If you thought the last two days taking a tour of the money wars was a stretch, then you’ll probably have a hard time believing me today. If you thought I was exaggerating that there’s a war coming – a war on your cash and a war on your savings – then today I offer you proof. It’s been there all along. But today, it’s more obvious – and more incredible – than ever.
But it’s happening all the same – strange things, seemingly unconnected things. But all of it adds up. If anything, it’s getting harder for people like me and Tim Price to make forecasts about how desperate and grasping the financial authorities will get. They already are!
Today I want to share with you two examples. One affects your cash. The other affects your savings. And keep in mind where we left off yesterday. The coming crisis will be caused by the measures designed to prevent it. In the war against deflation, where governments spend money they don’t have and impose measures to get you to spend your money, the end result is the destruction of money as we know it.
I know it’s a big claim. You might even think it’s outrageous or irresponsible to make. But not only do I believe it will happen – I think it will happen by design. Preparing for it before the plan is ready to be executed is the key. If you think I’m moon-shot crazy for suggesting it, let me show you three examples from the last 24 hours. The first may be the most important “signal” to come from markets in all of 2016. Let me explain.
Ten-year Japanese government bond yields nearly go positive
That popping sound you just heard? It could be the sound of a bond bubble in the early stages of rapid decompression. Mind you, l wouldn’t be the first to end up with egg on my face predicting the end of the Japanese bond bubble. They don’t call it “the widowmaker” trade for nothing. But what exactly happened?
The Japanese government announced a $276bn stimulus programme. It’s not all direct government spending. In fact, actual new direct government spending amounts to about $73bn under Shinzo Abe’s new plan. But judging by the reaction of the bond market, this could signal the end of quantitative easing (QE) and Abenomics as we know it. Why?
The yield on ten-year Japanese government bonds (JGBs) spiked as high as negative 0.025% after the government announced its programme. 40-year yields traded at three and a half month highs, according to Reuters. From the benchmark ten-year all the way out to the 40-year, investors are worried that the Bank of Japan (BoJ) has run out of bullets to fire in its war on deflation. With the government cranking up the printing press to spend, inflation becomes a real worry. And you don’t want to own bonds when inflation is a real worry. Or real.
My real worry is that BoJ will be pressured into buying new government debt directly. The government will issue 40-year, 50-year, or even “perpetual” bonds to pay for it all. The policy – which hasn’t worked yet – won’t work this time. But here’s how it might work. And here’s how it might destroy money as we know it.
Japan drops 50-year bond bomb on savers
The first is government stimulus, as I showed you above. The second is the Bank of Japan’s money-printing and asset-buying programme. It’s a pincer movement now. And its helicopters may bring them together in a final kamikaze assault on the Japanese saver.
Last week, the Bank of Japan seemed to back away from its role in the coming endgame. But I expect that reluctance to be temporary. To prevent the stimulus from being inflationary, and a large and catastrophic sell off in the bond market, the BoJ will have to play ball.
I’m talking about the government issuing 50-year bonds which the Bank of Japan would buy. It’s called variously “debt monetisation” or “helicopter money”. And while terms need to be accurate, the general point is this: Japan is on the verge of taking a bold new step in its theatre of the money wars. The Wall Street Journal reported last week (emphasis added is mine):
“Helicopter money by strict definition involves a central bank directly underwriting government bonds and holding them forever. So far Japan’s central bank has bought debt only from the markets, and it will likely keep doing so. But an increasing number of government and even BOJ officials say there may be no material difference between the two approaches because the bank will likely have to hold the bonds for a long time to avoid rocking the debt market.
“Speculation over policy measures such as helicopter money has grown since a recent face-to-face meeting between Mr Abe and former Federal Reserve Chairman Ben Bernanke, a leading advocate of central bank underwriting of government spending.
“Tokyo is considering reducing some of the shorter debt issuance planned for this fiscal year to make room for 50-year bonds, the people said. It is also weighing more issuance of 40-year debt, one of them said.”
I won’t belabour the consequences of government bond-buying. You know those already. It smashes interest rates lower and puts pressure on pensioners and savers to boost returns by taking greater risk. It also makes it much harder for pension funds to meet their future obligations without also taking on more risk. But this new twist in the tale ratchets up the risk even more. Why?
When the bank buys the bonds issued by the Treasury without any pretence of a middleman, it becomes apparent to all we’re near the monetary endgame. It’s a racket, pure and simple. And they’re not making any attempt to hide it.
The cautious mind would recall that Japan’s been slouching down this road to ruin for the better part of two decades. Why must the crisis come now? Can’t the debt get larger? If the government holds it to maturity, won’t it isolate the risks of the policy?
A full answer to all those questions is beyond the scope of today’s letter. But “Exhibit One” shows you clearly where all the monetary authorities are headed: more debt. And if that debt is paid for by creating new money, not only does it push down interest rates for everyone, the new money puts the value of your savings in the bank at risk from inflation when it comes. And it will come. It always does. The bond market is an early signal. In the meantime…
BoE and media quislings coming for your cash
You can debate whether Japan’s monetary battle plan will destroy wealth by accident or by design. But there can be very little debate that central bankers at the Bank of England – and some of their enablers in the British media – are laying the groundwork for a direct assault on your freedom to own and use physical cash.
