by Tres Knippa, Short Japan Debt
February 1, 2013
If you would like to get a glimpse of what to expect from central bankers in the coming years, then look no further than the new Bank of England head, Mark Carney. The UK just posted inflation figures of 2.7%. It is important to point out that the inflation target set in the UK is 2%. Shouldn’t the UK be worried about inflation numbers that exceed the target set by the central bank? We have all been fed the economic theory that inflation is a good thing, and with it comes GDP growth. Well, not in the UK. UK GDP numbers just dipped into negative territory again. What is a central banker to do? Where is the usual parade of nonsense the Keynesians have been feeding us? Inflation is not a problem, bond yields are low, by all means, keep printing and spending. Isn’t the data coming out of the UK a complete repudiation of this theory? Should the world start to realize the dangers of ZIRP?
It is my prediction that the goalposts for inflation targeting will keep getting moved further and further away as long as deficits stay high and GDP growth stays low. What should we expect? I think we should expect inflation numbers to keep exceeding the expectations of central bankers around the globe. If you talk to the central bankers of the world, they have been espousing the wonders of inflation targeting to any politician that will listen. Just keep printing money, continue quantitative easing, keep running fiscal deficits and GDP growth is right around the corner. Every politician’s dream, right? Good thing they have a few Nobel Prize winning economists to act as straw men and keep telling them the answer is always borrow more and spend more. It may not be good economics, but it certainly helps reelection efforts.
Is the head of the Bank of England now the hardest job in finance? If you are Mark Carney, this seems to present the ultimate challenge to any central banker. Shouldn’t the inflation numbers in the UK be the canary in the coal mine that endless printing and spending may actually have more negative consequences that the Keynesians think are possible? Have no fear, just change the target. This is exactly what Mark Carney said in a press conference in Davos. Get ready to hear this word a lot…tolerance. Mark Carney said the Bank of England is ready to tolerate higher rates of inflation in order to get to a specific GDP target. Oh, I get it! Inflation is no longer the target or a threat, now GDP growth is the target. Sound familiar? Recall Bernanke’s speech to the Senate when he shifted focus from inflation numbers and is now setting monetary policy based on the unemployment rate? Face it, Mark Carney and every central banker in the world will talk around and make excuses for low interest rates, no matter what. Some economists suggest that the Federal Reserve and the Bank of England should raise rates as a preemptive strike to these upticks in inflation. Higher rates? No way.
What have we heard from central bankers all over the world in recent years? We intend to print (unlimited) money and support bond prices until certain targets are reached, then we will back off. Governments all over the world continue accumulating massive fiscal deficits that are being financed by the central banks. Are we really expected to believe governments are eager to raise borrowing costs and see negative implications for all that spending? I have said time and again on nearly every financial news channel that it is a shame the world does not have a functioning bond market. Policy makers no longer have negative consequences for bad decisions. Who takes the gold, silver, and bronze medals for bad decisions that are not reflected in bond prices? Japan, France, and the United States.
Let’s shift our focus from West to East for a moment to one of my favorite examples of the failures of Keynesian economics — Japan. The Japanese, thanks to the foolishness of Shinzo Abe, have now joined the inflation targeting game. What is the logical series of events to unfold in Japan? I expect to see more money printing, more government debt, a lower and lower target for the yen, a short-term bounce in GDP growth, and a slip back into recession with nothing to show for it than a higher debt to GDP ratio. Rinse and repeat. Now let’s assume the exact same thing happens in Japan that is happening in the UK. What if inflation numbers uptick? “Can’t happen,” say the Krugmans and fellow Keynesians of the world. Well, if it can happen in the UK, then why can’t it happen in Japan? Does anyone actually believe that the Bank of Japan and the big spending central government of Shinzo Abe would back off the throttle if cost push inflation breaks out with little or no GDP growth? If the 2% inflation target is reached in Japan, do I really think Shinzo Abe would pressure the BOJ to close the spigot? Answer — not a chance.
If you would like to get a glimpse of what to expect from central bankers in the coming years, then look no further than the new Bank of England head, Mark Carney. The UK just posted inflation figures of 2.7%. It is important to point out that the inflation target set in the UK is 2%. Shouldn’t the UK be worried about inflation numbers that exceed the target set by the central bank? We have all been fed the economic theory that inflation is a good thing, and with it comes GDP growth. Well, not in the UK. UK GDP numbers just dipped into negative territory again. What is a central banker to do? Where is the usual parade of nonsense the Keynesians have been feeding us? Inflation is not a problem, bond yields are low, by all means, keep printing and spending. Isn’t the data coming out of the UK a complete repudiation of this theory? Should the world start to realize the dangers of ZIRP?
