A short lesson on economics and currency policy for 2016 and beyond

When a government issues negative-rate debt, it earns a profit on the transaction. And when it sells its debt to its own central bank it in effect owes the money to itself. A site called Forex Live just published an interesting analysis of this unprecedented situation:

A Paradigm Shift Is Underway on Deficits

If you can print your own money, you can issue unlimited amounts. The only risks are inflation and a decline in the currency.

It just so happens that inflation and a decline in the currency are exactly what many governments want.  In the developed world, inflation is non-existent and the currency war rages. The high card in that game is default via monetization and it’s coming.

The dominant ethos of the past 25 years has been a drive towards fiscal discipline. Politicians and political commentators have built their reputations and careers as misers. There is something inherently, almost pathologically wrong about defaulting.

That will all change.

The idea of default sounds like it would create panic; if not in the streets then in markets. But it’s easier than you might assume and it will happen sooner than you think.

The hard part is already done. It’s simply a matter of taking the debt the central bank already owns and writing it off. To ease the shock value of it, the debt will simply be converted into bonds the central bank will continue to ‘own’ but will have 0% coupons and no maturity.

Japan will be the first to do it.  Japan is a demographic nightmare and has been unable to stir inflation for the past 20 years despite zeroed out rates. The debt-to-GDP ratio is a mind-blowing 227.9% with a fresh stimulus budget coming. There is no way out.

At the moment, the BOJ owns 35% of Japan’s government debt and at the current pace of buying it will hit 63.3% at the end of 2020. With the stroke of a pen, all that could disappear.

It probably will not even be disruptive. The central bank could launch a new round of QE at the same time as the announcement and keep control of what’s left of the bond market. At the moment, Japanese 10-year issues are yielding -0.11%. The means you have to pay interest to the government just so they’ll give you your money back in 10 years. Almost everyone who owns Japanese bonds is an insurance company or pension fund that has no other choice.

Governments face hard choices but they will find that monetization is far easier than Eurozone-style austerity (how many governments won re-election after that?) or stalled out growth.

Certainly in the first episode there will be some worries in markets. Gold will undoubtedly rally and the currency will decline. It may even create some inflation.

But like QE, the first forays will be small and governments will quickly fall in love with the ability to spend in ever-larger amounts.

This is disturbing on a lot of levels, but it’s also quite conceivable. When governments figure out that in a world of deflation (caused by the industrial overcapacity and bad debt from their previous policy mistakes) they really can borrow and spend whatever they want — and if it causes inflation, well, great, they win the currency war — then the floodgates will open.

 

[Part of a larger article published by DollarCollapse.com]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239..0970

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