The Bank of England’s Monetary Policy Committee doesn’t meet until tomorrow. But behind the scenes and in the media, there’s a concerted effort to prepare the British public for a new kind of money. Money that isn’t cash. Money that isn’t created by commercial banks. Money that’s created (and destroyed) with a few keystrokes by the Bank of England itself.
The latest push for this new monetary regime comes from Martin Sandbu at the Financial Times in a story headlined: “Electronic money is a public good, more evidence in favour of digital currency.” Do you see what he’s done there? If money is a “public good” it’s not really yours. How you use it, how it’s regulated, what value it has, those become matters of public (or central bank) policy. Sandbu explains why he thinks all this is a good thing (emphasis added is mine):
“Regular Free Lunch readers will know our sympathy with proposals for central banks to take over the role of money creation (a public good if anything is) from the private sector. They would do so by giving individuals and companies a convenient way to hold official digital money (as they already offer banknotes and coins) instead of deposits with private banks. The interest in e-cash is now resolutely in the mainstream. As Marilyne Tolle reports on the Bank Underground blog, the Bank of England is running a research programme on how and whether to provide it.
“Tolle usefully surveys the principal possible effects of e-cash. It would probably replace private transaction settlement systems; it would threaten the current business models of private banks; and it would enhance the ability of central banks to carry out monetary policy.
“Such interest by a leading central bank is exciting. Even more exciting is the fairly positive view emerging from Threadneedle Street. In a new staff working paper, John Barrdear and Michael Kumhof estimate that a modest scheme of central bank e-money, which does not replace the private banking system’s role in money creation, could boost the size of the economy by 3% and help stabilise swings in economic activity.”
The last line is telling. For central bank “e-money” to not cause a huge public backlash, it would have to be first introduced alongside the cash you currently use. It would be presented as a convenient option. But how long do you think it would remain optional for? How long would it be before the traditional option – like a bus ticket – was “phased-out” for something purely electronic?
Hold that thought. The paper Sandbu refers to is called Staff Working Paper 605: The macroeconomics of central bank issued digital currencies. Read at your peril. It’s filled with complex equations. Tim Price called it “physics envy”. But it’s designed to create the impression that central bank digital money has the authority of a law of physics.
Allow me to suggest that Working Paper 605 is both information warfare in action and a battle plan. It’s a “trial balloon”, a way of floating an idea on the British public so they get used to it (the same way Andy Haldane talked about negative interest rates last year, and the same way NatWest suggested implementing negative rates to business customers this week). And if it reveals no details about how digital cash will replace physical cash, the intention is clear. The report claims the financial stability resulting from the removal of private bank money and the introduction of central bank digital cash will lead to 3% GDP growth (beating the 2% target many central bankers currently have). It concludes:
“As a baseline, we consider a setting in which an initial stock of CBDC [central bank digital cash] equal to 30% of GDP is issued against an equal amount of government debt, and is then, subject to countercyclical variations over the business cycle, maintained at that level. We choose 30% because this is an amount loosely similar to the magnitudes of QE conducted by various central banks over the last decade…
“Our simulations suggest that this policy has a number of beneficial effects. First, it leads to an increase in the steady-state level of GDP of almost 3%, due to reductions in real interest rates, in distortionary tax rates, and in monetary transaction costs that are analogous to distortionary tax rates. Second, a CBDC regime can contribute to the stabilisation of the business cycle, by giving policymakers access to a second policy instrument that controls either the quantity or the price of CBDC in a countercyclical fashion.”
There it is. More pure fantasy about controlling the quantity of money to tame the business cycle. Only this time, technology gives the promise of complete control. The only reason that control isn’t complete right now is because you can still own physical cash and gold. For now.
Until tomorrow,
Dan
PS One way or another the era of QE as we know it appears well and truly over. In yet another FT article, Sandbu argues “the case for monetary helicopter drops”. Read it carefully and don’t say you weren’t warned. He writes (emphasis added is mine):
“In QE or other asset purchases, the central bank issues new money and buys securities —typically government bonds — with it. In other words, it swaps securities with cash in the private sector’s wealth holdings while leaving the size of those holdings the same. All that changes is that the income stream from the purchased bonds now returns to the government (central banks repay their profits to the finance ministry) instead of accruing to private holders — which depending on the public and private sector’s marginal propensity to spend could make a small difference to demand.
“With helicopter drops, there is no such swap. The newly minted cash is added to the private sector’s wealth holdings. From the point of view of private individuals, their net wealth (or their net income stream, if helicopter drops are carried out in portions over time) has increased, and for a large enough increase, they can be counted on to spend more. That should boost nominal demand even if the government, whose financial situation remains unaffected, does nothing.
“And why would we not engage in it? If not now — in a situation with persistent deflationary pressures, inadequate demand leaving resources idle, and large nominal debt overhangs —then when? The worst-case scenario is that helicopter money only boosts inflation and not real spending. But as we pointed out yesterday, we are in the paradoxically fortunate situation that greater nominal spending growth is a good thing regardless of whether it is initially the volume or the price of demand that goes up.”
The worst case scenario is far worse than Sandbu guesses. Believing they can create “just a little inflation” with new money, the financial authorities inevitably create a lot of inflation. The result is the destruction of real wealth and real lives. These ideas are dangerous. History shows them to be. No amount of dressing them up or cloaking them in economic terms changes that. Beware and be on your guard.
Category: Economics