Japan Does the Full Ponzi

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


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Cullen:

    They might not be able to create wealth directly, but they can create inflation and can thus force holders of wealth to actually do something active with their wealth – instead of just sitting on their wealth passively and letting deflation give them “money for nothing”.

    I.e. it might create a special, positive, constructive disequilibrium: economic growth.

    Are there strong arguments why that is impossible? MMR seems to argue that fiat money can do just that.

  2. Yes, it is Ponzi based monetary policy, but this is exactly what the Fed has been doing for the last few years. The only difference is they have not stated it explicitly.

  3. It sounds a bit counter-intuitive. If I know I can get a 15% return in the stock market why would I pull my money out and invest it in the regular economy? Or even spend it for that matter…

  4. Well the Nikkei is only going to reach 13000 if they devalue the yen further or introduce stimulus. Both measures would actually justify a higher Nikkei, because nominal profits (fundamentals) would be higher, right?
    Disagreeing with this is saying that all Nikkei gains that happened in the last few months aren’t “justified”.
    I’m not sure what “new” policy you’re disagreeing with here Cullen.

  5. If Bernanke hasn’t stated it explicitly that he wants the stock market higher then he’s come very,very close by mentioning a rising stock market as a benefit of his policies and discussing the “wealth effect”.

    For mine he has been quite explicit albeit in slightly less provocative terms than his Japanese counterparts.

  6. It seems to me the practical effect of Japan’s monetary policy is that fewer Volkswagens will be sold and more Toyotas and Hondas will be purchased globally, due to favorable exchange rates. Yes, it encourages retaliation and a possible currency war, but in the short run it appears that this policy will be effective. It is also helping the trade to boost the value of holdings such as DXJ.

  7. I suppose one might say that the policy of targeting a certain level of bond prices by the central bank is “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.”

    Or are stocks somehow different than bonds in this case?

  8. I suppose that if the Bank of Japan were to buy stocks directly with their reserves that they could indeed make investors wealthy.
    On the face of it, that sounds outrageous, isn’t the Fed doing the same here when it drove up the price of the MBS market after it collapsed.

    Agree with Nils above. And I wonder if private investment hasn’t been diverted to secondary investing in the past decade.

  9. Is it really any worse/different than:
    – “0 interest rates until at least 2015″
    – “we will buy 70% of all new MBS for the forseeable future”
    – “we will backstop all state spending”
    … ?

  10. The Fed has stated the stock market is a transmission mechanism for monetary policy so yes it has been stated explicitly. Has Ben put out S&P 500 targets for the next quarter? No. But they have stated many times the past 3 years it’s a transmission mechanism – hence Japan is only following American policy.

  11. Unlike the Fed the BOJ is allowed to purchase directly in the stock market. (they are allowed to buy ETFs and REITs) The Fed has to use a middle man to get the same goal.

  12. Cullen,

    It extremely weird to see such comments coming from you!

    Saying Japan goes full ponzi is simply wrong, and, i think, is counter-intuitive to MR. The critical difference is that, unlike Mr. Ponzi, the Japaneze government can never go bankrupt, and default on its obligations, as it controls its own currency. You said this many times yourself, and now, for some reason, you are saying quite the opposite.

    Regarding setting the targets for inflation and stock index – what is fundamentally different in it from setting the target for interest rates, buying MBS, or providing currency swaps to EU banks? All of them are just tools to “support economic growth”.

    You saying stock markets are nominal wealth. What about bond markets? The currently “acceptable” central bank operation can greatly affect value of both government and corporate bonds, yet nobody complains or says it is a ponzi. The same should be the case for other parts of capital structure.

    All policy tools that help to “kick the can down the road” are acceptable and welcome. Dr. Krugman said enough about that in his recent piece, and I have nothing to add. Except, maybe, that, as we all know, US is Japan…

  13. What Japan does is simply NGDP targeting – they think that by buoying the stock market they will decrease saving propensity and incomes will rise. I think it is wrong but there is some logic to it.

  14. The BOJ is buying stocks directly. As far as I know, Bernanke isn’t doing this.

  15. Cullen finally sez it. Japan does the full ponzi!!!! And the US is
    doing exactly the same thing. Priceless.

  16. If that’s true (that it’s NGDP targeting) the MM boys should be cheering right now. Let’s see what they say.

  17. If a company buys back stock at double its current market value then this theoretically increases the wealth of those who realize the gains. But if the underlying fundamentals of the company are not consistent with this change in price then why shouldn’t we expect the price to revert back at some point thereby wiping out any gains we previously saw?

  18. The BOJ isn’t just setting a target and expectations. They’re buying stocks and driving prices higher. This is not at all what Bernanke is doing. Bernanke is buying govt backed bonds at market prices hoping to force investors into other asset classes. It’s a big difference.

  19. There’s a difference between driving down one’s currency and targeting stock prices. The sovereign owns the currency. It does not own the corporations in the targeted stock indices.

  20. US govt bonds are risk free assets owned by the sovereign. They are the monopoly supplier of bonds. If they want to set the terms on the sale of their bonds then be my guest. If they want to peg their currency at something then be my guest. But meddling with private sector asset prices so directly is well beyond the realm of setting overnight rates and forex rates. And I think it’s far more disruptive.

  21. Again, it’s explicit targeting of assets they are not the supplier of. One could make a reasonable argument for controlling the price of a sovereign’s bonds or a currency. But setting the price of a private sector corporation’s equity without explicitly altering its fundamentals is misguided in my opinion.

