I saw this headline over at Calculated Risk regarding the new “monetary policy” in Japan:
And from the Japan Times: Japan’s economic minister wants Nikkei to surge 17% to 13,000 by March
Economic and fiscal policy minister Akira Amari said Saturday the government will step up economic recovery efforts so that the benchmark Nikkei index jumps an additional 17 percent to 13,000 points by the end of March.
“It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31),” Amari said in a speech.
The Nikkei 225 stock average, which last week climbed to its highest level since September 2008, finished at 11,153.16 on Friday.
“We want to continue taking (new) steps to help stock prices rise” further, Amari stressed …
I think this is remarkably silly policy. It’s the worst abuse of central bank powers and based largely on a misunderstanding of secondary market dynamics. I wish wealth creation was as easy manipulating stock prices. Then every country in the world could just have their central bank target a market price and presto-changeo – we’re all rich! Nevermind if the underlying corporations don’t actually justify the valuation! After all, the central bank says the cash flows justify THIS price. They said so!
Of course, this isn’t how reality works. The stock market is made up of companies selling at a nominal price on exchanges and all shares outstanding are always held by someone looking to find someone else to sell to so the current holder can realize gains (which subsequently leaves the new holder with the exact same problem searching for the next person in line). Those prices are determined primarily based on the eagerness of the participants in those markets to buy or own shares based on the expected future performance of the actual underlying corporations.
We can implement policy that causes these prices to deviate from where the market would have otherwise set them (largely by making participants more or less eager to own shares). But what is the point of this? What does this do other than cause disequilibrium if it does not cause an equal change in the underlying business? If the market believes the Nikkei is worth 11,000 based on expected future fundamentals then pinning the price at 13,000 only causes a short-term disequilibrium that will result in the same amount of eventual wealth lost that is presently being gained.
Again, stock markets are nominal wealth. Someone must always hold shares of stock outstanding so someone will always be concerned that they’re left holding the ponzi scheme at the peak if that’s in fact what the central bank explicitly targets. And that leaves the same underlying downside reversal risks present at all times. Yes, the Bank of Japan might create some real wealth (for some market participants) in the near-term and might thereby make Japan appear better off than they really are, but there’s absolutely no underlying fundamental change in the corporations that make up this index that should lead one to believe that these price changes are justified. And when the Ponzi scheme is exposed the market collapses thereby destroying wealth for all the current participants leaving us right back where we started.
This is ponzi based monetary policy. It’s based on a false understanding of market dynamics, a false understanding of real wealth, and it’s very likely to cause disequilibrium in the long-term.
See also: The Destabilizing Force of Misguided Market Intervention
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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