Following the latest set of global economic news, most notably a mediocre set of Chinese Official and Caixin PMIs, coupled with a mix of lackluster European manufacturing reports and an abysmal Japanese PMI, European, Asian stocks and U.S. stock index futures have continued yesterday’s losses. Oil slips for 4th day, heading for the longest run of declines since April, as OPEC ministers gather in Vienna ahead of a meeting on Thursday to discuss production policy. The biggest winner was the Yen, rising 1%, with the USDJPY tumbling overnight and pushing both the Nikkei 1.6% lower and weighing on US futures, when Abe’s official confirmation of a 2.5 year delay in Japan’s sales tax appears to have backfired once again, and led to a rush to safety reaction.

The Stoxx Europe 600 Index declined to a one-week low, with 18 out of 19 Stoxx 600 sectors falling; the MSCI Asia Pacific Index halted a five-day winning streak and copper fell by the most in three weeks. S&P500 futures declined 0.3%. The yen strengthened the most in a month as Japan delayed a planned sales-tax hike, as a result Japan’s Topix index slid 1.3 percent even as Softbank Group Corp. climbed to its highest in more than a month in Tokyo after announcing plans to sell at least $7.9 billion of its stake in Alibaba Group Holding Ltd. India’s rupee dropped after a local-language newspaper reported that central bank Governor Raghuram Rajan doesn’t want an extension of his term. Crude oil slipped toward $48 a barrel before an OPEC meeting on Thursday. The pound weakened for a second day on speculation a vote for Brexit is becoming more likely.

Summarizing the slew of overnight economic and PMI data:

• Caixin China May Manufacturing PMI 49.2, Matching Estimate
• Nikkei Japan May Manufacturing PMI 47.7 vs 48.2 in April
• Nikkei India May Manufacturing PMI 50.7 vs 50.5 in April
• Spain May Manufacturing PMI 51.8 vs 53.5 in April; Est. 52.5
• Swiss May Manufacturing PMI Rises to 55.8; Est. 54.0
• Italy May Manufacturing PMI 52.4 vs 53.9 in April; Est. 53
• France May Manufacturing PMI 48.4 vs Flash Reading 48.3
• Germany May Manufacturing PMI 52.1 vs Flash Reading 52.4
• Eurozone May Manufacturing PMI 51.5 vs Flash Reading 51.5
• U.K. May Manufacturing PMI 50.1 vs 49.4 in April; Est. 49.6
• Swiss GDP Expands 0.1% Q/q in 1Q; Est. Expands 0.3% Q/q
• South Korea’s May Exports Fall 6% Y/y; Est. -0.4%
• Indonesia May Consumer Prices Rise 0.24% M/m; Est. +0.20%

As noted last night, China’s purchasing managers’ indexes for May added to evidence that growth remains subdued after the economy expanded last year at the slowest pace in more than two decades. Similar manufacturing gauges for the euro area and U.K. pointed to mediocre expansion, while a gauge for the U.S. is also due Wednesday. Polls showing an increased risk that the U.K. will vote to leave the European Union in a June referendum are also making investors wary.

In light of the poor global PMI data, concerns about global growth have returned: “In normal global cycles, global trade would be running at around double global GDP, but post the GFC (Great Financial Crisis), global trade has been running only half of the rate of previous cycles. It would seem that trade is caught in a vicious cycle of ever rising inventories, falling industrial production and declining global trade volumes,” Jefferies equity strategists including Sean Darby and Kenneth Chan wrote in a note.

“The recovery in Europe is not accelerating and we have a very, very heavy week for data and events still ahead of us, so you can forgive people for a wait-and-see mood,” said William Hobbs, head of Europe, Middle East and Africa investment strategy at the wealth-management unit of Barclays Plc in London. “Markets are trapped a little bit, people are worried about geopolitics and the British referendum. This is keeping investors on the sidelines in case the worst-case scenario comes through.”

