Is the US about to go the way of Japan?
The Japanese yen tanked after the Bank of Japan vowed to buy an unlimited number of Japanese government bonds in order to hold the 10-year yield under its 0.25% target.
This is literally quantitative easing infinity. If the central bank is going to buy an “unlimited” quantity of bonds, that means it will create an unlimited quantity of yen out of thin air.
No wonder the yen tanked.
The Bank of Japan followed through, buying just over $500 million in bonds on Monday and another $2 billion on Tuesday morning.
Think about this from an investor perspective. If the Bank of Japan is willing to buy bonds at an artificially high price, why wouldn’t you sell your bonds to them? This creates a scenario where the central bank could potentially own virtually all of the government’s bonds if it follows through with this scheme to the bitter end.
Why did the Japanese central bank make this extraordinary move? Why is the Bank of Japan price-fixing the yield on government bonds? Why is it trying to control the long end of the yield curve?
The Bank of Japan has been monetizing Japanese government debt for decades. The debt to GDP ratio in Japan is at about 250%. They justified this by claiming there wasn’t enough inflation in Japan. In fact, Japanese officials have blamed the economic malaise in the country on a lack of inflation. In his podcast, Peter Schiff said this has been a lie all along. The lack of rising prices isn’t a bad thing.
Today, CPI in Japan is 2.7% and wholesale inflation is 9,3%.
How can anybody argue that the problem in Japan now is not enough inflation and the Bank of Japan should double-down, in fact, infinity-down on the very policy that was pursued when their goal was more inflation?”
If the Bank of Japan’s goal was to create more inflation, it succeeded. Why doesn’t it now let interest rates rise? Why keep printing money?
No. They’ve got all this inflation, and apparently, they need more. Apparently, it’s not enough. What that shows you is that this was never about inflation.”
So, what is it about?
Why was the Bank of Japan buying all of these government bonds? Why was it trying to keep interest rates from going up? Because the Japanese government has so much debt that if interest rates went up, all hell would break loose because the Japanese government would then have to level with Japanese voters and say, ‘You know what? We racked up all of this debt. Time to pay the piper. We’re going to have to have huge tax increases to cover this exploding debt burden.'”
Of course, Japanese politicians don’t want to be held accountable for their reckless spending. They don’t want to have to give voters the bitter medicine of tax increases. They don’t want to cut government spending. So, the only way they can spare the Japanese people from higher taxes is to buy bonds, monetize the debt and keep interest rates artificially low.
But now they have an inflation problem. In fact, they likely had one all along. The Bank of Japan’s monetary policy likely robbed the Japanese of falling prices they would have enjoyed from their productivity. But now, prices are rising and the central bank is pouring gasoline on the fire because it’s more concerned about the Japanese government’s ability to service its debt.
Peter said he thinks at some point, the Bank of Japan will have to flip and turn away from this extraordinary loose monetary policy. If it doesn’t, the central bank’s balance sheet will explode. And inflation will explode.
The Japanese are going to get clobbered by the inflation tax. The Bank of Japan is trying to spare Japanese politicians from the embarrassment of having to raise taxes. Well, the Japanese public are going to pay taxes one way or another. It’s either going to be official tax increases or it’s going to be the inflation tax.”
Does this sound familiar? Because the question is how long before the Federal Reserve has to turn Japanese?
Peter said he thinks what is happening in Japan right now is going to happen in the United States.