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Karl Denninger's very sarcastic analysis of PIMCO's call/advice to Japan
PIMCO Calls For A Hyperinflationary Collapse In Japan
PIMCO Calls For A Hyperinflationary Collapse In Japan
I never thought I'd see the day....
The consequence of such a policy thus has the potential to be truly catastrophic for the citizens of the nation.
The problem with liquidity traps is that they are born out of a deficit in the ability to borrow. That is, those who wish to borrow are unworthy of further extension of credit, while those who are worthy are unwilling to borrow.
This causes the excess money supply to not be circulated in the form of credit (via the reserve ratio) but rather to sit and do nothing of value.
Liquidity traps occur when Governments and Central Banks together encourage speculative asset bubbles instead of productive investment through willful blindness toward outright fraud in various lending activities in conjunction with "easy money" policies. Over time this consumes the margin between the outstanding borrowed amount and the borrowing capacity in the economy. When that capacity is exceeded the credit bubble collapses and no attempt to reinflate it will work, as the capacity and willingness to carry more debt does not exist.
Note that the worthy cannot be convinced to borrow simply by devaluation of the currency. Indeed, borrowing only looks intelligent under such a circumstance if you are convinced that the economy will recover with zeal and thus productive investment is warranted. (Borrowing to speculate will occur whether the forward view for the economy is good or poor - there's always somewhere to speculate if you are so inclined, especially when the borrowing rate is at or near zero!)
But when you commit to the raw printing of money borrowing for productive investment is an idiotic premise as each of your dollars (or yen in this case) that you EARN with that investment will be worth less than the yen before! You thus must outrun not only the borrowing cost but also the intentional devaluation of your earnings with that investment, and this, when faced with a government apparatus that has explicitly announced that it will not stop until it achieves some goal you have no control over or input toward, is a dangerous game indeed.
Increasing the amount of base money in circulation via direct printing through the wanton devaluation of the currency may cause prices to eventually rise but that rise in prices, due to slippage in the economy, results in a deficit in incomes even in the best of circumstances.
America discovered this in the 1970s - we suffered high price inflation yet even with union representation that has since been destroyed nearly all Americans saw their real purchasing power decimated during that decade as wages lagged woefully behind prices.
Where there is a structural problem with the employment base (such as exists in Japan and, to a lesser but growing degree in the United States) such a policy "wins" in the technical sense but bankrupts huge percentages of the population at the same time, exactly as it did in Weimar Germany. In the extreme case it is likely to bankrupt nearly everyone and can even lead to the violent overthrow of a government or rise of a dictator, as occurred with Adolph Hitler.
Such a policy as Paul McCulley and Tomoya Masanao have suggested quickly becomes self-reinforcing as the printed money forces down real wages in purchasing power terms, and thus the government is called upon to manufacture ever-larger amounts of "stimulus" and largess to be distributed to the population in the form of entitlements and social spending of all sorts. This too is a positive feedback loop that grows incessantly as a consequence, once again, of slippage in the transmission mechanisms. If the government does not realize the error in this path - that wages cannot keep pace with the devaluation since the transmission mechanisms are never 100% efficient - it will literally print to destruction.
PIMCO's Bill Gross in fact just identified this same feedback loop in the United States, although he doesn't realize it. In point of fact fully $500 billion of the deficit from last year was spent directly and indirectly on handouts to an increasingly unemployed population, thereby increasing the incentives to be unemployed as opposed to seeking employment. This in turn is reflected in the participation rate which has fallen in this recession thus far to levels last seen in 1983, destroying twenty five years of labor force progress in less than 18 months!
This in turn has raised the specter that the $500 billion in outlays via these "handouts" has become structural, and thus will mutate into a similar demand that The Fed either "print more or we deflate hard", exactly as happened in Japan.
The problem is that eventually you deflate anyway as it is not possible to couple your reflationary attempt with any sort of parity (or better) into personal income. The ultimate outcome is thus certain - the economy will deflate anyway but you will destroy the purchasing power of every saver in the nation along with everyone's ability to earn a living first!
When nobody is left with a job due to the destruction of purchasing power up the wage and income scale asset prices in real terms collapse no matter how much money you print!