It is my prediction that the goalposts for inflation targeting will keep getting moved further and further away as long as deficits stay high and GDP growth stays low. What should we expect? I think we should expect inflation numbers to keep exceeding the expectations of central bankers around the globe. If you talk to the central bankers of the world, they have been espousing the wonders of inflation targeting to any politician that will listen. Just keep printing money, continue quantitative easing, keep running fiscal deficits and GDP growth is right around the corner. Every politician’s dream, right? Good thing they have a few Nobel Prize winning economists to act as straw men and keep telling them the answer is always borrow more and spend more. It may not be good economics, but it certainly helps reelection efforts.
Is the head of the Bank of England now the hardest job in finance? If you are Mark Carney, this seems to present the ultimate challenge to any central banker. Shouldn’t the inflation numbers in the UK be the canary in the coal mine that endless printing and spending may actually have more negative consequences that the Keynesians think are possible? Have no fear, just change the target. This is exactly what Mark Carney said in a press conference in Davos. Get ready to hear this word a lot…tolerance. Mark Carney said the Bank of England is ready to tolerate higher rates of inflation in order to get to a specific GDP target. Oh, I get it! Inflation is no longer the target or a threat, now GDP growth is the target. Sound familiar? Recall Bernanke’s speech to the Senate when he shifted focus from inflation numbers and is now setting monetary policy based on the unemployment rate? Face it, Mark Carney and every central banker in the world will talk around and make excuses for low interest rates, no matter what. Some economists suggest that the Federal Reserve and the Bank of England should raise rates as a preemptive strike to these upticks in inflation. Higher rates? No way.
What have we heard from central bankers all over the world in recent years? We intend to print (unlimited) money and support bond prices until certain targets are reached, then we will back off. Governments all over the world continue accumulating massive fiscal deficits that are being financed by the central banks. Are we really expected to believe governments are eager to raise borrowing costs and see negative implications for all that spending? I have said time and again on nearly every financial news channel that it is a shame the world does not have a functioning bond market. Policy makers no longer have negative consequences for bad decisions. Who takes the gold, silver, and bronze medals for bad decisions that are not reflected in bond prices? Japan, France, and the United States.
Let’s shift our focus from West to East for a moment to one of my favorite examples of the failures of Keynesian economics — Japan. The Japanese, thanks to the foolishness of Shinzo Abe, have now joined the inflation targeting game. What is the logical series of events to unfold in Japan? I expect to see more money printing, more government debt, a lower and lower target for the yen, a short-term bounce in GDP growth, and a slip back into recession with nothing to show for it than a higher debt to GDP ratio. Rinse and repeat. Now let’s assume the exact same thing happens in Japan that is happening in the UK. What if inflation numbers uptick? “Can’t happen,” say the Krugmans and fellow Keynesians of the world. Well, if it can happen in the UK, then why can’t it happen in Japan? Does anyone actually believe that the Bank of Japan and the big spending central government of Shinzo Abe would back off the throttle if cost push inflation breaks out with little or no GDP growth? If the 2% inflation target is reached in Japan, do I really think Shinzo Abe would pressure the BOJ to close the spigot? Answer — not a chance.
What does this mean for investors? Expect central banks to attempt to keep rates at near zero forever. We are simply past the point of no return. No central banker has the slightest inclination to raise rates because they know the governments can’t pay higher interest rates on debt. As an investor and a trader, you need to be looking for very specific market action. If central banks say they will keep buying bonds, and bonds start breaking, you’d better watch out. I think we are a lot closer to that scenario that some people think. When the bond markets finally fight back, nothing will be safe.
I have witnessed three financial bubbles in my career. The NASDAQ and the housing bubble were child’s play compared to the biggest bubble of all — the government debt bubble. Be cautious as central bankers ignore the negative consequences of their actions.
[Tres been a trader on the floor of the CME since 1996. His scope would be considered Global Macro. Mr. Knippa trades markets all over the world but have been focusing attention recently on the Japanese debt market. It is his opinion that there is a significant chance the Japanese will have a debt crisis and very possibly lose control of the yen in the coming years. Tres is a registered as a CTA and maintains a fund that seeks to profit from what he thinks is the coming pressure on the Japanese government bond market. You can learn more by visiting – Short Japan Debt.]