  22. I didn’t say Japan could run out of money. I am not sure who you got to that conclusion from this piece.

    You say this supports growth. I am curious how you think it does that. Can you explain the transmission mechanism? And why that transmission mechanism should persist?

  23. Setting the price of state owned assets and private owned assets is very different. One the state actually controls. The other the state has only a very loose influence over. The latter has the potential to be far more disruptive.

  24. Agreed. Govts should have every right to set the price of their own product, like T-securities. But the manipulation of private markets is harder swallow.

  25. A Ponzi scheme collapses when the originator rus out of money. This is the definition of Ponzi, and, thus, it is implied how I got to that conclusion – from the title. If the originator cannot run out of money, how and why it should collapse? It is just not a ponzi! In theory, the government can buy up all the equity outstanding and set any price for the index.

    How does it support growth? Well, how controlling interest rates supports growth??? And how the transmission mechanism in regards of interest rates controls should persist?

    Regarding equities, I can easily explain. Equities, first and foremost, is a mechanism for enterprises to raise capital. High/”fair” price of equities would provide companies with more capital for capex, expansion, and “sustainable growth”. Bingo! And, as a government can not run out of money, the “correct” price of equities can be maintained forever.

  26. Wow, why is that nonsence? Government can manipulate anything. Are you forgetting abot MBS, and so called special assets guaranteed during Bear Stearns/Lehman/AIG endeavour?

  27. Cullen,

    By setting interest rates, do not you think the government sets the price of corporate bonds, and all private credit instruments in general?

    And if we recollect dividend valuation or DCF, does not it cover equities too? Well, it is. So, why to draw a line there? Japan is perfect laboratory mice to show us where we all are going….

  28. Sorry, but this is not correct. Equity prices are set on secondary markets through simple exchanges between participants who are gauging the value of the future underlying cash flows. The govt can set the price of these assets on secondary markets by be a lemming and buying up assets that aren’t worth what the cash flows say, but that’s pointless. The govt can set the price of assets, but IT CAN’T SET THE OUTPUT OF THOSE ASSETS! This is a HUGE difference.

    The Fed does not control the output of the private economy. It only loosely influences it.

  29. If the government buys stocks from reserves, it directly injects money into the economy.
    I buy Ford at 10 and sell to Uncle Sam at 12, then I have more money.
    And if I’m getting a margin call because my Apple has tanked, Ben can help me there, too.
    Isn’t that good for growth?
    Isn’t this the same as the Fed driving up housing prices with low rates and purchasing MBS? Isn’t that a private market, too?

  30. The govt sets a benchmark rate which helps banks set the spread on their loans and other deals. It influences private credit, but it does not set it. Ultimately, the most important determining factor in private credit is the creditworthiness of the borrower. And the Fed can’t set that.

  31. Cullen,

    I agree that this is a dangerous undertaking by the BoJ. My question is, if risk = reward, where does the ‘risk’ go if the boJ begins to target specific market levels higher?

  32. You’re missing the point. Why is Ford suddenly worth $12? Is it because Ford actually sold more cars? Or is it because the Fed is a lemming buying Ford at $12? More importantly, does the Fed then sell Ford back into the market at $12 where someone then loses $2 per share when the stock reverts back? Changing the nominal price of an asset without actually altering the underlying fundamentals is a dangerous game to play and has the potential to be highly disruptive.

  33. Well, as Ben Graham famously, said, stocks become inherently more risky as they increase in price. I would add that they become substantially more risky when they increase in price without a justified underlying improvement in company fundamentals.

  34. Defenders of this new and more extreme strategy by the BOJ as just the same Fed policies but stated more clearly miss the main problem with this BOJ policy, which is the explicit and public targets. It is so arrogant it is almost beyond comprehension; central bank planners seem to have forgotten that what they are doing is both dangerous and unprecedented and requires some caution. The BOJ is clearly stating that the emperor has no clothes; this runs the risk of bringing markets everywhere to an uncertain halt in numerous potential scenarios. Price discovery RIP.

    Further, if equity returns are in effect just as guaranteed as JGBs then who in their right mind will continue to hold JGBs? They are waving an open flame at a gas station that could potentially blow a wide hole in the global economy.

  35. I never mention output in my note. Nor did it Japanese government, as far as I know. And we are not discussing the price discovery mechanism that did exist, but does not seem to exist anymore. And, as you very well know, price of a stock, and even price of a market index for some time can have absolutely no relationship with its future cash flows.

    “The government can set the prices of assets”. That is the key. For some unknown to me reason you are stating that to set the price of interest payments/government bonds is fair/correct/justified, and to set the price of other assets is not. I disagree, and see no difference. If price of one asset can be set, so can be price of any other. I strongly believe the governments think the same. We are seening the first obvious signs of this now. If you fear the consequenses, you are right.

  36. Cullen, you are missing the point! Why Ford was worth $10 in the first place? That price is obviously incorrect. Not doubt, within the fed/treasury/budget office, there is enough capabilities to calculate, IN ADDITION TO THE “CORRECT” INTEREST RATES WE SHOULD HAVE, what is the “correct” price of ford shares based on the output (!) planned/predicted by the government. Again, bingo! Here comes the right price, using which, the goverment can “support” the market, which is obviously missing the right price because of “liquidity” or something else.

  37. Does the Fed sell Ford back into the market? I don’t know — does the Fed plan to sell the MBS it now holds on its balance sheet? Or its Treasuries?
    The Fed can buy Ford to make it go up, and then sell Ford if it thinks the stock has gone up too quickly.
    Is that manipulation dangerous? Probably.