As a consequence all intentionally inflationary acts by a central bank deprecate the general public's savings AND purchasing power in real terms. This is an intentional criminal act for which the persons responsible deserve to be held to account. History says that if the politicians and Central Bankers do not stop this self-destructive process before it reaches a critical self-reinforcing level the certain means by which they will be held to account is through the self-immolation of the political system in the nation involved. Most of the time this is followed by the rise of a tyrannical government that immediately executes both the government officials and Central Bankers who were responsible.
Paul Volcker recognized this in the 1970s and did what was necessary to stop the cycle before it resulted in the destruction of our government. We now have a cadre of limp-wristed Central Bankers who believe they can ignore the lessons of history, including Zimbabwe, Argentina and Weimar Germany.
THEY ARE WRONG.
There is only one way out of a liquidity trap that does not involve impoverishing everyone: you force those who are overlevered, no matter who they are, through bankruptcy and by doing so you default the insoluble debt, removing it from the system.
This often causes severe asset price deflation as assets are forced into liquidation, but it restores balance between asset prices and earnings while at the same time allowing those who have been prudent and did not take on excessive leverage to survive and even prosper during the necessary period of adjustment.
While I would hate to see Japan follow the idiotic prescription put forth by Mr. McCully and detonate itself, it is preferable that it happen there to here in The United States.
I therefore suggest that Japan's central Bank immediately adopt PIMCO's suggestions, in the hope that we will be able to learn by watching them implode their currency and nation, and through observance of the idiocy of this path avoid the same fate ourselves.
Godspeed to the BoJ.
An economy enters a liquidity trap when the monetary policy rate is pinned against zero, yet aggregate demand consistently falls short of aggregate supply potential.
Correct, as far as it goes. And Japan is indeed an exception, because the central bank uniquely has the ability to foster rising inflationary expectations, lower real long-term interest rates, and a lower real exchange value for the yen, all keys to breaking out of her liquidity trap.
The latter ultimately can lead to currency destruction. This, of course (the currency) is all the central bank has as its stock in trade. Should it destroy it, the Central Bank will then have nothing. It will in effect cease to exist as its only item of value will have become extinct. If the BoJ needs academic footing to do what needs to be done, it could well follow then-Fed Governor Bernanke’s 2003 suggestion: Rather than targeting the inflation rate, the BoJ could target restoring the pre-deflation price level, meaning that deflationary sins are not forgiven. This way, Mr. Bernanke argued, the public would view reflationary increases in the BoJ’s balance sheet and the money stock as permanent, rather than something to be “taken back” at the earliest orthodox opportunity.
The problem with such a move is that while you can achieve it in terms of nominal prices in the marketplace you cannot force through that same devaluation into wages. The consequence of such a policy thus has the potential to be truly catastrophic for the citizens of the nation.
Buy unlimited amounts of the long-dated Japanese Government Bonds (JGBs) to pull down nominal yields, with an accord with the fiscal authority to absorb any future losses on JGBs, once reflationary policy has borne its fruits, generating a bear market in JGBs.
Working with the Ministry of Finance, sell unlimited amounts of Yen against other developed countries’ currencies, printing the necessary Yen.
In other words, devalue the currency to whatever extent is necessary to cause prices to rise.Working with the Ministry of Finance, sell unlimited amounts of Yen against other developed countries’ currencies, printing the necessary Yen.
The problem with liquidity traps is that they are born out of a deficit in the ability to borrow. That is, those who wish to borrow are unworthy of further extension of credit, while those who are worthy are unwilling to borrow.
This causes the excess money supply to not be circulated in the form of credit (via the reserve ratio) but rather to sit and do nothing of value.
Liquidity traps occur when Governments and Central Banks together encourage speculative asset bubbles instead of productive investment through willful blindness toward outright fraud in various lending activities in conjunction with "easy money" policies. Over time this consumes the margin between the outstanding borrowed amount and the borrowing capacity in the economy. When that capacity is exceeded the credit bubble collapses and no attempt to reinflate it will work, as the capacity and willingness to carry more debt does not exist.
Note that the worthy cannot be convinced to borrow simply by devaluation of the currency. Indeed, borrowing only looks intelligent under such a circumstance if you are convinced that the economy will recover with zeal and thus productive investment is warranted. (Borrowing to speculate will occur whether the forward view for the economy is good or poor - there's always somewhere to speculate if you are so inclined, especially when the borrowing rate is at or near zero!)
