Last August, in a CBB titled “Do Whatever it Takes,” I drew parallels between the progression of experimental global central bank “money printing” to the escalation of aerial attacks against civilians during WWII.
“As the war commenced, efforts were indeed made by most 'belligerents' to limit aerial attacks to military targets away from innocent civilians. It wasn’t long, however, before civilian deaths mounted as bombs were unleashed ever closer to population centers. And then not much time elapsed until industrial targets were viewed as fair game, with civilians paying a progressively devastating price. Somehow, an increasingly desperate war mindset saw targeting population centers in much less unacceptable terms. Soon it was perfectly acceptable. War-time justification and rationalization saw conventional bombing of civilian targets regress into direct firebombing and incendiary raids of major cities in Europe and Asia. Less than six years passed between President Roosevelt’s “Appeal” and the dropping of nuclear bombs on Hiroshima and Nagasaki.”
Thursday, the Bank of Japan (BOJ) announced the Japanese version of “Do Whatever it Takes.” What commenced during the Greenspan era as central planning of pegged interest-rates and market liquidity backstops, later evolving to ever-expanding crisis-period bailouts, market interventions and debt monetization, has escalated to an unprecedented global free-for-all of monetary inflation and debt purchases in a non-crisis environment. Amazingly, the Japanese – with 4.3% unemployment and approaching 25 years since the bursting of their Bubble – somehow succeeded in leapfrogging the Bernanke Federal Reserve.
April 4 – Reuters (Leika Kihara and Stanley While) - The Bank of Japan unleashed the world’s most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows. New Governor Haruhiko Kuroda committed the BOJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014, a dose of shock therapy officials hope will end two decades of stagnation. The policy was viewed as a radical gamble to boost growth and lift inflation expectations and is unmatched in scope even by the U.S. Federal Reserve’s own quantitative easing program. The Fed may buy more debt, but since Japan's economy is about one-third the size of the economy, Kuroda’s plan looks even bolder. ‘This is an unprecedented degree of monetary easing,’ a smiling Kuroda told a news conference after his first policy meeting at the helm of the central bank. ‘We took all available steps we can think of. I’m confident that all necessary measures to achieve 2% inflation in two years were taken today,’ he said.”
And a few notable Kuroda quotes courtesy of Dow Jones: “This is an entirely new dimension of monetary easing, both in terms of quantity and quality… I will not use my fighting power in an incremental manner… Our stance is to take all the policy measures imaginable at this point to achieve the 2% target in two years."
Well, this is insanity. Not surprisingly, Kuroda’s gambit was cheered by Fed doves (quotes from Reuters): “Watching Japan struggle to beat deflation and revive an ailing economy ‘is not a healthy element of the global scene’, Atlanta Fed President Dennis Lockhart said… ‘So their preparedness to take more aggressive action, if it works, will certainly help everyone.’” “Charles Evans, president of the Chicago Fed, called the move ‘pretty aggressive’, adding:’ ‘I certainly hope that every foreign central bank around the world is able to adopt policies that ultimately lead to the most vibrant economies that those economies can have because we need it around the world.’”
A few notable “masters of the universe” (having already profited handsomely shorting yen) warned of a potential yen free-fall. For sure, the Bank of Japan’s shock and awe inflation strategy strives to convince Japanese consumers and businesses that prices and business activity is in the process of being inflated higher. The big unknown is to what degree the clearer message “your yen is going to be devalued lower!” will incite Japanese institutions and savers to exit the yen in search of better returns throughout global securities markets. The thought of Japan’s savers joining forces with U.S. savers in a quest to protect their “money” from central bank-orchestrated devaluation must be enough to have the global leveraged speculating community salivating all over themselves.
April 5 – Reuters (Leika Kihara and Stanley White): “Bank of Japan Governor Haruhiko Kuroda played down concerns his unprecedented burst of monetary stimulus would create asset-price bubbles even as it delivered an immediate pay-off in global markets, with government bond yields at a record low, the yen hitting a 3-1/2 year trough and stocks surging to multi-year highs… ‘We will be vigilant of the risk of a bubble. I don’t think there’s a bond or stock market bubble now and I don’t see one emerging any time soon. But we will be vigilant of the risk,’ Kuroda told the lower house of parliament.”
