Yen And The Art Of Bridge Maintenance

For years, critics of central banks’ increasingly belabored efforts to engineer robust growth and “healthy” inflation have argued that the policies exacerbate inequality.

At the same time, monetary policy is perpetually under indictment for facilitating various asset bubbles.

The nexus between those two lines of criticism is clear: Assets are generally concentrated in the hands of the wealthy. So, when you adopt policies that inflate the value of those assets, a byproduct is a wider wealth gap.

Regular readers are acutely aware of my position on this debate. On one hand, scarcely anyone writing for public consumption on a daily basis has spent more time than I have documenting the role of accommodative monetary policy in exacerbating inequality. (There are a couple of portals whose editors breathlessly document the same dynamic, but they’re generally seen as unreliable sources of information on other matters, so it’s difficult to disentangle what’s supposed to be serious analysis and what’s just click fodder.)

On the other hand, I steadfastly refuse to countenance the idea that this situation is solely the fault of central bankers, with no blame reserved for fiscal policy (i.e., elected officials).

For one thing, complex problems are almost never amenable to analysis that assigns blame to one person or one group of people. If you can plausibly assign all blame for a given undesirable state of affairs to a single entity, then the problem likely isn’t very complex. Fail to understand that and you risk embarrassing yourself, as Donald Trump did when he essentially blamed China for all the deleterious side effects of globalization, only to see Beijing log a record surplus with the US by the end of his first (and only) term in office.

Beyond that, it’s important to remember that while central bank independence is a cornerstone of sane, democratic economic management, that doesn’t mean that fiscal policy gets a free pass when things go wrong — elected officials can’t just shrug their shoulders and say “I dunno, ask those people over there who are ‘independent’ when we need to assign blame, but beholden when we need a favor.

Hundreds of lawmakers are elected to legislate on the behalf of the polity. Obviously, special interest groups and lobbyists have captured the process in the US, but let’s just forget that for a moment and think in idealized terms.

The idea must be to pass laws that promote positive outcomes for society as a whole. Individual lawmakers are beholden to narrow constituencies, but together, those constituencies comprise the whole. Without getting too far into the philosophical weeds, you want something akin to utilitarian outcomes. To suggest otherwise is to say it’s desirable to deliberately further the interests of small groups over the interest of the collective. Don’t misconstrue the message. Logrolling and pork barrel are part of it. And that’s fine, up to a point. But at the end of the day, you have to have a government that operates (if only tacitly) under some version of “soft,” compassionate utilitarianism.

When hundreds of lawmakers collectively screw up from an economic management perspective by, for example, failing to enact laws that provide for equality of opportunity or allowing capitalism to become unduly predatory (e.g., predatory above and beyond the kind of dynamics that make capitalism arguably the best option we have among a set of flawed alternatives), it’s ludicrous to pin the blame on a relatively tiny handful of people whose tools are so narrowly construed that using them in a forceful fashion is guaranteed to create sub-optimal outcomes.

Since the financial crisis (the GFC), the idea with monetary accommodation has generally been to keep papering over the cracks, until such a time as fiscal policy in advanced economies “matures” and evolves to meet the needs of modernity. There’s just one problem: Fiscal policy never matured.

At some point over the past dozen years, markets essentially atrophied, as the martial law imposed by central banks in the wake of the GFC inhibited the price discovery mechanism. At that juncture, stimulus withdrawal became next to impossible. The “state of exception” had become “permanent,” to use the same metaphor employed by Deutsche Bank’s Aleksandar Kocic.

As we saw in Q4 of 2018, US real rates above, say, 1%, simply aren’t “doable” anymore. And the further away from reality prices get, the less feasible it is to allow price discovery to reassert itself. For example, yields on five-year Italian government bonds are negative now. What’s the “real” price of that debt? Nobody knows, but what we do know is that in the absence of the ECB, nobody would pay Italy for the “privilege” of loaning the heavily-indebted Italian government money.

Read more: In Funhouse Mirror Fixed Income Market, Zero Is No Obstacle

It’s easy enough to say things like “Well, central banks should just ‘rip off the Band-Aid.” When you hear that kind of rhetoric from bloggers and Twitter personalities, just remember that those Band-Aids don’t cover paper cuts — they cover bullet wounds. Rip them off, and some of these borrowers are going to bleed out on the pavement (figuratively, of course).

You don’t have to be a PM to understand this. How much would you demand to loan Italy money until 2031? If your answer is a number far larger than 0.55%, then you can get an idea of what I mean when I say that allowing price discovery to reassert itself isn’t feasible.

And look, folks, these countries know this. Why do you think they’re terming out the debt?

“The ECB’s bond-buying response this year has provided a golden opportunity for debt management offices to sell bonds over longer periods and for a cheaper rate, putting even the shakiest of government finances in the region on a more solid footing,” Bloomberg wrote Saturday, adding that “Italy has been buying back short-dated notes and exchanging them for new longer-dated securities, spreading out the burden on its obligations.”

