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PIMCO Discusses The Failed Keynesian Japanese Anti-Deflation Experiment; Implications For The U.S.
Paul McCulley discusses the failed Japanese inflation experiment, and the ongoing 3rd decade of deflation, which has destroyed over 70% of the Nikkei's value. The reason proposed by the Pimco Managing Director for this 30-year ongoing weakness: an inability to fight the "liquidity trap" with sufficiently forceful measures. Yet an implication of Pimco's perspective is that despite posturing for an end to QE in March right here in our very own United States, this will likely not happen, or even if it does, QE will promptly return soon thereafter.
To its credit, the BoJ did adopt a commitment approach when it adopted Quantitative Easing (QE) in 2001, explicitly committing to a continuation of that regime until year-on-year change in the core CPI became positive in a “stable” manner. But when for a few months it appeared that “success” had been achieved in 2006, the BoJ exited QE. Whether or not it was a matter of a genuine policy mistake, made with the best intentions, or a policy mistake borne of a lack of will to be enduringly unorthodox is an open question.
But the fact of the matter is that Japan slipped back into deflation soon thereafter. The missing ingredient was a commitment to not only resist pulling back from QE and avoiding rate hikes until inflation turned positive but to continue that policy even after inflation started moving up. And in terms of credibility, the cost has been high: Unless and until the BoJ commits credibly, backed by money-printing actions, to behaving “irresponsibly relative to orthodox, conventional thinking,” Japan will remain stuck in a liquidity trap.
And in addition to a neverending quantitative easing regime, Pimco thinks the following measure are applicable.
- Explicitly promise there will be no exit from QE and no rate hikes until inflation is not just positive, but meaningfully positive. One way to do this would be to adopt a price level target rather than an inflation target, embracing the idea that past deflationary sins will not only not
be forgiven but require even more aggressive reflationary atonement. - 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.
Again, nobody really cares about Japan - the question is whether these are relevant for the US, and whether the proposed monetization and currency race to the bottom are applicable to that much bigger anti-deflationist Keynesian experiment: the US.
But as Mr. Bernanke intoned, no country with a fiat currency, which borrows in its own currency in the context of a current account deficit, should ever willingly embrace deflation.
So yes, look for endless QE, ever-increasing monetization and a much more worthless dollar in the US future very soon.
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I wonder what a global liquidity trap looks like? LOL.
Fasten your seatbelt and get ready for carnage.
You and others have been talking about this carnage and plummeting stockmarkets for some time now. What i don't understand how is how they can plummet as long as there is QE.
Somebody wrote earlier today that the stockmarket is a lagging indicator now, i think it's the other way around. The stockmarkets are pricing in inflation already.
I wonder what a global liquidity trap looks like? LOL.
A days wages for a loaf of bread - that's what it'll look like. The ingredients have already been mixed and the loaf is in the oven. The Third Seal is open (there is no timeline to be discerned when things were put in motion). When we reach that point in time (globally), well, that remains to seen.
A rising tide floats all boats. If the whole world does the same thing nobody looks like the biggest idiot when it all collapses on its own weight.
The real question is, how long Japan will continue to listen to the great advice they've been getting from the West for the past two decades. Their saving rate is falling and and the BOJ has nearly exhausted that private stash by convincing everyone to buy their bills at a marginal return. I guess we'll see what that feels like when the Treasury goes after our 401ks and IRAs.
Question,
Don't dogpile on me because this is a knucklehead question, I'm a biologist not in finance/economist.
Would there be a tactical advantage to protecting ones IRA from being redirected to treasuries etc. if you had foreign owned equities and physically held the stock certificates? Could the Guv still force redemption/redirection? If this wouldn't work are there any other ways to convert to a protected instrument?
I'm no expert either but it seems to me you are screwed regardless. Assuming they do this, you may be receiving a rate less than inflation which means you will loan the government money with a negative rate of return. You can roll your IRA over to a Roth IRA but you have to take the hit on the taxes. I'm in a similar situation and trying to find a better solution myself.
I am not expert either. I know of someone who owns rental houses in his IRA, the real things, not REITs. Since they can't be accurately valued, a govt mandate for a percentage of Treasuries holdings would be difficult. It seems to me that if you can get your assets into something that is not reported by an institution, then you might be safer. As you neared retirement age you might have to start moving into treasuries to be compliant, they'd probably enact some rule about withdrawals coming from the mandated percentage of treasuries and "other", with proof.
BTW, I'm not suggesting you become a landlord, there are horror stories that go along with his efforts. Just pointing out that there may be gray areas available to protect your assets from mandated Kool Aid.
I get an itch when I think about real estate these days and it's not that good kind of itch that feels good to scratch.
google "yamashita's gold"
FX is not static. Everybody's got the same problem, so we are going to see a "race to the bottom" in currency devaluation. Just look at Venezuela.
It is a race to the bottom with a lot of hairpin turns on the road course ahead. With a quadrillion in derivatives sitting atop a measly 50 something trillion of supposed actual GDP, the implosion will be astonishing!
It looks to me as though Ben plans to keep the QE game going just long enough to secure reconfirmation then he will pull the plug.
Will there be QE in the future? Of course. But it will probably recommence with S&P closer to 500 than 1200.
Look at Japan. It has been a process of controlled demolition over a period of more than a couple of decades.
