Monday, May 27, 2013

Ambrose, You Asked For It

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 central bank.  In this post, he notes the accurately predictive statements of Kyle Bass regarding this chapter of the worldwide grand experiment:

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?

Au contraire. 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.

What?  Are you surprised?  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 nonsensical macro-statistic.  A self-reinforcing government-interventionist statistic if ever there was one, one that ensures the economic house will be built on sand.

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 financial repression.

Financial repression.  Use the force of the state to disallow markets from acting rationally – “crush all resistance.”  The power-mad talk of the power-mad. 

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 the 1940s.

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 restructuring.

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 spiral.

Worth a try.  They do not know what they are doing; they do not know what to do.  You can hardly blame them for trying….

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.

1 comment:

  1. Perhaps the most hilarious thing is that this is the same Ambrose-Evans Pritchard who in an article just a couple of years ago laid forth the theory that Japan would inevitably lose complete control of their government expenses, and in sheer desperation hyperinflate their currency trying to solve it.

    No, I'm not kidding, he said that. Unfortunately I have lost the link to the article, perhaps it is still available at the Telegraph somewhere....