Market Snapshot:

• S&P 500 futures down 0.3% to 2089
• Stoxx 600 down 0.7% to 345
• FTSE 100 down 0.5% to 6197
• DAX down 0.4% to 10218
• German 10Yr yield down 1bp to 0.13%
• Italian 10Yr yield up 3bps to 1.38%
• Spanish 10Yr yield up 3bps to 1.5%
• S&P GSCI Index down 1.1% to 366.9
• MSCI Asia Pacific down 0.2% to 129
• Nikkei 225 down 1.6% to 16956
• Hang Seng down 0.3% to 20761
• Shanghai Composite down 0.1% to 2914
• S&P/ASX 200 down 1% to 5323
• US 10-yr yield down 1bp to 1.83%
• Dollar Index down 0.3% to 95.6
• WTI Crude futures down 1.4% to $48.42
• Brent Futures down 1.7% to $49.06
• Gold spot up less than 0.1% to $1,216
• Silver spot down less than 0.1% to $15.98

Global Headline News Wrap

• SoftBank Plans to Sell at Least $7.9 Billion of Alibaba Stake: Japanese company is seeking to boost cash, pay down debt
• Euro-Area Manufacturing Near Stagnation Signals Slowdown Ahead: manufacturing in 19-nation euro area barely grew in May
• OECD Blasts Governments as World Slips Into ‘Low-Growth Trap:’ distortions from ultra-loose monetary policy are growing; global economy will fail to accelerate this year
• Staples CEO to Step Down Following Failed Office Depot Merger: North American President Goodman to take interim CEO job
• China’s Xiaomi Buys Microsoft Patents to Spur Global Forays: patents cover wireless communications, video and cloud
• MGM Resorts Buys Borgata Stake From Boyd Gaming for $900m: gains full ownership of Atlantic City’s top-performing casino
• Shari Redstone Says Viacom Shareholders Want New Management: says she isn’t seeking to manage company or become chairman
• Valvoline Files for IPO as Parent Shifts Focus to Chemicals: share sale of oil-change retailer targeted for 4Q; parent co. to rename itself Ashland Global Holdings Inc.
• Adelson Settles Six-Year Feud With Fired Sands China Chief: confidential accord averts Las Vegas trial on 2010 lawsuit
• Las Vegas Sands to Pay $75m-$100m to Settle Jacobs Case: WSJ
• May U.S. Auto Sales Seen Little Changed; Annual Pace in Focus: preview
• Musk Says It’s ‘Obvious’ Model 3 Owners to Pay for Superchargers: to likely charge owners of forthcoming Model 3 sedan to use co.’s network of Supercharging stations
• Einhorn’s Main Greenlight Capital Hedge Fund Loses 1.9% in May: lost 1.9% in main hedge fund in May even as stocks climbed

Looking at regional markets, Asian stocks maintained the subdued lead from Wall Streetwith the region’s bourses mixed as they digested a slew of data releases and remained cautious ahead of this week’s key risk events. Nikkei 225 (-1.6%) declined at the open as commodity-sector weakness and a firmer JPY set the tone in early trade, while markets also ignored confirmation that PM Abe is to delay the sales tax hike as this was widely expected. ASX 200 (-1.0%) failed to benefit from better than expected GDP which expanded by the most in 3% years, as the firm data also dampened prospects of further RBA action. Chinese Markets outperformed with Shanghai Comp (-0.1%) and Hang Seng (-0.3%) only showing modest losses following Manufacturing PMI releases in which the Official reading beat expectations and the Caixin figure printed in line, despite posting a 3-month low. 10yr JGBs traded marginally higher amid weakness in Japanese stocks and was also underpinned by the BoJ presence in the market for JPY 430b1n of government debt.