  38. The govt owns its bonds and no one competes with them to issue risk free assets. The terms are theirs as the monopolist. Monopolists set prices for their assets. That’s what they do. No one should be shocked that the govt can set the price of its debt. And its completely reasonable to do so since it is the monopolist.

    But it is not the equity market monopolist. Equities are issued privately and compete for space in the private sector. Their values are not based on monopolist powers, the ability to tax or the ability to set laws. Their values are based on competitive market based factors. The govt can influence these factors, but it cannot control them. Explicitly setting the value of these assets is a huge deviation from setting the value of the assets you are the monopolist over. The govt can control whether or not it can issue money to redeem bonds at par. It cannot control whether the entire SP 500 sells enough goods and services to justify current market values.

  39. Japan is doing exactly what the Fed is doing just more honestly and directly by stating it and even giving their target price. The Fed on the other hand does it dishonestly by forcing people into risky investments by removing interest income from safe investments while allowing their Wall Street Cronies to control the price target and game the system. Same result. One system is just more criminal than the other.

  40. But the Japanese government also did not decreed Nikkei to be 13000 sharp at March 1. It only “suggested” that it might think about “targeting” it. It infuenses equities but does not set the their price.

    Regarding “creditworthiness” of borrower. Again, you are factually incorrect. The most obvious example is when the US (not Japanese!) government guaranteed the MBSs issued buy F/F. Any “creditworthiness” was, thus, removed. The Fed can set that, and will set that again many times, I have no doubts. Another good example is GM bankruptcy case. And again, the question arises, why a government would limit itself to specific parts of capital structure? It will not if it is “necessary” to “support economic recovery” or “growth”.

  41. Of course the govt CAN manipulate anything, but it doesn’t for good reason. Yes there is a fine line sometimes, but your examples are weak. MBS are govt guaranteed and Bear/Lehman/AIG were less manipulation and more bailout/saving the system.

  42. Cullen, you are looking at this from the wrong direction. First and foremost, the government is money monopolist!!! Thus, it can set value of money relating any other thing that can be exchanged for money. Of cause, only if it “necessary” for “growth”. Some people would call it fascism, I would call it “monetary realism”. Again, for some unknown for me reason, you try to limit government monopoly to government bonds. But this is just a stupid rule existing in the heads of some idealists. Remember, USD was backed by gold some quite recent time ago. Such a strong and fundamental rute! Where did it go?…. Prepare for many other rules go the same way soon.

  43. KB — Ford is obviously worth $20 a share. The Great Recession has reduced the number of cars it has sold in the past 5 years; however, Ford has the capacity to produce 20 million cars a year *and* the public has the demand for 20 million cars.

    Sincerely, PK

  44. The govt absolutely is not the money monopolist. We live in a system where money is issued by private sector entities who compete to issue it (they’re called banks and they’re not state owned). The govt is the monopolist of very specific things like its bonds and reserves.

    Likewise, the overwhelming majority of the stock of financial assets in the economy are issued by private entities who compete for holders of those assets and justify the ownership of those assets by providing valuable goods and services.

    The economy you’re describing is some sort of command economy controlled entirely by state owned entities and the govt.

  45. The lines between the Fed and it’s member banks have become so blurred, there really is no difference any more.

  46. No, MBSs were not government guaranteed.

    We can argue about where this “fine” line should be, but it does not affect reality. For me, that line has been passed long ago. But again, putting whining aside and getting back to reality, the line now is being pushed more and more, and there is no way or reason it would be stopped. I think we will see GDP inflation targeting, “support” for bonds and equities, and many other interesting things.

  47. Cullen, read the constitution. The government is the money monopolist. It may delegate this right to some obscure entities, like fed, which, in turn, delegates it to private banks, but the government has the ultimate control. This is the fact. We can get into whatever sophistry we want, but if tomorrow congress says we do not have dollar, but schmollar, that will be it. Again, remember what happened to gold standard.

    All the “bonds” and “reserves” stuff is secondary.

    The economy I am describing is, very unfortunately, the economy we getting closer to. You, yourself, see troublesome signs of it. That’s why this emotional piece on Japan is published, I think.

  48. I am fascinated at Cullen’s objections here. The Fed is doing a lot of things which are altering prices all across the scope of the marketplace which he has little issue with. THey are sucking out Treasuries and MBS like mad, creating a lack of alternative investments and thus “forcing” people into other risk assets – and I dont hear nary a cry over this. It is explained away by saying “the BOJ directly buys equities while the Fed is taking away assets to invest in, thus forcing people into other assets… so then its different.” Not really in my view.

    Also during QE1 the Fed bought all sorts of stuff for well above market prices. So the BOJ buys stuff above market prices. Why is it any different if its equities or mortgage bonds. The Fed doesnt issue mortgage bonds. The US govt is not the monopoly supplier of mortgage bonds. I am thinking Cullen will answer QE1 was during an emergency so then it was ok. But then you are playing God deciding when these policies are ok or not. They are the same policies. Its a slippery slope. Period.

  49. Fannie Mae and Freddie Mac MBS, unlike Ginne Mae, were not explicity guaranteed by the government, they were guaranteed by capital of F/Fs. The rule was changed after the fed decided to purchase them.

  50. What’s the problem here- this is what all the central banks are doing, they just don’t tell you that so explicitly.

  51. I think Cullen’s “fair” limit was for treasuries and MBSs only, maybe for “one-time special asset pruchases” too. Now, when he sees the new level of market manipulation and distortion, he gets worried.

