Most Americans would have you believe that the U.S. Federal Reserve was entirely responsible for the monetary conditions which created the mother of all stock market bubbles after the LTCM bailout. Yes, the Fed was complicit in the extraordinary rise of technology in the late 1990s. However, it was the Bank of Japan and its Zero Interest-Rate Policy which may have been the real locomotive for the tech boom.
A friend of mine recently told me the story of his mother-in-law, an ordinary Japanese woman, living in Japan, whose friendly broker used to call her every couple of months when Japanese interest rates were near zero, asking her if she wanted to invest in some foreign fixed income assets his brokerage was peddling that offered much higher yields. Invariably she said yes, and she, along with millions of other Japanese, became part of what is infamously known as the carry trade.
This all began in 1998-1999 when the Japanese realized that deflation was spoiling their ability to pull out of a deep economic depression that had lasted eight long years. Basically, the Bank of Japan cut interest rates to near zero in order to stimulate spending. But, in the global economy, ordinary Japanese citizens like my friend’s mother-in-law didn’t even need to to look for better places to put their money. Their inventive brokers created higher interest products specifically for them that allowed them to sell yen, buy foreign currencies like U.S. dollars and invest in U.S. treasurys or GSE paper.
Basically, the Bank of Japan did not realize the limitations of monetary policy. It could provide easy money, but it could not control where that money ended up. So, ultimately it ended up in the carry trade and helped supply the fuel for the tech bubble.
Was the BOJ responsible for the Tech Bubble? That’s a question that cannot be answered. But, what is true is that the Japanese government and monetary authorities were very instrumental both in the late 1990s and earlier this decade in providing free money to global investors via the carry trade.
My friend says his mother-in-law doesn’t get those calls anymore becuase the carry trade has moved on. If anything, the carry trade has moved on to the United States as the U.S. now has the lowest interest rates in the G7. This new round of easy money may have spawned the oil bubble we have recently witnessed and its hard to say where the money will find its way next.
Ben Bernanke and Alan Greenspan assured the global investing community that they would not repeat Japan’s mistake after Japan’s own bubble because they would ease immediately instead of waiting for defaltion to kick in. Make no mistake, Greenspan and Bernanke have held to their promises as interest rates in the U.S. have been below the rate of inflation for much of this decade.
Howver, what is clear is that easy money is never the right monetary remedy for weak economic growth. Easy money only leads to increasing risk appetites of the investing public and new bubbles somewhere in the global investment world.
The parallels between Japan’s bubble and the one in the U.S. are growing clearer by the day.