UK Telegraph: Japan Mulls Monetization of Debt, Yen Devaluation

The true believer of Keynesianism sallies forth to where no other developed country has gone before. (Not after the World War II, that is.)

UK Telegraph's Ambrose Evans-Pritchard reports that the Democratic Party of Japan (DPJ) has drafted a bill that will require the Bank of Japan to monetize the government debt, set the "inflation target" at 2%, and devalue Japanese yen by 30%. And they call it a radical thinking.

Japan mulls monetisation of public debt and yen devaluation
(Ambrose Evans-Pritchard, 4/14/2010 Telegraph)

"A draft by 130 lawmakers from premier Yukio Hatoyama’s Democratic Party of Japan said the country needs a radical shift towards growth policies, calling for an inflation target above 2pc. The exchange rate should be steered to ¥120 against the dollar, from the current ¥90.

"Shizuka Kamei, financial affairs minister [and former policeman], said the central bank must monetise government debt to support the market for state bonds and prevent deflation becoming deeply lodged in the economy.

"The Bank of Japan’s governor, Masaaki Shirakawa, told lawmakers that it would illegal [sic] to fund state spending by printing money. “History has proven that central banks directly buying government securities caused severe inflation and dealt a blow to the economy. The BoJ is now providing adequate funds,” he said." [The article continues.]

The BoJ governor is right. This is crazy.

Japan's industrial output is on the upswing, so is the housing market. Stronger economies in Asia are revaluing their currencies upward against the basket of major currencies (China, Singapore). And Japan wants to debase their currency to cause inflation.

As if inflation is the sign of strength. Japan may not have had a significant inflation in its lost two decades, but it hasn't really had a significant deflation either. Monetary base has been stable, and price of goods and services has been stable. However, since the government takes away more from its citizens - increased taxes, increased national health care insurance premiums that hit pensioners particularly hard, the average Japanese do not have a sense that they are enjoying extra purchasing power.

The so-called "structural reform" by the previous administration under Prime Minister Koizumi has all but destroyed the employment safety net. Japanese saving rate has plummeted from high teens to low single digits, not because of higher spending but because of lower income. Now the Hatoyama administration wants to further destroy the savings (or what's left of them) of the citizens by debauching the currency intentionally.

Ever patient and philosophical, the Japanese would probably say "Shoganai (nothing we can do about it)" and accept their lot.

I hope they are buying gold and silver while yen is still strong.

Tweet

New York Fed President: Excess Reserves at the Fed Are Put to Good Use

This video was one of the three that were posted on Zero Hedge on Monday. It is a video of CNBC's Steve Liesman interviewing the New York Fed president Bill Dudley.

About 3 minutes into the interview, the NY Fed president admits that the Fed is using the excess reserves to purchase Treasuries, agency bonds, and mortgage-backed securities for its Open Market Operations.

The Fed is doing what?

The excess reserves belong to the member banks (national and regional commercial banks). Since the near-collapse of the financial system last September, banks park their excess reserves at the Federal Reserve instead of lending them out as loans, and earn interest. The excess reserves sit on the LIABILITIES side of the Fed's balance sheet. The banks are "lending" money to the Fed by parking their reserves, but it is an extremely short-term lending: 24 hours.

Now the NY Fed president says they've been "borrowing" this short-term money and "lending" it to the Treasury Department, by purchasing Treasury notes, bonds, agency bonds (that no one in the world wants to touch at this point), and MBS. They are all longer-term investment, the shortest being 2-year note, the longest 30-year Treasury or agency bond.

Naturally, he downplays the risk of higher "borrowing" cost. He doesn't seem to think that the economy will recover in a meaningful way any time soon for the short-term rate to rise.

Why do they need to do this? They can simply print money to buy Treasuries, and a lot of people already think that's what they've been doing. Just to technically avoid the dreaded word "monetization"?

Borrowing short and lending long is what banks do, and what killed Bear Stearns and Lehman Brothers when the short-term liquidity simply vanished from under them. And they didn't have $2 trillion balance sheet that the Federal Reserve has.

Does Tim Geithner know that the Federal Reserve has been using the excess reserves to buy Treasuries? Do the member banks know? They must and they must have agreed. They just didn't bother telling us, because there's nothing to worry about. Right? (Bear Stearns? Lehman Brothers?)

Between the Fed acting like a highly leveraged investment bank and FDIC outdoing AIG with its paltry $10 billion (reserve ratio of 0.22%) to cover nearly $5 trillion deposits (not to mention hundreds of billions of dollars of loan guarantees and loss-sharing agreements), we are somehow supposed to feel secure that we're in good hands.

Tweet