  52. I think KB’s point is again valid here. Say the Fed helps created a housing bubble and distorts price (I know – it could never happen!) Does it create actual “wealth”? Perhaps not. But can it create “money” and “stimulus” ? Yes.

    Say my house is worth $150K but Mr Greenspan/Bernanke/Ms. Yellen decide they need a housing bubble to help stoke animal spirits and their standard “wealth effect” ideology. Say my house then goes to $300K. Say I then take out a $150K mortgage. Say I walk away and default. I pocket that money and spend the money. I do the same thing along with millions of Americans. We create a banking crisis. The Fed steps in and does QE and buys those MBS at par rather than the 30 cents on the dollar they are worth.

    So what happened here? I made money from the overinflated house. The banks are made whole by the Fed. No one loses in this awesome system.

  53. Maybe Japan feels it is in crisis. It is in a 20 year deflationary spiral. So by the thinking of the QE1 period the BOJ policies are just fine because its in a crisis period for the country, trying to find an escape velocity from the muck they have been in for decades.

    This is the point of all this central bank action. Distorting markets of all sorts can be appeased under one viewpoint or another. What you or I or Cullen see as an emergency someone else can use as an excuse. Letting a small cabal of bankers determine all these things with no real oversight other than phony COngressional committees stacked with people with little financial acumen is an invite to the path we are on. And I have seen it here and in many places to take away the wall between central banking and treasury. Which is what Abe is pushing for in Japan. So you can see the end game here if that is the future.

  54. And when the student loan bubble pops the Fed can buy securitized Sallie Mae loans too because the govt now does 93% of student lending. So that market is like Fannie/Freddie too. Woo hoo.

  55. The BOJ can buy all JGBs. As Cullen has stated there is really no need for Treasuries – its an arcane system. Just as a US bond auction could never fail so could a Japanese bond auction. The central bank can suck up all of em at will if need be. Just dont ask Kyle Bass.

  56. The constitution is actually incredibly vague on this subject. Art. I. Sec. 8.: “The Congress … shall have power … (2) to borrow money on the credit of the United States … (5) To coin money, regulate the value thereof, and of foreign coin, and fix the standard weight and measures.”

    If you think modern banking and the Fed system is illegal then take it up with Congress who passed the Federal Reserve Act. But nowhere in the Constitution does it deem banking illegal, the Fed system illegal or the govt the money monopolist.

  57. I don’t have “little issue” with it. I’ve been a critic of QE since the day it started. This version of QE regarding stock prices is simply a more egregious form of QE which I vehemently reject.

  58. See 2007 & the housing bust for the reasons why I think this might be misguided. The housing bust is a perfect example of inflating prices away from their fundamentals resulting in the greatest economic calamity of the last 80 years. This sort of policy is ripe for those kinds of disequilibriums.

  59. KB, good point about explicit vs implicit guarantee. I don’t think you’d like the Market Monetarists whom I believe are in favor of buying any and everything from stocks to my girlfriend’s diamond earrings if it will help them reach their NGDP target :)

  60. MBS is private, although one could say that Agency MBS is publicly-backed private asset.

    If the government/Fed:
    – turns a blind eye to capital requirements and solvency
    – allows any dealer to become a bank at the whiff of a crisis, plus taxpayer backing
    – allow repo of dubious quality
    – emergency back stopping of MMFs and deposits
    – 0% interest
    – low cost discount borrowing
    – etc.
    It is inviting the Fed-Equity carry trade, with nearly explicit federal underwriting. One could say Germany invaded Poland, but history will say the Ally giveaway of Sudentenland and the explicit permission of Russia was only one very small stepped removed from complicity.

  61. I guess it all depends on how you interpret Amari’s statement. I don’t think they’re actually going to go out and buy stocks in the secondary market to ensure that their target is reached for example.

    To put it another way: I think Amari just openly stated something that was previously only discussed in closed meetings. I think that the Fed also discusses what their monetary policy is going to do to stocks and so are government officials probably, don’t you?

    But yeah, if you read the statement in the sense that they’re actually going to target a specific level in the Nikkei, rather than just stating what they think will happen because of their policies, then I guess I do get where you’re coming from.

  62. Ive seen you say many times QE1 was a necessary thing due to the circumstances at the time. Your issue was more with QE2 and QE3 and QEinfinity, not QE1. My point was about QE1 and doing these things during “emergencies”. Under that guise other countries can do things and just label it economic emergency. Etc.

  63. Sorry necessary is probably the wrong word – “agreeable” since the system was developing major hiccups might be the better term.

  64. That makes sense, Cullen. The only point I would dispute is that the Fed indirectly affects the prices of private assets when it sets the price of Treasuries. Perhaps it’s a matter of degree rather than quality.

    I do think it will be quite interesting to see how the NIKKEI responds–as far as I know this is the first time a government has called for a specific index price at a specific time.

  65. Please, you’re ignoring the facts behind QE1 and subsequent QE’s. What Japan is proposing is like QE2, only potentially worse.

  66. Cullen – Good luck with your patience in trying to clarify the distinctions among the chorus of “this is exactly what the Fed is doing” or “Cullen never critized the Fed for their asset purchases,” etc.

    There is nuance here and context matters. Setting terms on government-issued or guaranteed securities and attempting to set prices of publically traded companies is different. Likewise, a central bank holding those government issued debt securities which have a finite lifespan (and can thus be held to maturity) versus buying shares of company stock.

