanese Gold Demand Set For Second Surge

Is Europe at risk of a Japanese scenario?

With respect to monetary debauchery, Japan has certainly been the forerunner in recent years.

Japan was the first major industrialized nation to experience the bursting of a massive real estate and credit bubble in 1990. It was the first country to introduce a zero interest rate policy in reaction to the deflationary consequences, and where modern-day “quantitative easing” celebrated its sad premiere. The unintended consequences of the zero interest rate policy are especially glaring in Japan....

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Among these are the growing interdependence between fiscal and monetary policy, and the erosion of the allocative and signaling function of interest rates. This leads to ever larger waves of speculative excesses followed by macro-economic rescue operations and ultimately the subtle nationalization of the financial and economic system.

Due to the zero interest rate policy for 17 years already, the government has by now refinanced its entire debt burden at extremely low interest rates. Despite these favorable financing conditions, debt servicing now amounts to 25 percent of tax revenue. A rise in the average interest rate of a mere three percentage points would swallow the government's entire revenue. This alone illustrates that higher interest rate levels cannot possibly be reconciled with the fiscal situation. We refer to this economic policy impasse as the “Keynesian endgame."

The most recent policy effort -- called "Abenomics," after Japan's prime minister Shinzo Abe -- would be called the final “all-in” in a poker game. In our opinion, this monetary gamble is going to have grave consequences, which won't remain confined to Japan.

Though there are significant differences between Europe and Japan -- such as the heterogeneity of national interests -- Europe nevertheless follows the same path as Japan in terms of economic decisions. Interest rates are close to zero, banks and large corporations are surreptitiously subsidized, and risks are offloaded onto the central bank while government debt rises unceasingly. According to the Bank for International Settlements, Western industrialized nations are repeating the mistakes that Japan's government made, but with a difference -- central banks themselves are in danger of becoming zombie-banks.

The road into the low interest rate and debt trap era is the result of many small steps taken to resolve the crisis, and may look sensible considered individually. If Europe wants to learn from this experience, there would soon have to be an exit from the expansive monetary policy, more flexible labor markets, as well as a convincing fiscal consolidation. But this would entail a painful process of adjustment, even as it is the only way back to a path of growth that is sustainable in the long term. Otherwise, a gradual decline of prosperity and ever-greater pressure on social institutions would follow, similar to Japan.

Japan’s mentality of thrift appears to exhibit certain similarities with parts of Europe. The aging population has strong confidence in the sustainability of the value of domestic government bonds, the proceeds of which were, however, used for crude Keynesian stimulus programs. These are the counterpart to domestic savings, which have been channeled through the Post Bank and pension funds. In spite of low interest rates, bank deposits and government bonds have provided significant gains in purchasing power in real terms in recent years, not least due to the often-cited price deflation.

However, should we see a sustainable increase in inflation expectations in the course of the reflation program, it must be expected that bank deposits will be gradually withdrawn and redirected into alternative investments. Japan's gold demand, which already tripled last year from a very low level, could increase significantly. In the meantime, the gold price in terms of the Japanese yen is trading only slightly below its all time high.

IMPORTANT - Tomorrow Ronald Stoferle will be releasing his eagerly anticipated “In Gold We Trust” report.  This is an incredible report that all KWN readers around the world need to see.

UPDATE - KWN has many more interviews being released today.

© 2014 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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