It appears not only Bill Gross is insane enough to realize that direct monetization = inevitable interest rate hike. Slowly, even the central banks are starting to gravitate toward this conclusion. From The just released minutes by the BOJ: "One member -- referring to some recent views that the Bank should underwrite JGBs to fund restoration and rebuilding -- expressed the opinion that such an action might initially seem to work well, but lessons drawn from history showed that it would eventually result in severe inflation and thereby inflict substantial damage on people's living situation. This member continued that the Bank needed to keep working to gain the wider public's understanding on this point. In relation to this, a few members expressed the view that, if confidence in the currency were impaired due to underwriting of JGBs by the Bank as the central bank, this might lead to a rise in long-term interest rates or instability in financial markets, and hamper the smooth issuance of JGBs." Something tells us this "member" was not Bernanke (aside from the obvious reason that Benny is a gaijin). And where else, we wonder, have we seen this: an initial boost which fades away, leaving just concerns about runaway inflation. Is it possible that the dissident BOJ member can come to one or more FOMC meetings and actually give our clowns a first person perspective of how this whole "deflation battle" goes down 30 years in.
Other comments from the minutes:
Regarding U.S. and European financial markets, stock prices in major economies fell temporarily and long-term interest rates came under downward pressure, as investors' risk aversion had heightened due to increased tension over the situation in North Africa and the Middle East and to the disaster in Japan.
On crude and supply/demand mechanics:
As for international commodity prices, while prices of nonferrous metals and grain had shown some signs of adjustments, crude oil prices had climbed due to growing demand from emerging economies, accommodative financial conditions around the world, and uncertainty about the situation in North Africa and the Middle East.
On Japan's view of the US:
Private consumption had been firm mainly due to the effects of the fiscal stimulus measures; nevertheless, balance-sheet adjustments continued to weigh on household spending. Housing investment remained at a depressed level. As for prices, the effects of the rise in international commodity prices were increasing somewhat, while an expansion in downward pressure on prices -- associated with slack in supply and demand conditions in the goods market and the labor market -- was restrained.
Japan on China:
The Chinese economy continued to show high growth. Exports and production had been increasing, and growth in private consumption had been firm due mainly to households' increased income levels. Economic conditions in the NIEs and the ASEAN countries had been recovering. In many of these Asian economies, inflationary pressure remained high, reflecting greater utilization of production factors and the effects of the increase in international commodity prices.
And lastly on the impact of the earthquake on Japan:
As for the effects of the disaster in Japan, it was possible that supply-chain disruptions of automobiles and electrical machinery would exert downward pressure on production in the short term, particularly in Asian economies. Although there was a view that the effects of the disaster would not last for a protracted period and would remain marginal, as restoration of production lines and a shift to substitutes proceeded, this view was attended by a high degree of uncertainty.
And to top it all off, is the BOJ's announcement that it will buy ¥250 billion worth of bonds with a 1-10 year maturity, and ¥100 in bond maturing between 10 and 30 years from now. Good to see they have learned their 30 years worth of lessons.
Full minutes (link)