  67. So the BoJ has said nothing of an NGDPLT for example? Just this stock market target?

  68. “It does not own the corporations in the targeted stock indices.” … well not YET anyway!

  69. Yes, he has no problem saying the Fed should do whatever is necessary to hit their NGDPLT (including buying up “non-traditional” assets), however he’s also say that if the NGDPLT was communicated effectively that the CB would NEVER have to resort to actually buying those non-traditional assets. Has any NGDPLT been communicated by the BoJ in this case?

  70. I’m a parent — If you tell your child, if you do this, I will respond like this … well, the threat is never enough. It’s not until you follow through that the ‘policy’ has any teeth.
    I think that’s true in most cases. As the Fonz once said to Richie Cunningham, the threat of violence only actually works if you’ve punched somebody out at one time.
    So whenever I hear people advocating that the threat of Fed action will be enough, I think we have to be suspicious. Sumner is really advocating buying up those non-traditional assets.
    IT’s why this thread has gotten so much attention — the BofJ is hinting at our future.

  71. I will agree with a couple of the commenters here.

    Calling it Ponzi may not be accurate. Isnt Ponzi technically when you take 100$ from Peter, tell him you are investing it and then get 100$ from Paul,Cullen and Greg so you can pay Peter 125$ and keep fifty and then go find more and more 100$ “investors” to keep paying the earlier investors off. Its Pay Go disguised as investing in a secondary market.

    Since CBs can buy whatever they are chartered to AND they cannot run out of money AND they are explicit about what they are doing, should this not just be called ReStuP (Really Stupid Policy).

    I like ResStuP, it describes what the BOJ wants real stock traders to do . “Just take a break and rest up. We will price the market from here guys”

  72. Or rather, promising that assets will be priced for particular cash flows that won’t be there? Same thing. This is ponzi monetary policy. the BOJ is promising a price on equities that their underlying production probably won’t deliver on.

  73. Rather than the “Fonz” Sumner and company like to talk about “Chuck Norris” in this regard. Ha!

  74. “the BofJ is hinting at our future.”

    You are probably right Johnny.

    I suspect that we might be running some sort of social experiment. Our last great crash in the 30s resulted in a fiscal response that led to the recovery. The conservatives have spent 5+ decades trying to discredit and minimize the effectiveness of fiscal policy and Keynes. We are now seeing the culmination of the anti Keynes, hypermonetarist experiment. They wish to show once and for all that monetary policy is the far superior tool, even if it means conducting fiscal policy under a monetary disguise.

  75. That’s certainly true – but it really matters why Japanese stocks are moving higher.

    The price increases of the past few months had two main driving forces: firstly the JPY denominated stocks, in a heavily export oriented economy, increased in price because the JPY got devalued due to BOJ messaging. If you look at their “real value” – denominated in say AUD, the rise is much smaller. The Japanese export economy got more competitive.

    Secondly, BOJ messaging about 2% inflation targeting increased inflation expectations, which could signal higher consumer spending and higher investment activity. This could increase GDP, and rise all boats: the Japanese corporate sector (even non-export firms) could become more competitive.

    Both of these factors are real, tangible improvements to the Japanese economy – not Ponzi financing.

  76. (Correction: the last “more competitive” should read “more profitable”.)

  77. Everyone gets the nuances by now – thank you Cullen. The details of how the central planners manipulate prices in the economy are just that, details. In the end, they are central planners manipulating prices. Japan is actually a breath of fresh air for simply saying it outright rather than hiding behind nuance and crony capitalists; as grotesque as it all the begin with.

  78. I understand what you are saying Cullen but again, the underlying production cant deliver but the BOJ can…… and will! And they are not being coy about it.

    I could not agree more that this is terrible policy with absolutely no connection to how markets and production and ROI should work but if this is ponzi, would not helicopter drops be ponzi?

    Dont mean to be argumentative I just have a definition of Ponzi scheme in mind that doesnt jive with this ridiculous idea of the BOJ.

  79. I don’t even know what that means though? What will the BOJ deliver? More revenues for firms? More products for them to sell? The BOJ can’t deliver anything to these firms except bloated share prices that will ultimately make it more difficult for their consumers to manage their income statements as they bounce up and down in a disorderly fashion….This obsession with prices on secondary markets puts the cart before the horse.

  80. Cullen specifically said “private credit” – while your examples are cases of public credit/debt.

    Private credit, issued by private banks, is mainly constrained by the borrower’s creditworthiness. This is why QE only had a limited impact on borrowing.

  81. I guess I see it this way, correct me if Im wrong. The only way the BOJ can deliver higher stock prices is by paying for the stocks….buying them. So they deliver by taking a stock holders stock and paying him twice what its worth today. Its just an asset swap. BOJ takes your stock you take 500,000 yen. This drives the price of stock up and gives money to stock holders. Of course at some point the stock can be resold (low) and lather, rinse, repeat. Completely stupid, dangerous and abhorrent econ policy but what they seem to be willing to do.

  82. Grasshopper, re: MMers: They both are and are not. That is the Zen of MM. They say that the CB should stop at nothing to achieve the NGDPLT (including purchasing the whole Earth), however, they are simultaneously opposed to “non-traditional” purchases by the CB because, once communicated, they will never be necessary. Does that make sense? If it does, you have either reached enlightenment, or you’re ready for an extended stay at Happy Acres… I’m not sure which! ;)

  83. Cullen, the Japanese are not constrained by their constitution. The Japanese government openly threatened to force the BOJ to intervene not only on monetary, but on fiscal channels.