Top Asian News

• China Factory Gauge Signals Further Economic Stabilization: May Manufacturing PMI 50.1 vs est. 50.0
• Abe Postpones Japan’s Tax Hike Ahead of Upper House Election: Abe vows reform, stimulus to achieve strong economic growth
• Australia Economy Grows Most in Four Years Thanks to Exports: 1Q GDP rises 1.1% q/q vs est. 0.8% gain
• Macau Casino Revenue Decline Deepens in May on Tighter Rules: Revenue fell 9.6% in May compared with 9.5% drop in April

In Europe, like in Asia, there was a subdued start for much of the morning (Euro Stoxx 50 -0.8%) swamped by an air of caution ahead of key risk events later in the week. Equities were initially pressured at the open amid broad based softness among financial names, while Mfg. PMI figures across the Eurozone have provided a mixed bag as to the health of the economy across Europe. As such, the slight weakness in Europe provided a lift for fixed income markets with bunds firmly above 164.00, while the long end has continued to extend on its recent outperformance on residual month-end duration extension buying. In terms of this morning’s auctions, Germany drew a higher b/c than previous with a retention by the Buba of 18.88%m„ while the UK’s auction was less impressive than previous with a 0.6bps tail.

Top European News

• HSBC Said to Cut Senior Investment-Banking Jobs to Lower Costs: job cuts part of ongoing plan to reduce costs
• Bayer’s Baumann Says Monsanto Takeover Will Take Time: WiWo; Bayer’s planned takeover of Monsanto “won’t be a sprint, but rather a marathon,” CEO tells WirtschaftsWoche in interview
• Ahold Earnings Beat Estimates on Revamp in U.S., Netherlands: underlying operating income rises 15% to EU449m
• Sainsbury Sales Drop Accelerates Amid Fewer Promotional Offers: U.K. grocer posts biggest market share decline in 15 months
• U.K. Manufacturing Stays Subdued as Brexit Referendum Looms: U.K. manufacturing unexpectedly returned to growth in May, though the pace was subdued
• Swiss Growth Unexpectedly Slows on Weak Government Demand: 1Q GDP rises 0.1%, estimate was for 0.3% increase

In FX, the yen strengthened 1 percent as Prime Minister Abe told lawmakers he will “mobilize fiscal policy to achieve strong growth.” “Abe has already decided on the sales tax and he said he will come up with more fiscal stimulus,” said Roy Teo, a senior currency strategist in Singapore at ABN Amro Bank NV. “From that perspective perhaps the market is speculating that with more fiscal stimulus in the pipeline then the BOJ may delay further easing policies. If the BOJ delays then it’s positive for the yen.” The pound declined 0.2 percent to $1.4455 after dropping 1.1 percent on Tuesday, when ICM opinion polls released by the Guardian showed a lead for the campaign to take Britain out of the EU. A gauge of the pound’s one-month volatility versus the dollar climbed to 20 percent on Wednesday, the highest since 2009. The Bloomberg Dollar Spot Index declined 0.3 percent, after a 3.7 percent surge in May that marked its biggest monthly gain since September 2014. The odds of the Federal Reserve raising interest rates in June almost tripled last month to 34 percent, while the chance of a move by July roughly doubled to 54 percent, Fed Funds futures show. The euro advanced 0.2 percent versus the greenback before a European Central Bank policy meeting on Thursday. The yuan erased a decline of as much as 0.2 percent that took it close to a five-year low, while New Zealand’s currency rose 0.6 percent after a gauge of the nation’s terms of trade increased by more than economists forecast.

In commodities, the Bloomberg Commodity Index slid 0.7 percent, falling for a second day. West Texas Intermediate crude fell 1.5 percent to $48.35 a barrel, after climbing for a fourth month in May. The Organization of Petroleum Exporting Countries is unlikely to reach an agreement limiting production at this week’s meeting in Vienna as the group sticks with Saudi Arabia’s strategy of squeezing out rivals, according to analysts surveyed by Bloomberg. The global surplus that has caused prices to slump since 2014 is correcting itself, the oil minister of the United Arab Emirates said Tuesday. Copper declined 1.7 percent in London, while zinc, lead and tin were down at least 0.9 percent.