If all of this sounds like markets have simply been “nationalized” by central banks, that’s because they have.

But, as I hope to have made clear above, it’s not counterintuitive that central banks keep getting more dovish the more things rally.

“Central banks have never been this dovish at this level of asset prices and valuations before,” BofA’s Michael Hartnett wrote Thursday, describing a 2021 wherein Wall Street is “nationalized.”

The longer central banks are forced to shoulder the burden, the more dovish they have to be. That’s because the bubbles they’re being forced to inflate are taking assets so far away from what would otherwise be market clearing prices, that allowing the market to suddenly determine the price would lead to a simultaneous collapse across most of the fixed income universe, with God only knows what consequences for equities that are priced off record-low bond yields and quantitative risk models that were built and calibrated during an era of persistently suppressed volatility.

If you’re looking to assign blame, you should at least consider fiscal policy and lawmakers in developed nations who have had 12 years since the last crisis to figure things out, develop a more nuanced view on how best to stabilize their economies, and otherwise pass legislation that makes common sense, as opposed to making “sense” in the very uncommon way that one decides to implement austerity in the middle of a downturn or during a shaky recovery just because someone said, in a textbook one time, that there are imaginary budget lines which can’t be crossed.

BofA’s Hartnett noted that the “new policy establishment [is] inciting deeper nationalization of bond markets in the US, EU, and Japan… so as to facilitate MMT, inflationary fiscal spending, and unlimited deficits.”

Then, he connected the dots. “Authorities are tolerating asset price bubbles and extreme wealth inequality so as to ‘bridge’ to stronger growth and lower unemployment,” he wrote. (Note that “bridge” is being used as a verb there.)

That strikes at the heart of things. I’m not going to speak to the pre-GFC era because that conversation admits of more nuance, but what I will say is that post-financial crisis, central bankers have spent a dozen years maintaining this “bridge” and accepting the side effects (i.e., bubbles and inequality) on the assumption that lawmakers will at least lay the groundwork for the better economy that’s supposed to be on the other side of that bridge.

But if that groundwork never gets done, then what options do central banks really have? If they stop maintaining the bridge, it’ll collapse, and everything that’s currently sitting on it will crash into the ocean. Remember: It’s not just BTPs and bonos parked on that bridge. Your 401(k)s are on there too.

Consider, for instance, that the BoJ is now the largest holder of Japanese equities. Haruhiko Kuroda’s ETF holdings total more than 45 trillion yen, including unrealized gains.

How do you unwind that without crashing the stock market?

Analysts have spent the last couple of years positing various answers to that question. Do note that it does need an answer. You can’t hold stocks to maturity. Stocks, like fiscal policy under irresponsible lawmakers, aren’t things that “mature.”

“Increased scrutiny over the decade-old program to buy ETFs has given rise to some alternative ideas on how to unwind the bank’s massive holdings, including a proposal to sell them to households,” Reuters wrote late last month. “Selling ETFS to the market is considered a highly unlikely option due to the danger of triggering a massive stock sell-off.”

One former BOJ executive told Reuters that if the bank wants to unwind its holdings of ETFs in a way that doesn’t disrupt the market, it would take roughly 200 years.


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19 thoughts on “Yen And The Art Of Bridge Maintenance

    1. Yes.

      If you get growth and, possibly, “a bit” of inflation, you can survive a lots of past sins.

      Taxing the uber rich very heavily would also help but let’s not dream too much…

  1. I recently read about Tony Hsieh’s presentation to Jeff Bezos before Amazon purchased Zappos. The story mentioned that in that meeting, Hsieh talked about happiness and Bezos chimed in that people are very bad at predicting what will make them happy. That’s the US story writ large. Way too many voters think a tax cut or a very warped view of freedom or blaming and attacking “others” will make them happy. How badly we misunderstand what would truly make for a happier society. We have nearly infinite resources and yet we insist on austerity and inequality. It’s a sad state of affairs.

    1. I think there is addiction at play here, grudges and blame are powerful emotional responses that result in ‘brain on drugs’ type thing.. Technology has enhanced our ability to ‘be slighted’ and immerse ourselves in a state of unconscious bliss while re-enforcing our bias system. We’ve come a long way but our advances in human psychology and emotions are still lagging.. Sadly we can see a mountain and want to conquer it, but we have a very clouded view of ‘what makes us human’ and how to harness it. It appears the only way we know how to direct this energy is through cult think. =(

      1. If there is any deep cultural core to our society in the US it is the endless fight by the leaders of competing (religiously centered) groups wrestling to take control of our lives. One of the great myths about the US is that settlers came to these shores to enjoy religious freedom and the right to practice their beliefs as they see fit. That was the story but the reality is that most of the groups who came here were represented by folks who weren’t given the right to run the lives of their neighbors where they were so they came here in a “soul rush” to get charge of the non-believers in groups they despised. Reread the Scarlet Letter and the sermons of Cotton Mather if you want to see who we are. The newspaper in my current home town just published a list of the top agenda issues for the Kansas legislature as far as the GOP is concerned: abortion and control of LGBT citizens. Not fixing the infrastructure, supporting schools, reducing embedded racism, just running the lives of citizens their “leaders” don’t approve of.