    Translation: the BOJ can print Yen in the trillions, bury it and let it be mined by Japanese citizens. This will directly impact the output of the private sector, by increasing demand and utilizing spare capacity.

    The Fed probably has this power too, but was not forced by voters and politicians to do it, so it does conservative easing, trying to push on a string via QE and all that.

  84. Constitution or not, I don’t think it’s prudent policy. Maybe Japan is turning into one big command economy. Hell, maybe we are. But that doesn’t mean it’s the right approach. You can justify almost anything under the realm of what’s “legal” for a govt in a time of “emergency”, but that doesn’t mean it’s always smart. Having power doesn’t mean it’s always wise to abuse that power….

  85. Nonsence. MBS is private credit. Lehman/Bear/AIS were private too, as well as GM deal. You did not read what I wrote.

  86. The policy is absolutely wrong and destructful. What I was trying to show, is that it’s just the next logical and expected step in the long line of steps taken before, and there is no logical or moral limits in the current paradigm to stop it if it helps to “support the growth” or, god forbid, to prevent another “slowdown”…..

  87. This may not actually be the case – let’s say Japan government pumps some export-oriented equity to the unsustainable levels based on current output. Then it devalues yen, and bingo! The output adjusts to the new forex reality, and suddenly the unrealistic price becomes actually cheap. Right there, the government can actually sell the stock back to the market with nice profit, and report a win-win situation!!!

  88. Haha, welcome to the brave new world as a direct consequence of the current MR system – a command economy. 1984 is well and alive. The Japanese just said overtly what the Fed does implcitly. The tools may be slightly different but the aim is the same. And yes KB, you can call it many things. This was just the next logical step on the slippery slope of our great system.

  89. Most of this discussion is missing the fundamentals.

    Capital markets exist to apportion capital effectively. There are rewards for being productive and penalties for being inefficient in the form of making it easier or harder to raise capital ( higher or lower stock or bond valuation). The potential rewards or loss cause investors to be effective capital allocators, the weighing device of many being more accurate than a few government bureaucrats and an investor will work harder because his skin is in the game as opposed to a government bureaucrat, where accountability is dispersed.

    If anything beyond economic efficiency influences valuation, effective capital allocation is damaged, causing economic inefficency.

    Market manipulation by government implies governments are either effective capital allocators or causing a subpar economy. The history of USSR, communist china, the EU and Obama’s clean energy investments, along with almost all the rest of history, shows the idiocy of hoping the government to be good capital allocators.

    In a crisis, any available tool that may aid survival must be used. TARP, QE1, Paulson, Bernanke, Geithner were arguably vindicated in crisis responses that allowed our countries survival. The crisis ended some years ago (except in Europe).

    Since then, historically unprecedented fiscal stimulus and market manipulation have not been successful. Probably because structural problems exist that fiscal stimulus does not address. Yellen and Krugman have absolutely no clue about structural problems.

  90. Sh-t, Tom, that does make sense. But please don’t mistake understanding for agreement!

  91. Repeating this argument doesn’t make it sound better. As you know the Fed is the monopolist seller, but not buyer of the debt – normally. Now it is also a monopolist buyer, but the system was not thought to operate like that.

    Manipulating the price of money indirectly manipulates the price of everything. So yes – it is not a direct manipulation, but it is a manipulation and the aim is the same. This is just the next logical step – making an implicit target explicit.

  92. “Market manipulation by government implies governments are either effective capital allocators or causing a subpar economy. The history of USSR, communist china, the EU and Obama’s clean energy investments, along with almost all the rest of history, shows the idiocy of hoping the government to be good capital allocators.”

    Well some public goods can only be provided by govts, so they have to have some allocation, no way escaping it. But yes manipulating private markets is decreasing the efficiency of the economy most of the time.

    “In a crisis, any available tool that may aid survival must be used. TARP, QE1, Paulson, Bernanke, Geithner were arguably vindicated in crisis responses that allowed our countries survival.”

    Once you start sacrificing principles because you are in an “emergency”, you are on a very slippery slope.

    “Since then, historically unprecedented fiscal stimulus and market manipulation have not been successful.”

    They have been – look at the Dow 14000. Look at the UE going down. Look at the 1% income growth. A win-win situation for everyone.

  93. Considering how many times I’ve repeated it, I am amazed that you still get it wrong. Do you not believe that the govt is the monopoly supplier of govt bonds or that the fed is not the monopoly supplier of reserves? You seem to consistently favor your ideology over the facts….Which is fine, but don’t accuse me of repeating an argument as if it isn’t a simple fact.

  94. I am literally stunned by the number of people who think that economic prosperity is as simple as this. I’ve obviously failed to teach many of you anything about how real wealth is created in this system….

  95. Rightful point here…

    Japanese assets have been undervalued for years, isn’t this just things rebalancing at last ?

  96. LOL….

    Kyle Bass, the guy who was still a frat boy when Foreigners went short JGB’s for the first time !

    Why does this guy gets any time on the air ? can I get some too ?!

  97. InvestorX just said he agreed that the government is the monopoly issuer of bonds. I think we all agree on that.
    Where some differ is wisdom of the Fed buying debt. Once it begins to do that, then it begins to distort the market, the same as if it began to buy stocks, for example.

  98. I’ve never said I was in favor of the Fed buying debt, but there are 20 different comments here implying as much. From the onset of QE, I’ve said it was more likely to cause distortions than cause any good. I published this research piece almost two years ago….


