Obviously, I'm typing this up on the back of the Bank of Japan's further Quantitative Easing this past Friday, but it got me thinking about what modern Central Banking is taking shape as, which produced a thought: While we know that a Central Bank's interest aligns with itself and the other Bankers (and not actually "for" the local economy), maybe we're missing too much how they've changed the "game" of currencies.
As much as the Fundamental Economics of International Trade are important, the Japanese may have found an end-around for their Government Debt in a way I don't think anyone is thinking about yet. I'll explain.
As the basic level, the Japanese government debt simply can't be paid back. It's been too big for a shrinking working age population that's been shrinking since around 1998. (Granted, if they'd stopped over-spending then, they'd not have this problem) As a result, the Bank of Japan owns more and more of the Government Debt. But here's the catch: what happens when the Bank of Japan owns *all* of the Government Debt?
The fact that effectively all Japanese Government Debt is owned by the Japanese has always made the debt problem a weird one. But it gets even weirder when the BoJ owns it all. The Japanese Bond Market has been effectively illiquid for ages. They're in the process of moving most of the government retirement systems out of J-Bonds, which has been read as a "last-ditch effort" but might be something different.
So, in 2019, if the Bank of Japan owns *all* outstanding Government of Japan debt, what happens when they default on it? While the assumption that it would make the Bank of Japan insolvent, here's where my point comes in: So long as the Bank of Japan can trade Yen for US Dollars (remember, same Central Banking Club), what does it matter? It's just a bunch of digits in an account.
Now, it might be hard for the government to issue new debt to the Japanese banks. And if you think that, you're also fooling yourself. The Japanese Banks *will* fall in line. It's the way they operate.
I'll have some follow up thoughts later, but any one else want to chime in?
As much as the Fundamental Economics of International Trade are important, the Japanese may have found an end-around for their Government Debt in a way I don't think anyone is thinking about yet. I'll explain.
As the basic level, the Japanese government debt simply can't be paid back. It's been too big for a shrinking working age population that's been shrinking since around 1998. (Granted, if they'd stopped over-spending then, they'd not have this problem) As a result, the Bank of Japan owns more and more of the Government Debt. But here's the catch: what happens when the Bank of Japan owns *all* of the Government Debt?
The fact that effectively all Japanese Government Debt is owned by the Japanese has always made the debt problem a weird one. But it gets even weirder when the BoJ owns it all. The Japanese Bond Market has been effectively illiquid for ages. They're in the process of moving most of the government retirement systems out of J-Bonds, which has been read as a "last-ditch effort" but might be something different.
So, in 2019, if the Bank of Japan owns *all* outstanding Government of Japan debt, what happens when they default on it? While the assumption that it would make the Bank of Japan insolvent, here's where my point comes in: So long as the Bank of Japan can trade Yen for US Dollars (remember, same Central Banking Club), what does it matter? It's just a bunch of digits in an account.
Now, it might be hard for the government to issue new debt to the Japanese banks. And if you think that, you're also fooling yourself. The Japanese Banks *will* fall in line. It's the way they operate.
I'll have some follow up thoughts later, but any one else want to chime in?