Here’s the question of the day: What happens when central banks own the market?
The answer comes from Asia where Japan’s Government Bond Market Grinds to a Halt and the yield on 10-year Japanese bonds did not move for seven days.
Yields on newly issued 10-year Japanese government bonds remained flat for seven straight sessions through Friday as the Bank of Japan continued its efforts to keep long-term interest rates around zero.
The 10-year JGB yield again closed at 0.055%, where it has been stuck since June 15. This marks the longest period of stagnation since 1994, according to data from Nikkei affiliate QUICK.
The implied volatility of Japanese government bonds reached its lowest point since January 2008. Trading in newly issued 10-year debt has become so infrequent that broker Japan Bond Trading has seen days when no bonds trade hands.
During its policy meeting that wrapped up last Friday, the BOJ reaffirmed its commitment to continuing monetary easing until Japan reaches its 2% inflation target. That goal remains far off, with inflation stuck near zero.
Quiet Descends
Trading in short-term interest rate futures has also thinned. Tuesday saw no transactions in three-month Tibor futures — the first time that has happened since such trading began in 1989.
The three-month Tibor, or Tokyo interbank offered rate, has not moved in the nine months since the end of September 2016. There were just a few trades last Friday, and it was only a matter of time until the number hit zero.
This is all so stupid. It is easy to produce inflation if you want it. I have written about this several times already.
Please consider Mish’s Sure Fire Proposal to End Japanese Deflation: Negative Sales Taxes, 1% Monthly Tax on Gov’t Bonds.
Rather than indent with blockquotes, what follows is my proposal as presented twice already.
Mish’s Sure-Fire Proposal
It’s rather amusing that Japan cannot destroy its currency even though it has tried, and tried and tried.
Abenomics has been a huge failure. Keynesian “solutions” of all sorts have failed to rid Japan of the alleged scourge of deflation.
Some think handing out free money is the obvious solution, but what if people don’t spend it?
I can help.
Mish’s Four Pronged Proposal to End Japanese Deflation
- Negative Sales Taxes
- One Percent Tax, Per Month, on Government Bonds
- National Tax Free Lottery
- Hav-a-Kid
Negative Sales Taxes
People hoard cash, especially the miserly wealthy. We need to unlock that cash and put it to work.
To free up this money, I propose negative sales taxes. The more you spend, the more money you get back as a direct tax credit against income taxes.
I leave specific details to economists Larry Summers and Paul Krugman.
What can possibly go wrong?
One Percent Tax Per Month on Government Bonds
Negative interest rates are in vogue. However, all negative interest rates have done is to get those with money to hoard bonds.
Bond buyers effectively bet on capital gains of still more negative rates.
Phooey!
Just yesterday I noted Bank of Japan Corners 33% of Bond Market: All Japanese Bonds, 40 Years and Below, Yield 0.3% or Less.
33% cornering of the bond market is truly inadequate as this sentiment implies:
Makoto Yamashita, a strategist for Japanese interest rates at Deutsche Bank AG’s securities unit in Tokyo said “There are investors who have no choice but to buy.”
We need to end this “no choice” hoarding sentiment right here, right now.
I have just the solution. Tax government bonds at the rate of 1% per month.
No one will want them. Hedge funds and pension plans will dump sovereign bonds en masse.
This will allow governments to buy every bond in existence immediately, if not sooner. As soon as the government corners the bond market (at effectively zero cost), debt and interest on the debt will truly be owed to itself.
Once the bond market is 100% cornered, I propose government debt be declared null and void annually. This would effectively wipe out the entirety of Japan’s debt.
Japan’s debt-to-GDP ratio would immediately plunge from 250% to 0%.
National Tax Free Lottery
Japan desperately needs to get people to spend, continually.
Once again, I have a logical proposal. For every purchase one makes on a credit card, that person gets a free lottery ticket for a weekly drawing worth $10,000,000 tax free.
Each week, a random day of the week is selected and separately a random taxpayer ID is selected.
If the person drawn made a credit card purchase exceeding $10 on the day of the week drawn, they win $10,000,000 tax free. If there is no winner, the amount rolls over.
This beautiful plan will cost no more than $520 million annually, peanuts these days.
Hav-a-Kid
Demographics in Japan are a huge problem. Although various incentives have been tried, none of them have gone far enough.
I propose a reduction in income taxes for everyone starting a family. The following scale applies.
- One new child: 50% reduction in income taxes for a period of ten years.
- Two new children: 100% reduction in income taxes for a period of twenty years.
- Three new children: Subsidized housing, free healthcare, free schooling, and no income taxes for thirty years.
- Those with one new child in the last five years get full credit if they add at least one more child in the next five years.