  2. We’re on a bridge to nowhere. The Talking Heads song just played in my mind. The problem is that a reductionist commitment by all sides to “doux commerce” at the expense of all other considerations may very well be leading to self destruction in a political or environmental sense, implosion and instability. The ultimate irony of course is that these consequences are anything but “doux”. Utilitarianism is always susceptible to fatal reductionist errors. In Hirschman’s historical framework, “the interests” were justified as a way to contain and balance “the passions”. This was the original argument for capitalism. How can anyone deny that the passions have long been subsumed into the interests in a reductionist world of capitalism. There is no containment function. Capitalism has already destroyed itself and next it may destroy us.

  3. Why can’t M.M.T., or more precisely some principle that underpins M.M.T., apply to large corporations? Tesla is the only entity on Earth that can issue Tesla shares. Issuance of more shares and dilution of its stock does not affect price the way the laws of supply and demand or math dictate it should. Large institutional investors hold Tesla shares, and inclusion in the S&P 500 means it will be included in more indices. These are, in turn, the equivalents of currency sovereignty, QE, and reserve currency status, no? Seriously, walk me off the cliff.

    1. Interesting angle. Two things that come to mind:

      Scale. The demand for TSLA will run out long before the demand for $ will.
      Counterparty risk. If I buy treasury debt, there’s not a lot that can happen to make it illiquid. Tesla could always shit the bed, get broken apart, etc.

      Still — especially in a world of ultra cheap corporate credit — you’ve got a point: large caps can become transnationals and at a certain point, have some currency-like powers.

  4. The direction in which these comments are going encourage an observation independent of money, MMT, happiness, Tesla and “justifications” (for capitalism or anything). There are about 8 billion human on earth. Industrial agriculture, industrial fishing, etc. account for 30%-40% of greenhouse gases and are resource intensive. Can 8 billion people be supported for 100 years? 1000 years? 10,000 years? 100,000 years? What is the long term carrying capacity of the planet? How rapidly are we decreasing that carrying capacity by supporting such a large population in the current manner?

    Sorry to interrupt important questions about MMT and the meaning of capitalism.

    1. One might argue that the distortions by the central banks have lead to things like unsustainable population. If the markets were subject to more ‘natural laws’ then certainly we would have seen some rough times that certainly might effect things like the population of the planet..

        1. There are no “natural laws of markets.”

          Markets don’t exist. Trees exist. Rocks exist. Rivers exist. Lions exist. Companies, stocks, money, bonds, etc., are made-up constructs. They don’t exist without humans. Period. There is no arguing that point. Do you ever worry about what the bond market is doing on Saturday? No? Why not? Well, because we, as humans, decided it isn’t open on Saturday. But if you’re next to a hungry lion on a Saturday, it may eat you. Because unlike the bond market, that lion is real and doesn’t care about your preferences for what happens during a temporal stretch you arbitrarily decided to designate with a make-believe term called “weekend.”

          1. Excellent point. I was pondering more the ripple ripple effects of world markets, a family struggles and doesn’t see that changing so they decide not to have children for example. Or on the flip-side perhaps a family is deceived into thinking everything is great through the markets and overextends..

      1. Our host responded to a narrow point. If you want my take on your premise, I’d say “war” is the ‘natural’ (historically probable) answer.

        Preceded by fascism.

        Fascism is a wonderful system. It really is the perfect antidote to the failings of liberal democracies. Too bad about the camps and the wars and the ostracisation of all differences and long term loss of innovation.

  5. I read the book “Zen and the Art of Motorcycle Maintenance” which the title of this article is a parody of way back in 1978. It was required reading as part of a graduate course in comparative religions. Excellent book which I still recommend to people.

  6. “Obviously, special interest groups and lobbyists have captured the process in the US, but let’s just forget that for a moment and think in idealized terms.”

    I fully agree with H’s idealized terms and discussion that follow the above. But once you get back to admitting the reality and truth of this quote, it all falls apart.
    Special interest groups and lobbyists are the problem. The SCOTUS Citizens United decision was the culmination. Observe the current Mitch McConnell obstinance withholding fiscal support for a desperate people – a prime and glaring example of the problem.

    I have little faith that our elected officials will do any more than toss an occasional bone to the populace. Gross inequality is here to stay.

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