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The Fed and the BoJ Keep Investors on the Edge of Their Seats

Sep 22, 2016


OUZILLY, France - Imagine the poor economist without a sense of humour.

How he must suffer!

This week was to be dominated by central banks. Two big ones - the Bank of Japan (BoJ) and the Fed - were to make important policy announcements.

The speculators placed their bets, front-running the news, and sat on the edge of their chairs.

More Mumbo-Jumbo

Yesterday morning, the BoJ came out with more mumbo-jumbo.

'Yield curve control', it promised.

The central bank says it will target a 0% yield on ten-year Japanese government bonds.

It added that it would continue buying the nation's stocks (by way of exchange-traded funds) and charging a negative interest rate of 0.1% on the accounts banks keep with it.

Japan's stock market crashed in 1989. Since then, the no-luck Japanese have had sluggish growth, recession, and on-again/off-again deflation.

For more than a quarter-century, the gears of Japan Inc have turned slowly. And not for lack of trying.

The government spent hundreds of trillions of yen on 'infrastructure' projects in an attempt to 'jump start' the economy with fiscal stimulus.

At one point, they were pouring more concrete - on roads, bridges, dams, and other public works - than the entire US.

Critics charged that so much cement was used - channeling rivers in the countryside and building ugly bridges to nowhere - that it amounted to the largest vandalisation program in history.

The Japanese feds tried monetary policy, too.

ZIRP (zero-interest-rate policy) began in Tokyo. They invented QE (quantitative easing) too; it was supposed to get more 'liquidity' into the system and boost stock and bond returns.

And yet, nothing seemed to work.

From Tokyo to Harare

But rather than admit its manipulations have done no good - rather than raise a white flag...back off...and let the market sort itself out - Japanese authorities march on with more claptrap announcements, more pigheaded interventions, and more of the nation's real wealth squandered on dumbbell projects.

Like soldiers of the Imperial Japanese Army abandoned on a remote atoll in 1945, they continue to fight a lost war.

The Japanese government already has the highest debt load in the world, at 230% of GDP.

Now that the older Japanese, in retirement, are selling their Japanese government bonds rather than buying them, the central bank funds the entire government deficit.

And the BoJ buys so many stocks and bonds, hustlers are said to be creating new investments just so the naive geniuses can buy them.

Today's announcement tells us that the central bank will buy more government debt, adding to its pile - already about one-third of all outstanding Japanese government debt.

This is what Zimbabwe and Argentina did. It is a classic way to ruin an economy, by 'monetising' debt.

It amounts to paying government expenses with newly invented money.

Eventually, the extra money leads to consumer price inflation.

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Rude Shock

Consumer price increases are what the BoJ is aiming for.

It has even developed an Orwellian lie to describe its main policy goal. It says it wants 'price stability of 2%'.

No kidding. It describes 2% annual inflation as 'stability'. Maybe it's a translation problem.

But just as the authorities have been unable to lure price increases up to their quacky 2% will they be unable to keep them there once they arrive.

Instead, inflation will keep right on going. The authorities, who built an economy where companies, households, and the government can barely survive at zero interest rates, will be unable to bring it under control.

Then retirees will get a rude shock. They put their savings into government bonds yielding almost nothing. They'll find out what they're worth when consumer price inflation is running at 3% or 5% or 10%. (ZILCH is the answer.)

And then, the whole illusion that the authorities know what they are doing will give way to the reality that they are no better than witchdoctors, fortune-tellers, or presidential candidates.

Meanwhile, it's a big day for the Fed, too...

Again, speculators sit on the edge of their seats, awaiting the latest gibberish.

Will the Fed tell us that, since the economy is strengthening, the time has come for another 25-basis-point increase (effectively, nada)?

Or will it say that it will remain watchful...'data dependent' a sentry at a volcano ready to throw a maiden over the edge if the rumblings increase?

We don't know. But here at the Diary, we are on the alert...ready to laugh when the news comes out.

BILL BONNER Founder, Agora Inc

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "The Fed and the BoJ Keep Investors on the Edge of Their Seats"

Parimal Shah

Sep 23, 2016

ZIRP and QE are like quicksand
Once you get in to it
It is almost impossible to get out.

In a few years, India will be on Top.
But if, and only if, politicians behave more like true leaders and trustees
and not like some of the prolific looters.
As it happened in the governments of the past 6 decades.

Like (2)

Amir Lakhani

Sep 22, 2016

What a satire! Wonderful.

Like (1)
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