Guarantee
I absolutely guarantee my plan will end deflation in a jiffy.
Some of you may be wondering “How the heck do we pay of this?”
That’s a good question, but please refer to the key linchpin of my plan: a “One Percent Tax, Per Month, on Government Bonds“.
No one will be in Japanese bonds so no one will be destroyed holding them.
All Japan has has to do is print the money to pay for any tax shortfalls. After all, interest is truly owed to itself.
Curiously, once the bond market is cornered, Japan can reinstall negative interest rates, effectively paying itself money on bonds before it wipes them out in debt revision procedure annually.
Literally, this scheme pays for itself.
Ultimate Keynesian Wet Dream
My plan is the ultimate Keynesian wet dream.
There’s no need to promote cash-for-clunkers or any other winners or losers.
Negative sales taxes and a national lottery ensures people will spend money on something they want.
A tax on bonds coupled with negative interest rates ensures the coffers will always be full of cash.
Meanwhile, “Hav-a-Kid” will do wonders for Japan’s aging demographics.
My Price
My price for this amazing plan is $0. It’s free for the taking.
Yet, zero seems woefully inadequate for such a brilliant plan that is absolutely guaranteed to work, especially when Japan has tried and failed for decades to produce inflation.
Moreover, paying nothing hardly seems correct for a country so desperate to get out of deflation.
Thus, if offered, I will graciously accept $1,000,000 for each one-tenth of one percent rise in Japanese inflation if Japan simply follows my plan.
All I ask is Japan pay upfront in gold rather than yen in arrears.
Mike “Mish” Shedlock
Hilarious! Please send me a case of whatever you were drinking this evening. I haven’t laughed so hard in a long time.
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Don’t laugh – Abe is studying in great detail …
As John McEnroe famously said at Wimbledon: “You cannot be serious!”
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Ha, Power Balls theory!
Nice!
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You forgot the sarc tags Mish!
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“especially the miserly wealthy…”
I prefer the term “Thrifty”
🙂
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moral hazard has been turned backwards, spendthrifts are role models now
Protestant work ethic is just a fond memory
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“I propose a reduction in income taxes for everyone starting a family. The following scale applies.”
When the America Income tax was proposed and started in 1913, it was sold as a “tax in the rich” (sound familiar?)
The standard deduction for a family with two kids basically meant they paid no income taxes.
And it was this was for decades.
And then a certain party discovered they could buy votes of the free sh*t army.
++++
“For the first few decades after federal income tax was established in 1913, it was only paid by a small percentage of wealthy Americans.
https://www.marketplace.org/2017/05/09/economy/history-income-taxs-standard-deduction-more-interesting-than-you-think
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For decades US tax policy has been subsidizing those who shouldn’t have children and been penalizing those who should have children and we’re becoming the Headstart nation.
We’ve become Lake Wobegone in reverse, everybody is below average and happy with their participation awards.
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Filling the world or country with more people just to increase GDP is asking for future troubles.
Why not let a new equilibrium arrive?
There is an obsession with meddling & the meddlers are not wise enough to know the result of their meddling.
Japan was one of the first to automate, whether they needed to or not. They might just be the poster child for what happens when you stuff robots into factories whilst your population has enough stuff. The people might want better quality stuff but just not more of it for the sake of it so why force it. Let them decide.
Further to this. Since when did saving become a crime?
Thrift the enemy of the state?
Up is down, down is up – everywhere there is double speak and double action. NIRP a real world example.
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Being an awkward SOB, the more they frig with the system the more I would save if I could but the less of it in the system.
This is a perfect reason for pulling out, holding physical Gold, and going back in once the system has collapsed. Also an excuse for Crypto-currencies to exist.
Expect the monetary powers to go after Gold etc once they have nowhere else to take the banking system and it is all locked down. Holders will be deemed enemies of the state and countries with the vaults pariahs needing to release the names of holders vs qty. Then they come after the holder with a MASSIVE tax demand, forcing redemptions to pay it or surrender of a % of the Gold to the state to cover.
Confiscation of wealth is the end game.
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Bring on some good deflation. Deflation is a blessing for shoppers.
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Savers get more for what they have saved and current earners get to buy more or save more with what they are currently earning.
Why complain if the poor get cheaper goods and services?
You can bet the rush to robotics won’t make stuff more expensive so tptb are fighting a losing battle to instil inflation. Too many trends moving against them.
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TPTB are having a roll, taking up all the deflationary slack for their own use in ” the good name of spurring inflation”.
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Not a blessing for revenues. Someone, one day, will explain to me how they think their earnings/salaries will remain static as revenue falls.