    Still, there’s a difference between buying govt debt and buying private stock. It’s not the same thing even if it has some similar distorting aspects.

  99. If I had to summarize how to create economic properity as simply as possible…

    Education + Natural Resources + Effective Rule-of-Law + As Few Barriors to Innovation As Possible + Sufficient Aggregate Demand = Economic Prosperity

    Maybe I’m missing something important, but subtract any one of those things… and different problems inhibiting Economic Propserity occur.

  100. @ Charles, re: JGBs: the BOJ can only buy all the JGBs they want as long as they can continue to roll over their debt. That’s the ponzi Cullen refers to, I believe.

    And, if the BOJ is guaranteeing returns in the equity market to the tune of 17% a month than why would investors continue to fund BOJ guaranteed debt at nearly zero? If interest rates budge just a little they could spiral out of control pretty quickly.

  101. @Charles: I also think that you’re underestimating the potential for hyperinflationary forces for a small island nation with limited natural resources and a very small army. I mention this because I do believe that their ability to print at will does not rival that of the United States, for better or worse.

  102. Cullen,

    You describe Japan’s theoretical new policy as a Ponzi scheme, but I think that terminology may be incorrect in this situation. Since the Bank of Japan (BoJ) can create an unlimited supply of reserves, it does not require any new lending to continually maintain any price for the Nikkei it chooses. The scariest outcome is not that the scheme would collapse, but that the BoJ would end up controlling all currently public corporations.

    To be clear, I doubt that outcome would happen in practice. The more likely endgame is that the policy becomes politically unacceptable and then the BoJ retracting its price target leads to a spectacular (ponzi-esque) crash.

  103. Now listen here that Nils fella, we don’t want any of that logical thinking ruining everybodies fun.

    Even that darned Spock fella knew when to keep his mouth shut and logic held in check!

  104. This misses my point. Regardless of how much the BOJ buys, they cannot create cash flows for the underlying companies. Buying stock on a secondary market does not change the operating side of a business. And if the BOJ pushes stock prices up to a level where the cash flows do not support prices then you’re looking at a ponzi scheme. The BOJ can’t just create corporate cash flows. Their stock of reserves doesn’t give them that ability unless they decide to start buying goods and services from these companies.

  105. “Ponzi based monetary policy”? As opposed to what? Money is always a ponzi.

    If I hold Yen it is merely because I believe I will be able to exchange Yen for a quantity goods, services, or assets in the future. There is no “fundamental” value of money; it’s fiat, the government decides it.

    My belief in the future exchange value of the Yen has been very stable, because the Bank of Japan have made it very stable. In terms of the CPI the purchasing power of my Yen have not changed over twenty years.

    Now Abe says he wants the future value of my Yen to start falling. So what? Good luck to him. Maybe I will spend more today if holding money has a negative real return.

    Maybe Abe will devalue my currency in terms of the CPI basket. Maybe he will depreciate it terms of the Nikkei. So what?

    Either way… why should I not believe Abe and Amari? Fiat is ponzi. That the value of my Yen is unchanged over twenty years is not some freak chance. The government, the central bank, made it so. Other governments do different things; new governments do different things. So what?

  106. Governmentt determines the value of money? I’d like to see Japan stop producing goods and services and see how well the govt can manage the value of the currency then.

  107. A govt determines acceptance value through the legal process. That is, they determine the unit of account. The value of a form of money is determined primarily by quantity value or the medium of exchange’s value in terms of purchasing power, inflation, exchange rates, production value, etc. This is almost entirely controlled by the quality of the goods and services produced within the system and NOT the govt.

  108. Really, sir?

    That the Japanese CPI level has unchanged over twenty years… that is just a freak accident?

    That the Eurozone HICP was 2% y/o/y in January 2013 despite a depression across the continent.. that’s just a freak accident?

    That the US CPI continues to bounce around 2% y/o/y … that’s just a freak accident?

    None of these things have anything to do with the actions and intentions of the central bank?

    Sure, sure.

  109. I was sarcastic in parts of my reply, do not worry. I think you know my thinking well from previous posts and it is more conservative than yours.

    I am trying to tell you that the system has been based on Ponzi and on a slippery slope all the time and Japan has just reached the next logical step in this Orwellian madness.

  110. Gareth,

    the govt is only one factor in determining the value of the currency. Other factors are:

    – productivity of the economy (Japan: high)
    – current account status (until recently huge surplus)
    – private debt creation (in Japan: deleveraging in corp sector)
    – carry trades (since 2008 a strong unwind)
    – population mix (Japan: a lot of elderly people)

    -> all factors contributing to the strong JPY

    Then there is the willingness of BoJ / govt to weaken the Yen. They need to still fight some of the above factors to achieve their aim. So far until recently the BoJ has talked about QE, but they have not pressed very hard and have used a lot of “sterilization”, so the JPY was strong.

