Ambrose Evans-Pritchard has written
a blog post
regarding the inflationary efforts of the BOJ, the resultant spike
in JGB yields, and the battle that will take place between markets and Japan’s
In this post, he notes the
accurately predictive statements of Kyle Bass regarding this chapter of the worldwide
Kudos to Kyle Bass at Hayman
Advisers for warning that the Bank of Japan would lose control of its ¥70
trillion bond buying blitz. The spike in the 10-year yield to 1pc on Thursday
was certainly shocking to behold.
His point is that the BoJ faces a
“rational investor paradox”. The authorities are trying to drive up the
inflation to 2pc and therefore to devalue Japanese government bonds (JGBs), so
why on earth would you want to own them?
“If JGB investors begin to believe
that Abenomics will be successful, they will ‘rationally’ sell JGBs to buy
foreign bonds or equities,” he told Bloomberg
He says the scramble to sell has
“overwhelmed” buying by the BoJ. Governor Kuroda will now have double down with
a huge increase in the scale of QE.
He notes similar criticism, from Nomura’s Richard Koo, although
Koo approaches the problem from the viewpoint of an “arch-Keynesian.”
Does Ambrose believe it is game-over for Japan?
Monetary policy should take the strain, pursuing a nominal GDP target of 3pc
and later 4pc to turn the vicious circle of the “denominator effect” (ie a
rising debt load on a shrinking nominal base) into a virtuous circle.
The answer is for more
interventions – target nominal GDP, that favorite macro-economic measure that
includes all government spending as good spending, therefore any reduction in (or
slowing in the growth of) spending automatically impacts negatively on this
if ever there was one, one that ensures the economic house will
Ambrose views that what the BoJ has done so far is
miniscule, and aimed at the wrong target:
The BoJ meddled on the margins with
pinprick purchases of short-term debt, buying from the banking system, and
merely pushing up the monetary base. Of course it failed. Who cares about the
monetary base. It is irrelevant.
What they should have done is to conduct
old-fashioned open-market operations, à la Friedman, Fisher, Hawtrey, Cassel,
or Keynes himself, buying long bonds from non-banks to force up the M3 money
supply. That works, as Ben Bernanke discovered when he finally alighted upon
the policy by accident late in the Fed’s QE efforts.
Apparently, Bernanke has it right. To complete his statement of faith in central
bankers, Ambrose declares these individuals larger and more powerful than markets:
I stick with my view that the BoJ
has the means to crush all resistance, and should do so. This may require
Use the force of the state to disallow markets from acting rationally – “crush
all resistance.” The power-mad talk of
Central planning, central planning, and when that fails,
more central planning. This is the world
of Ambrose. He suggests Japan cap
interest rates along the entire maturity curve, as the Fed apparently did in
It certainly worked. It allowed the
US to whittle away its wartime debt through inflation and negative real rates.
The creditors paid the price. It was an “inflation tax”, or covert debt
Of course, one could argue this is what the US has been
doing for going on six years now. The shallowness
of the so-called recovery bears witness to the shallowness of the policy.
Ambrose realizes this will require further interventions,
not just monetary interventions, but likely with capital controls as well. More repression, more central planning. He
suggests this is worth a try:
But all this is clearly “doable”,
and if the alternative is a spiral into mayhem and debt default, you can hardly
blame Mr Abe for wanting to try. There was always a “Hail Mary” element to this
massive reflation experiment, a last-ditch effort to avert a debt compound
There are, of course, other means by which this problem
could be tackled. None painless; but
yes, other means. Will we find these
possibilities raised by Ambrose?
The critics are right to say it may
fail. But are they suggesting that the previous status quo was tenable?
It will fail. Central
planning has always failed, of that history has delivered a resounding and
repetitive verdict of guilty. But this
does not leave the only option as the previous status quo – after all, it was
heavily laden with central planning as well.
It, too, was not tenable.
If Mr Bass happens to read this
blog, I would like to know what he would do if he were prime minister of Japan.
I am not Mr. Bass, but what the heck. Here you go: Default.
And then allow markets to do their cleansing work. Sooner or later the markets will do this
anyway; why not get it over with, and before even more of the productive
capacity of the remnants of the free portions of the economy are destroyed.
Yes, pensioners and others will be hurt by this, but you
recognize they are being hurt by financial repression yet recommend repression as
your preferred solution.
As for the countless readers
demanding an apology from me for backing QE, Abenomics, and all the sins of
monetarism: I defy you all.
Your cockiness will not survive the verdict of history. Markets are larger than any central
planner. Markets are having quite a difficult
time of making their voices heard today – this only speaks to the levels of
sophistication in the central-planning tools.
It speaks to the levels of repression already
occurring. It also speaks,
qualitatively, to the level of the upcoming crash.
Markets will win. Always.