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Rule #1 (of my several hundred rule #1’s) – the average person in the general population never wins.
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If prices fall faster than revenue, hence wages, then the earner wins.
Competition has it that you want to be the first to increase revenue by deflating costs, so gaining market share and increasing revenue. The wage levels will balance in that equation also., in terms of labour supply and acceptable price.
The trouble is obligations, aka debt. Previous contract remains static ( except for small margin on variable rate debt). Charge up to high debt levels , then lower income, and you are bankrupt.
Fiat is debt, it is the method of centralized control of the population and economy.
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Price * volume = revenue.
With volume held constant, exactly how does revenue fall at a different rate of change than price????
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Is profit more important than revenue? If profit is defined as revenue minus the standard cost of goods sold (COGS), and automation helps reduce COGS, then isn’t it possible that profit can remain the same even if prices are reduced?
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“Is profit more important than revenue?”
One would be inclined to agree, of course some companies currently have some extremely fat valuations based on nothing but revenue, but in the aggregate I agree.
“If profit is defined as revenue minus the standard cost of goods sold (COGS), and automation helps reduce COGS, then isn’t it possible that profit can remain the same even if prices are reduced?”
Of course yes, but that was not what was originally said, although i agree. The logical would be lower costs and lower sales price. Margin “should” remain the same and since that would be off a lower base you “should” have slightly compressed profits as well.
You kinda hit the point I was making… one offsets the other. Don’t move one variable in the formula and then conveniently ignore the offset.
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“Price * volume = revenue.
With volume held constant, exactly how does revenue fall at a different rate of change than price????”
Joking me?
Price mentioned is profit, which is product of sale price minus input cost. If you introduce efficiency input cost decreases. Sales price may stay the same, but net profit per transaction, and hence revenue, increases. Sales price may be decreased if chosen, net profit stays same on each transaction, custom increases due to market price advantage, revenue increases.
Etc.
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Earnings/salaries should not remain static, they should increase relative to productivity gain and efficiency, that is price of goods.
You and your static state of 2% , I shall call you Van de Graaff, instead of Sally, how do you feel about that eh? No more spankings either.
http://www.rowan.k12.ky.us/userfiles/1217/Van de Graaff Hair raising experience 2013 001.JPG
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“People hoard cash, especially the miserly wealthy. We need to unlock that cash and put it to work.”
Karl Marx used that same argument against the capitalist system, which created wealth (cash hoards) for industrialists. Keynes, the modern socialists and central bank economists use almost identical words in echoing Marx. All that is missing is the hoarder/money lender from Shakespeare’s Merchant of Venice demanding his pound of flesh.
The other side of the coin is that availability of cash hoards are essential for investment capital to fund new industry, factories, innovation, etc. Right now we have peak debt, and lack of loan demand for Fed reserves. Plus cash hoards in private hands should be irrelevant in this era of central banks printing fiat to infinity (QE) whenever needed. But the historical reason for individuals hoarding cash is to have a cushion against bad times. Is it better that people liquidate their savings (cash hoards), and instead place their faith in government programs being there when needed?
As to a negative sales tax, I already have credit cards offering rebates of 1% to 5% on purchases. Makes little difference, since it still leaves me on the hook for 99% to 95% of the purchase price. Allowing every person to print $100,000 of fiat currency on their inkjet printer would solve the problem of limited disposable incomes. A family of five could print enough to buy a $500k house, boosting the housing market. Price deflation would be another societal incentive to spend, particularly if price deflation was dramatic (e.g. half-price iPhones, automobiles). Just put the whole economy on sale.
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“Once the bond market is 100% cornered, I propose government debt be declared null and void annually. This would effectively wipe out the entirety of Japan’s debt.” Mish
Actually this has been done before, both in the UK and in France (by John Law). Brilliant success at first, with temporary good times. Unfortunately, via this approach, on the fiscal side government spending policies running up the debt are further emboldened. Collapse of currencies and governments only got a short reprieve. Bet on chaos, bloodshed and revolution.
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japan does not have a demographic problem, it has an insufficient number of robots problem.
as far as the BoJ is concerned, it has created the modern central bank, that enables profligate government spending by monetizing fiscal deficits and adheres to the adage “do no work, pay no taxes, borrow like mad and print money”. the ECB and the BoC fully endorse this central bank mantra, whilst the Fed and the Old Lady have stopped, but cannot reverse previous fiscal monetization.
I have not yet heard why simply cancelling all government debt held on central bank balance sheets would make a blind bit of difference to any economy.
Debt monetization essentially swaps coupon paying government debt with a maturity date (that is permanently round tripped for ever increasing new debt from maturities and fiscal deficits) for zero coupon undated bank notes or even NIRP bank notes!
