The Japanese government is now actively printing new cash to buy government debt and so Japan is finally following the United States and UK in the race to print money to finance huge fiscal holes that would require too much tax rises and cuts in government expenditure for the politicians and public stomach in the short term. The inevitable result will be higher inflation and real wage cuts for its workforce and the risk of a sudden collapse in government bond markets once the bond vigilantes get the upper hand. So far the Japanese 10 year bond yield is stuck in the 0.7 to 0.8 % trading range but if they get the 2% inflation then that yield makes no sense at all and there will be a rout in the Japanese bond market as the fiscal deficit and national debt continue to spiral upwards. Nice youtube video below explaining Japan's national debt problem.

During the financial crisis it became abundantly clear that the amount of capital that banks were holding was insufficient and hence the taxpayer - that is me and you was forced to come to the rescue and make up the difference. Banks like to minimize the capital they are forced to hold so that they can engage in risky lending activities and invest in potentially higher return investments. In Basel III there are suggestions that instead of holding capital equal to 8% of risk adjusted assets banks should at least double that to 16% and hold additional liquidity as well to meet their finance needs for at least 30 days. I think the Basel III proposals are definitely an improvement but given the high costs to the taxpayer and the economy on general we should actually require a reserve ratio of 20% of risk adjusted plus a 5% liquidity buffer. That should protect the taxpayer and also ensure most banks can survive the next crisis without the need for me and you having to bail them out. There is an interesting report out today from the Federal Reserve that favours higher ratios as banks have failed miserably at risk management and therefore suggests we should veer on the side of caution...better late than never in my view ! The report link is here link

In my view central banks are playing with fire with all this printing of money. I thought that Mark Carney might shake things up a bit at the Bank of England and my goodness it needs a shake up having failed to spot the financial crisis and then persistently failing to reach its inflation target. Well the latest idea is that interest rates will continue to be at record lows of 0.5% until unemployment which is currently 7.8% fall to at least 7%. There are two provisos (i) so long as there is not a 50% or greater chance that inflation will be above 2.5% or (ii) the low interest rates risk financial instability. The idea of the "forward guidance" is that the prospects of low interest rates for some time to come will encourage investment and consumption in the real economy.  Well, since when inflation was 5.2% the Bank of England had not predicted a couple of years before that there was much chance that it would be above 3% then don't expect them to use the first excuse ! Next, it is low interest rate policies that can be the cause of financial instability by encouraging investors into risky assets - the low interest rate policy of Alan Greenspan after the dot com bubble crash was a significant contributor to the housing market bubble and crash. We are now likely to have low interest rates for a couple of more years and possibly till mid 2016 - that will be 8 years of record low rates. This is artificially pushing up stocks and the high end property sector and enabling governments to over borrow a great recipe for the next disaster !

The real reason for low interest rates is to penalise savers and benefit debtors and of course to bail out the banks, even today Mark Carney has made this clear stating:

"“Governor [Mervyn] King and his colleagues made tremendous progress on improving the balance sheets of the banks. We need to finish the job.”

So lets be honest the inflation target is effectively no longer operational, it is about squeezing real wages for the rest of us to bail out the reckless banks. A bad start Mr Carney.