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.
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.
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
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.
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.
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.
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 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