Having zero interest rate bank notes or NIRP in the system, rather than coupon paying government debt with maturity dates makes no dfference to anyone.
Of course, the real gorilla in the room is the leakage of money printing from monetary policy in one country into the direct and indirect effectiveness of monetary policy in another country – either by crowding out the previous holders fo government debt into another countries government debt and equities.
Central bank balance sheets for major economies (US, EU, Japan and China) are around 4 trillion dollars each. I guesstimate that at least 25% of each regions central bank balance sheets has impacted non-domestic security market prices – that is, money “leaks” from one country and impacts another.
In the GFC, this was called “coordinated central bank intervention”. Now it is uncoordinated central bank anarchy. Central banks are debasing each others currencies and economies.
SInful. For shit and giggles, here is an allegory of a central banker at a press conference, post a central bank meeting.
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government debt makes a huge difference in the interest expense, at the moment US doubled their debt but pays the same interest, because they lowered the bond rates through QE, but 7% of the US budget goes to paying off debt, so the more debt you have the less fiscal spending you do, slowly contracting the economy from lack of government spending. Governments cant afford to borrow, they just end up halving their growth rate through diverting tax income to no beneficial projects, paying off an interest rate adds no value to the economy, just an expense.
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The idea that policymakers can run inflation at a different rate than the natural rate that is in the economy is troubling. In order for the market mechanism to work, prices must be true. Allocation mechanism is dependent on true prices and how they change. Our current policy of debt financed price stability has led us down the road of the debt super cycle. Prices are inflated because insufficient natural demand is made up for through massive debt issuance. Coming up with another mechanism to distort prices only diverts attention from the real issue. We need to get back to market determined prices. interest rate, tax rate and leverage rates all have equilibrium levels that change over time. The current mechanism heavily favors supply over demand simply resulting in even more pent up demand to deflate. A long run sustainable government is only as strong as its private sector. Its that simple. Let the market work.
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That made me smile Mish! Excellent!
DavidC
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The idea for central bank money printing is to flood the economy with cash so people will buy stuff. In reality, all it does is make investing in everything ridiculously expensive.
The money goes to the wealthy who already have everything so instead of buying stuff, they invest it.
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The inflation creation suggestions are too complex. Just figure out the amount of money that needs to be created to devalue the currency in circulation by the desired percentage then divide that up equally among all TAXPAYERS and send them pre-paid credit cards with that amount all at once or divided by the number of quarters you want to gradually apply the inflation effort.
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BTW, the use of credit cards instead of checks would allow the tracking of where the money is spent and, possibly, to limit on what it can be spent. Also, no cash withdrawals would be allowed which if that was not done would allow the money to be saved instead of spent.
Note that I don’t support the mythical need for inflation, that’s just a simple way to get there.
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Now, why hasn’t the BOJ sent it’s top academics to Venezuela to study how the experts do it?
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Mish is right about the CB ability to corner the sovereign bond market and then zero out the debt. Our trading partners may lose interest in letting us run the worlds payment system or shipping us oil and cars in return for that same sovereign paper but hey, that’s what aircraft carriers and ICBM’s are really for. A little printing surgically applied to reducing private debt per Steve Keen might actually help more than it hurts. A Jubilee of private debt should induce growth in GDP more than it causes inflation thus allowing prices to fall even as private debt comes down. This is actually worth a try.
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I propose ending the secret ballot, and assigning every one who voted for Trump for instance, to assume their share of the liabilities, or assets remaining at the end of his term. Put the debt off balance sheet for now, just get the deficits in order and bail in the voters, choices have consequences.
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I propose ending the secret ballot, and assigning every one who voted for Trump for instance, to assume their share of the liabilities, or assets remaining at the end of his term. Put the debt off balance sheet for now, just get the deficits in order and bail in the voters, choices have consequences.
If people with idiotic proposals were locked up, you would be in prison.
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I beg to differ about Mr Bierce’s idea. He simply targeted the wrong individuals. Now if we were to assign the various government debts, that being city, county, state, and federal debts to those government retirees, both the politicians, who would assume a greater percentage than the rank and file public union workers, then we just might solve our problem with deficit spending. Those who worked so hard to increase such deficit spending debts should have the honor of paying them off out of their pension benefits. Makes perfect sense.
Of course we might also prohibit our Federal Reserve system from buying any Federal, state, county, or city bond or other financial instrument. That might put a cap on deficit spending, or at least we could hope.
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I am prepared to assist in the production of Japanese babies to save the economy.
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Quite noble!
I commend your efforts and hope the Japanese government takes up your generous offer.
I suggest you deserve $10,000 for each positive result.
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