Besides what better way for .gov to persuade the sheeple to convert their IRAs and 401Ks into annuities than crashing the equity markets once again? People aren't going to willingly hand over their retirement assets to .gov to fund its runaway deficit spending during a raging bull market. But after another equity crash, the boomers will be falling all over themselves to put what's left of their retirement money in a "guaranteed investment."
Ever heard of the Japanese Postal Savings system? It will be Japan's greatest export to the US.
And, if for some reason Ben does not get reconfirmed, the plug will simply unplug spontaneously.
you are on to something there.
I very much agree with your points, Jefferson.
Controlled demolition is, perhaps, the best we can expect out of those setting policy in Washington (New York). But as we've seen in Japan, it can (and probably) will be a long, drawn-out process.
The timing of what you suggest (pulling the plug) is the biggest wild card. I agree that more people would be willing to surrender their 401k assets for governement annuties if the S&P were at 500. But if we were sitting those equity levels in the fall, you could pretty much kiss any Democrat incumbent goodbye.
The question is can (will) they extend QE to November before pulling the plug. Because if they pull soon... it better be real soon. Gotta have time for the calvary to came in (again) to save the day.
I heard an amazing analysis this weekend, the reason for Economic contraction in the US is from the Weak currency, the unit of measure. With zero rates and a declining value
there is little incentive to hire workers or produce. Its a failed banking system which has led us here.
The Ones who led us here are now getting Bonuses.. while the unemployment lines grow..
I would like Long rates to see 15% if only to put pimco out of business, one can hope.
QE is going to continue forever in the mortgage market. It simply won't be the US Treasury or the Fed conducting such operations directly.
Instead, those two government-owned GSE's Freddie and Fannie will now do the bidding of Mr. Bernake and his side kick Timmy Boy.
Wake up people---why do you think the Treasury just gave blanket checks to these agencies?
They cannot allow mortgage rates to go up to much or home prices will decline further---thereby making the fictitious equity held by the banks look less real than it already does.
They used to say there was nothing sure in life but Death and Taxes. You can now add Quantitative Easing to that list.
So when do we get our Japanese-style stock market fall to new lows despite QE?
http://finance.yahoo.com/echarts?s=^N225#chart1:symbol=^n225;range=my;indicator=volume;charttype=ohlc;crosshair=on;ohlcvalues=1;logscale=on;source=undefined
Very trenchant analysis pbm. As to pimpco, what could you possibly expect from such a government front organization infested with the likes of $700 billion man Kashkari and "consultant" Greenspan but a rehash of the old recycled garbage. The incestuous and criminal mélange of government and corporate interests (read fascism) has long ago ensured that the outcome of the engineered global financial meltdown is a foregone conclusion. McCulley's hollow posturing on BOJ is as wretchedly pathetic as his masters at the treasury and the Federal Reserve.
What many people don't realize is that our "betters" are merely freeing up some labor and material resources for their "green and clean" social engineering projects.
Anybody who believes that the world's central banks and their owners are going to allow their indentured servants to throw off their debt shackles via high inflation let alone hyperinflation is delusional.
Oh sure, a few examples may have to be made to show what happens if a country tries to welch on its debt. Iceland comes to mind.
The reality is that sovereign debt is there to curtail economic growth not promote it. The reflation trade meme is a bad joke as a long term strategy.
Look what QE and ZIRP did for Japan. Nada. Zilch. The Zero Economy. Did it ever occur to anyone that the BOJ doesn't want Japan to escape deflation but just seeks to control the economy's descent?
That is the future of the world.
Is it your view that the global elite who dominate the Federal Reserve also dominate the BOJ? If that is so, it appears we are already experiencing post-nationalistic central banking. The Fed is not really "nationalistic" in the sense that it acts out of national interest, even though it uses devaluation as an American trade weapon. If BOJ also is non-nationalistic and, in fact, malicious in its actions so far as Japan is concerned, it appears to be consistent with your "global elite" worldview.
Japan=net exporter=higher currency=deflationary risk. US=net importe=lower currency=global reserve currency=higher oil and commodities=inflationary pressure. Considering these facts,why people keep on comparing the US with Japan?. And further more,the effect of higher oil prices=higher gasoline prices,have a multiple affect in the US than other industrialized nations,simply due to the fact that people in the US commute a lot more than other nation back and forth to work,draining the US economy from capital needed for growth. If in doubt,look at which point the economy collapsed last year?it wasn't in 2006-2007 when the housing market tarted the downward spiral,rather it was after oil hit $140,which probably made it impossible for people who bought expensive homes in the suberbia abandon them. I think with the fragile state of the economy,oil at the current level is sufficient to chalk whatever left from the economy...
What a bs sales job. What a bunch of blood sucking parasites... Hey Paul - you kiss your wife with that mouth? You kiss your mom with that mouth? You sir, are a whore.
2. Buy unlimited amounts of the long-dated Japanese Government Bonds? REAAALLLY???
So if I'm correct... let me think for a minute... that would mean the US Federal Reserve should buy a lot of long-dated Government Bonds? Right?
Oh... who would we buy them from... let's see... who holds a tremendous amount of Treasury long dated bonds on their balance sheet...
HMMMMM????
+1000
would've given you 1001 but you had to make a bold statement didnt you?
+1
Pump Monkey & Co in action...
I have a feeling that a large part of housing boom was financed courtesy of Japan's low rates.