  111. A summary of my views, as Cullen seems perplexed:

    – FRL = Ponzi finance. Fed’s main role is to protect the Ponzi from blowing up. Fed cares only about nominal GDP growth, not about a productive economy or lifting all boats.
    – QE1 = breach of Fed’s charter. It is a fiscal gift to TBTF. It cements the perverse “privatize gains, socialize losses” racket that is modern TBTF banking.
    – QE 2 + 3 + n = an attempt to keep elevated risky asset prices higher, above fair value (DCF). It is obvious as the reserve requirement is currently a non-binding constraint (check e.g. also Hussman on that)
    – The correct way to deal with 2008-2009 was the Swedish model, where the operating entity is protected, equity holders are wiped-out, bond holders take haircuts and convert part of their bonds in equity.
    – All kinds of different CEOs, CFos etc. need to go to jail (compare with e.g. Milken)
    – BoJ has just done the next logical step in this system, by making an implicit target explicit
    – Reserves are as I understand claims on physical cash. It is true that they do not exit the banking system as a whole, unless there is a mass withdrawal of cash from banks and stuffing in mattresses. But reserves are still (claims on physical) money and so CBs print money. The amount is currently still trivial as compared to the total debt = money in the system (e.g. ~$50tr. in the US). CB printing is offset by private sector deleveraging. So one needs to look at both (and other factors such as productivity growth, population growth etc) to judge the imapct on inflation.

    Best, InvestorX

  112. “So far until recently the BoJ has talked about QE, but they have not pressed very hard”

    You, sir, you certainly are getting there. Since December Abe has talked about weakening the Yen, not done “pressed very heard”, and yet, lo, the Yen has weakened. Or was that just a freak accident? Perhaps in fact the issuer of a fiat currency does in fact have the ability to determine the value of fiat currency?

  113. Ok so it can if it presses too hard. But is not the only force determining the outcome in a non-command economy.

  114. Why does the BoJ need to “create corporate cash flows” to put a floor price on the Nikkei, sir?

    The Bank of Japan has put a floor price on the CPI basket for twenty years. They did not have to buy up the entire output of the country to hit that target, strangely. The ECB has put a floor price on their CPI basket which moves up a bit every year. They also have not had to buy up the entire output of the Eurozone.

  115. Stock prices are based on the underlying expected future cash flows of the corporations they represent. Why should stock prices remain at permanently elevated levels if their cash flows do not justify such price appreciation?

  116. Of course we all agree that separating the price of stocks from their fundamentals is a dangerous idea.
    But the rationale is easily understood — central banks believe that propping up asset prices creates wealth. Maybe they just want to smooth out the markets.
    It’s not so much of a stretch to say that if the central bank can buy MBS to keep those prices afloat or guarantee housing or student loans to keep those lenders afloat or to acquire Treasuries on the secondary market it can do the same for stocks.

  117. Why “should” they is a good, but bad question.

    If the BOJ put a 13K floor price on the Nikkei, there is a floor price on the Nikkei. It is a done thing. A fait accompli. For any quantity of sellers who try to sell at 13K, the BOJ can satisfy the order with freshly minted yens.

    If they have to print so much yen that there is a reflation of money earnings… money earnings will adjust until the “real” PE comes back into line with the peg. If you print it, they will spend. (Some adjustment of the real output of the Japanese economy may take place as well…)

    Here are some better questions for you, sir.

    Why should the BOJ, bless their socks, put a floor price on the Japan CPI basket which never changes over twenty years?

    Why should the ECB put a floor on the price of Eurozone CPI basket which moves at only 2% a year?

    Why should MAS peg the price of the Singapore dollar against a trade-weighted currency index?

    Why should the SNB peg the CHF at only 1.2 EUR?

    Why should the Fed NOT peg the dollar price of gold?

    Those are all monetary policies. They all work. Some are better. Some are worse.

  118. I explain that badly. You are a finance guy. Here we go.

    The BOJ has offered to buy an unlimited amount of Nikkei off any market seller at 200K – that is two hundred, using freshly printed yens. They can always do this. We know, they can print. Boy, they can print!

    The current price of the Nikkei is 12K. Do you spot an arb here to increase your “real” wealth here, or not? Maybe you think it’s a Ponzi, you don’t believe in Ponzis?

    OK, I take it, sir, if you don’t. I have some JGBs. I’m gonna sell them, you know! And I made the trade with the BOJ, the trade of my life. What do I do now? I buy some stuff, you know!

    Is it a Ponzi now? I’m buying a lot of stuff with my freshly printed yens, I’m buying and buying and buying, and earnings are going up, and the companies are investing more because I’m so rich they know I can always buy.

    But eventually we get some inflation. And then the BoJ, they start pegging something else…

  119. Indeed. Just very recently, Chinese companies went into land speculation rather than improving their manufacturing capabilities. Before that, there must have been significant diversion of productive time, efforts and money into buying and selling houses in the US rather than doing things that are useful in the long term.

    If business is going to make more from stock market investment, then it would do for short term gains and the expenses of shared, bleaker future.

  120. Hi Cullen,

    Then does it make a difference if the Fed starts buying lots of cars from Ford to justify the $12 price tag (and then dump the cars into the desert?) Are we then all richer ?

  121. Thanks for the link… whatever happened to the “I found a flaw” Greenspan? I.e. the deer-in-the-headlights, somewhat-chastened Greenspan.

  122. Keynes said “But the daily revaluations of the Stock Exchange, though they are primarily made to facilitate transfers of old investments between one individual and another, inevitably exert a decisive influence on the rate of current investment. For there is no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased, whilst there is an inducement to spend on a new project what may seem an extravagant sum, if it can be floated off on the Stock Exchange at an immediate profit.”

    I do think this is bullshit but he write it. I guess the dot com bubble worthless companies and the ghost estates of never to be occupied housing in Ireland and Spain did follow that transmission mechanism.

  123. Is it true that in Japan a lot of stocks are actually held by non-financial firms; manufacturers own stocks of suppliers and such like? If so then perhaps the BOJ buying stocks at elevated prices is a bit like a helicopter drop of money to the overall corporate sector?