But when you commit to the raw printing of money borrowing for productive investment is an idiotic premise as each of your dollars (or yen in this case) that you EARN with that investment will be worth less than the yen before! You thus must outrun not only the borrowing cost but also the intentional devaluation of your earnings with that investment, and this, when faced with a government apparatus that has explicitly announced that it will not stop until it achieves some goal you have no control over or input toward, is a dangerous game indeed.
Increasing the amount of base money in circulation via direct printing through the wanton devaluation of the currency may cause prices to eventually rise but that rise in prices, due to slippage in the economy, results in a deficit in incomes even in the best of circumstances.
America discovered this in the 1970s - we suffered high price inflation yet even with union representation that has since been destroyed nearly all Americans saw their real purchasing power decimated during that decade as wages lagged woefully behind prices.
Where there is a structural problem with the employment base (such as exists in Japan and, to a lesser but growing degree in the United States) such a policy "wins" in the technical sense but bankrupts huge percentages of the population at the same time, exactly as it did in Weimar Germany. In the extreme case it is likely to bankrupt nearly everyone and can even lead to the violent overthrow of a government or rise of a dictator, as occurred with Adolph Hitler.
Such a policy as Paul McCulley and Tomoya Masanao have suggested quickly becomes self-reinforcing as the printed money forces down real wages in purchasing power terms, and thus the government is called upon to manufacture ever-larger amounts of "stimulus" and largess to be distributed to the population in the form of entitlements and social spending of all sorts. This too is a positive feedback loop that grows incessantly as a consequence, once again, of slippage in the transmission mechanisms. If the government does not realize the error in this path - that wages cannot keep pace with the devaluation since the transmission mechanisms are never 100% efficient - it will literally print to destruction.
PIMCO's Bill Gross in fact just identified this same feedback loop in the United States, although he doesn't realize it. In point of fact fully $500 billion of the deficit from last year was spent directly and indirectly on handouts to an increasingly unemployed population, thereby increasing the incentives to be unemployed as opposed to seeking employment. This in turn is reflected in the participation rate which has fallen in this recession thus far to levels last seen in 1983, destroying twenty five years of labor force progress in less than 18 months!
This in turn has raised the specter that the $500 billion in outlays via these "handouts" has become structural, and thus will mutate into a similar demand that The Fed either "print more or we deflate hard", exactly as happened in Japan.
The problem is that eventually you deflate anyway as it is not possible to couple your reflationary attempt with any sort of parity (or better) into personal income. The ultimate outcome is thus certain - the economy will deflate anyway but you will destroy the purchasing power of every saver in the nation along with everyone's ability to earn a living first!
When nobody is left with a job due to the destruction of purchasing power up the wage and income scale asset prices in real terms collapse no matter how much money you print!
As a consequence all intentionally inflationary acts by a central bank deprecate the general public's savings AND purchasing power in real terms. This is an intentional criminal act for which the persons responsible deserve to be held to account. History says that if the politicians and Central Bankers do not stop this self-destructive process before it reaches a critical self-reinforcing level the certain means by which they will be held to account is through the self-immolation of the political system in the nation involved. Most of the time this is followed by the rise of a tyrannical government that immediately executes both the government officials and Central Bankers who were responsible.
Paul Volcker recognized this in the 1970s and did what was necessary to stop the cycle before it resulted in the destruction of our government. We now have a cadre of limp-wristed Central Bankers who believe they can ignore the lessons of history, including Zimbabwe, Argentina and Weimar Germany.
THEY ARE WRONG.
There is only one way out of a liquidity trap that does not involve impoverishing everyone: you force those who are overlevered, no matter who they are, through bankruptcy and by doing so you default the insoluble debt, removing it from the system.
This often causes severe asset price deflation as assets are forced into liquidation, but it restores balance between asset prices and earnings while at the same time allowing those who have been prudent and did not take on excessive leverage to survive and even prosper during the necessary period of adjustment.
While I would hate to see Japan follow the idiotic prescription put forth by Mr. McCully and detonate itself, it is preferable that it happen there to here in The United States.
I therefore suggest that Japan's central Bank immediately adopt PIMCO's suggestions, in the hope that we will be able to learn by watching them implode their currency and nation, and through observance of the idiocy of this path avoid the same fate ourselves.
Godspeed to the BoJ.
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