Bulletin headline summary from RanSquawk and Bloomberg:

• European equities enter the North American crossover in negative territory as participants await upcoming key risk events
• GBP continues to remain a source of focus for FX markets as the latest YouGov poll shows the remain and leave camp are neck and neck while UK mfg PMI unexpectedly printed in expansionary territory
• Looking ahead, highlights include US Manufacturing PMIs, ISM Manufacturing, Construction Spending and API Crude Oil Inventories
• Treasuries higher in overnight trading as global equities and commodities sell off, manufacturing gauges across the globe point to mediocre expansion.
• Manufacturing in the 19-nation euro area barely grew in May, damping confidence in the strength of the region’s economic recovery, according to Markit Economics. Purchasing Managers Index slipped to 51.5 from 51.7
• U.K. manufacturing unexpectedly returned to growth in May, though the pace was subdued while Switzerland’s economy barely grew in the first quarter
• China’s official factory gauge was 50.1 in May, the third it’s month remained above the dividing line that signals improving conditions, adding to recent evidence of stabilization in the world’s second-largest economy
• The global economy is slipping into a self-fulfilling “low- growth trap” where ultra-loose monetary policy risks doing more harm than good, the OECD warned
• Investors are putting record amounts of money into exchange- traded funds as bonds become increasingly difficult to buy and sell. Global fixed-income ETFs attracted $60 billion through May 25, the most for the period since the funds were created 14 years ago
• BlackRock Inc. and Nuveen Asset Management are shunning bonds in favor of equities as the probability rises that the Federal Reserve will increase interest rates in June or July
• China’s central bank is expanding the fight to monitor and control risks emerging in the burgeoning market for loosely- regulated shadow lending, in which firms make loans for everything from weddings to mining projects
• Sovereign 10Y yields mixed; European, Asian equities lower; U.S. equity-index futures fall; WTI crude oil drop, precious metals mixed

DB’s Jim Reid concludes the overnight wrap

Before we dive straight into the latest in Asia this morning it’s worth highlighting that later this morning (around 10am BST) Japan’s PM Shinzo Abe will be addressing the press following the conclusion of the Upper and Lower House plenary sessions. It’s expected that the PM will officially announce the postponement of the April 2017 consumption tax until 2019, something which looks more likely following the backing of Abe’s Liberal Democratic Party and junior coalition partner yesterday. Indeed Bloomberg has just said that Abe has delayed the move by 2 and a half years. Our Japanese strategists also suggest that we may see Abe announce a fresh fiscal stimulus package today in a bid to spur growth, with multiple reports suggesting that this could amount to ¥5-6tn. A dissolution of the Lower House and a ‘double election’ (general election and Upper House election) may also be announced, according to our Japanese strategists.

Leading into his scheduled talk Japanese equity markets are weaker this morning with the Nikkei and Topix -0.57% and -0.41% respectively. The Yen is little changed while JGB yields are a couple of basis points higher. The latest capital spending data for Japan in Q1 (+4.1% yoy vs. +2.4% expected) revealed a slowdown in growth although not as much as expected. Meanwhile, the Shanghai Comp (+0.11%) is a touch firmer although has fluctuated between gains and losses for much of the session. The Hang Seng (+0.03%) is little changed, as is the Kospi (+0.04%) while the ASX (-1.25%) is sharply lower following the Q1 GDP data in Australia which came in stronger than expected (+1.1% qoq vs. +0.8% expected). A rally for the Aussie Dollar (+0.71%) as a result appears to be weighing on the index with the data perhaps dampening the expectation that the RBA will look to ease again soon.

In fact it’s been a busy morning for data with China also in focus. The official manufacturing PMI for May was unchanged at 50.1 last month, a smidgen ahead of the consensus forecast of 50.0 and importantly marks the third consecutive >50 reading following 7 sub-50 prints beforehand. The non-manufacturing PMI did decline to 53.1 from 53.5 however. A separate non-official manufacturing PMI reading from Caixin Media declined to 49.2 in May from 49.4, albeit in line with expectations.
The remaining PMIs/ISM from around the world are the main event for the rest of today. The US manufacturing ISM is an interesting one as we could go back below 50 after 2 months above it following 5 months below from the tail-end of last year. As DB’s Joe LaVorgna points out the average of the Chicago, New York and Philadelphia surveys (ISM adjusted) strongly suggests that the manufacturing ISM will slip back into contraction territory. Historically, the manufacturing ISM has been below 50 on 82% of the occasions when the Chicago, Empire and Philadelphia ISM-adjusted series were all below. He is expecting 49.0 today with the market at 50.3.