I’ll have to disagree with Mr. Kuroda. Japanese debt is a historic Bubble – and I’d suggest a rather conspicuous one at that. And Japan’s move to follow the Fed down the path of 24/7 monetary inflation is a key facet of the “global government finance Bubble” more generally. Japanese institutions were said to be major buyers of European bonds this week. French 10-year yields dropped 24 bps Thursday and Friday to a record low 1.75%. French yields were down about 50 bps in five weeks. Spain’s 10-year yields were down 32 bps points this week to 4.73%, and Italian yields sank 39 bps to 4.37%. Ten-year Treasury yields were down 12 bps in two sessions to end the week 14 bps lower at 1.71%. No Bubble?
In Tokyo, wild Friday trading saw the 10-year “JGB” yield trade as low as 32 bps and as high as 64.5 bps before ending the week at 0.53%. Japanese stocks jumped another 3.5% this week, increasing the Nikkei 225’s y-t-d gain to 23.5%. The yen sank 3.4% this week, pushing its 2013 decline to 11.1%.
April 5 - Financial Times (Jonathan Soble and Ben McLannahan): “Use it or lose it. That was the upshot of Haruhiko Kuroda’s message to Japanese savers on Thursday as he hurtled the country’s central bank into a ‘new phase’ of super-loose monetary policy. By pledging to degrade the value of hoarded cash through inflation and all but snatching the safe-haven government bond market away from private investors, analysts say the Bank of Japan governor is trying to force citizens, banks and companies to deploy their money in ways that do more to boost the economy. The approach will have far-reaching consequences, some of which were already being felt in financial markets on Friday as bond prices swung wildly and stocks pushed to four-year highs.”
Well written, Misters Soble and McLannahan. Yes, absolutely “far-reaching consequences.” Monetary inflations and fiascos and their wretched consequences have inspired a great amount of thinking and writing over the centuries. All for not, as a small cadre of like-minded New Age global central bankers push deeper into their untested experiment in electronic “money” inflation. I have a hard time believing anyone with a sound grasp of monetary history doesn't see this as anything other than an unfolding disaster.
It’s interesting. The more apparent it becomes that monetary measures are not working as prescribed the greater the impetus to just do a whole lot more. Japan has been down this road before - for too long now. And, already, the global inflationist community is busy laying the "intellectual" groundwork for the next phase of this monetary battle. Calls are turning louder for central banks to just purchase government debt and simply “extinguish” it. The nuclear option.
It seemed like an opportune time to return to a little “History of Monetary and Credit Theory (From John Law to the Present Day),” written by the late French economist and Bank of France official Charles Rist (1938).
“But let us tackle the essential argument, the argument in which [John] Law is a real forerunner, the crushing argument which, since his time, has been used by all the currency cranks and by all plundering states. What is money but a simple exchange voucher conferring the right to a certain quantity of goods? And if that is its function, what is the point of using a costly metal? Here we reach the cardinal point of Law’s theory. Money is only a voucher for buying goods. It is a formula which has provided the starting point for all currency cranks, an apparently self-evident axiom on which have been based all systems which deny the citizen the right to a means of storing value. Money is made only to purchase with. Money is not the durable and indestructible good, of stable value and unlimited acceptability, with the help of which man has been able to put by the product of his labor, the instrument for saving by means of which a bridge is built between the present and the future and without which all provisions for the future would become impossible. No!”
“But apart from that, [Law] misunderstood the real character of metallic money, and it is this that makes him so representative of all the currency cranks. He ignored the function of money as a means of storing value in a world where men are so anxious to preserve the product of their labour and their saving from price fluctuations and vicissitudes of all kinds. It is that which ruined [Law’s] System. That metallic money is not an ideal instrument of circulation, and that it can be conveniently replaced in this respect by all sorts of circulating credits has been known from the earliest times. But nobody has yet shewn that circulating credits can replace the precious metals in their function as a store of value. None of the monetary systems yet know to us, even the most advanced, has dispensed with the precious metals, that ultima ratio of trade.”