Meanwhile over in Europe we’ll get the final May revisions for the manufacturing PMI’s for the Euro area, Germany and France. As a reminder the initial reading for the Euro area came it at 51.5 which was down a tad from April (-0.2pts). However both Germany (+0.6pts) and France (+0.3pts) actually recorded some improvement in their respective readings so the interest will likely lie in just how much softer the peripheral data is.

Yesterday markets were met with a flurry of economic reports as investors returned from the long weekends in the US and UK. Across the pond the various personal consumption spending reports were strong, although that was then followed shortly after with a disappointing consumer confidence reading and more disappointment in the latest regional manufacturing reports. US equity markets had slipped for much of the afternoon (down about -0.50%) although a late rally in the evening resulted in the S&P 500 paring that loss to just -0.10%. Meanwhile the US Dollar (Dollar index +0.34%) had a reasonable session, although interestingly 2y Treasury yields finished 3bps lower and Gold rallied +0.86% to snap that 9-day losing run. We’d imagine that month-end re-positioning played a part in some of yesterday’s moves.

Prior to this European markets struggled (Stoxx 600 -0.77%) as WTI once again failed to hold above $50/bbl and the latest Brexit poll swung back in favour of the leave camp. Indeed the ICM phone poll for the Guardian newspaper showed 45% of respondents voting to leave versus 42% to remain. An online poll for the same newspaper had the split at 47% to 44% in favour of leaving too, although it was the phone poll which had people taking notice given previous phone polls have showed the remain camp as having a reasonable lead. Indeed the last ICM phone poll conducted on 16th May showed a 47% to 39% split in favour of remain. In any case yesterday’s news had Sterling under pressure with the Pound finishing just over 1% lower versus the US Dollar.

Back to that data in the US. While personal income rose +0.4% mom in April and in line with expectations, notable was the big jump in personal spending during the month (+1.0% mom vs. +0.7% expected) which rose by the most since August 2009. Meanwhile on the inflation front the PCE deflator climbed +0.3% mom in April as expected which lifted the YoY rate by three-tenths to +1.1%. The PCE core was up +0.2% mom, also in line, with the YoY rate staying put at +1.6%. Away from this, the latest consumer confidence reading disappointingly declined 2.1pts in May to 92.6 (vs. 96.1 expected). Notably the consumer expectations component slipped to the lowest since February 2014. On the manufacturing front the Chicago PMI declined 1.1pts to 49.3 (vs. 50.5 expected) in May, confirming the recent weakness in other regional surveys. In fact yesterday’s Dallas Fed manufacturing survey (-20.8 vs. -8.0 expected) tumbled 6.9pts from April. Finally the other data release yesterday was the S&P/Case-Shiller house price index for March which revealed that house prices were up +0.9% mom during the month, keeping the YoY rate at +5.4%.

Closer to home the ECB’s latest money aggregates showed that the annual pace of Euro area money supply (M3) growth slowed in April to +4.6% yoy from +5.0%. That’s actually the slowest rate of growth since February last year. Our European economists noted that Euro area banks registered €12bn of net loan flows to the real private sector in April. Monthly loan flows to households have been stable over the past year (+1.6% yoy) while there has been considerable volatility on the corporate side. They note that the concern is that while YoY credit growth is still improving, the positive trend in the monthly loan flows could be petering out. Elsewhere, the Euro area headline CPI estimate for May was -0.1% mom as expected (an improvement of one-tenth but still the fourth consecutive negative reading) with the core nudging up by the same amount to +0.8% yoy. The wider Euro area unemployment rate was confirmed as unchanged in April at 10.2%, while over in Germany the unemployment rate was down one-tenth to 6.1%. Finally German retail sales were disappointing in April at -0.9% mom (vs. +0.9% expected).

Submitted by John Rubino via DollarCollapse.com,

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

END.