And the famous quote from John Law: “Money is not the value for which goods are exchanged, but the value by which they are exchanged: The use of Money is to buy goods, and silver while money is of no other use.”
Some years ago, I noted parallels between the unfolding experiment in contemporary managed electronic “money” and Credit and John Law’s disastrous experimental introduction of paper money in eighteenth century France. Similar to Law, contemporary central bankers see “money” simply as a medium – an expedient - for spurring spending – throughout the real economy as well as in securities and asset markets. The failure of the Federal Reserve to create a sufficient supply of money is central to Dr. Bernanke’s thesis of the causes of The Great Depression. Central banks are now in the process of creating Trillions of additional “money” in order to inflate prices and economic activity. Trillions. They’ve been busily adding electronic zeros.
I’ll be the first to admit that it’s a real challenge to explain to the average person (or academic or Wall Street professional) the flaws in current inflationary central bank doctrine. If inflation isn’t a problem, why not create some additional “money”? Central bankers can always reverse course and withdraw stimulus if necessary, right? And what’s the problem with higher asset prices? With markets at or near record highs, the myriad risks associated with currency devaluation, monetary degradation, mispriced finance, deleterious market incentives, resource misallocation, asset Bubbles, inequitable wealth distribution and economic maladjustment don’t resonate all that well. Somehow, even recent social upheaval in Greece, Ireland, Portugal, Spain and Cyprus are viewed as domestic problems and not the consequence of unanchored global finance. And do these central bankers actually believe they will be able to exit this policy course?
From Rist: “…The function of money as a means of storing value in a world where men are so anxious to preserve the product of their labour and their saving from price fluctuations and vicissitudes of all kinds.”
Rist titled his first chapter, “Confusion between Credit and Money in the Political Economy in the Eighteenth Century.” In our 21st Century age of runaway electronic debits and Credits based finance, the distinction between “money” and Credit has completely blurred. I’ve tried to make the case that there is in reality an exceedingly important difference: Credit is much about confidence, while money is “precious.” Credit, as was on full display between 2006 and 2008, can be robust, whimsical, fleeting and frighteningly fragile. “Money” – perceived as a trusted liquid store of nominal value – is the rock foundation for the entire financial system. As such, “money” enjoys almost insatiable demand. And this attribute has ensured repeated episodes of gross over-issuance that has plagued mankind for centuries. These days, “money” is the domain of the government debt and central banking nexus. The monetary black plague is back and it has spread globally like never before. Yet it’s virtually invisible and comes with a surprisingly protracted incubation period.
When his “Mississippi Bubble” scheme was faltering in 1720, John Law moved to devalue competing hard currencies. He was desperate to keep investors and, particularly, the manic crowd of speculators in his monetary instruments in order to stave off Credit collapse. The Fed, BOJ, BOE, ECB and others have been working desperately to keep investors and speculators fully engaged in global debt, equities and risk markets. With near zero interest-rates and Trillions of monetization, “money” is being methodically devalued around the world. Federal Reserve devaluation is forcing savers out of “money” and into risk markets, apparently believing that asset inflation will spur wealth-creation, risk-taking and economic activity. The Bank of Japan is devaluing yen-denominated “money,” hoping a weaker yen and expectations for higher inflation will jumpstart the Japanese economy.
These central bankers seem oblivious to the fact that they are on a perilous course that risks a crisis of confidence in “money,” not to mention global risk markets. The history of monetary fiascos is replete with out of control inflations. Once the money printing gets heated up, there is a strong proclivity for one year of elevated money printing ensuring only more intense pressure for even greater printing the next. Actually, this dynamic has been in play for years now. After having carefully studied these types of dynamics, I’ll confess it’s almost surreal to witness them in real time.