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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman.
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  • My Advice To The New Head Of The Bank Of Japan 3 comments
    Apr 6, 2013 12:07 AM

    "Haruhiko Kuroda is kicking off his term running the Bank of Japan today, announcing plans to double the Japanese monetary base in order to hit Shinzo Abe's two percent inflation target.

    ---Matthew Yglesias, Slate: "BOJ's Kuroda Vows To Use 'Every Means Available' To Fight Deflation", April 4, 2013

    Well, first of all, when the PM made his big inflationary announcement, I advised readers not to expect much. That is because the Western media don't understand that the elected Japanese cabinet is less powerful than the unelected Japanese bureaucracy (the "Mandarins"). If you have watched the old BBC series "Yes, Minister", you will understand, but Japan is actually worse than Britain on this score. Remember that even the divine Emperor was cowed by his cabinet (i.e., his Army ministers) on a number of occasions between 1931 and 1945. Under the pathetic MacArthur Constitution, with the Emperor stripped of his power, no one is in charge; certainly not the elected government. (Have you ever noticed how fast newly-elected Japanese PMs become "discredited" or "unpopular" in the media? That isn't personal--it's institutional. It's to keep them weak. And they routinely do the same thing to the Emperor and his family.)

    Abe was able to install a loyal ally, Mr. Kuroda, as head of the BoJ, no mean achievement. And Mr. Kuroda has said almost all the right things (see above). But let's remember that when it comes to reflationary monetary policy, the whole point is to target outcomes (inflation), not inputs (the monetary base). Doubling the monetary base sounds like a big deal, until you look at modern monetary history. It doesn't matter how much you grow the monetary base; what matters is an unconditional pledge to create inflation at all costs. The goal is inflation, not a bigger BoJ balance sheet. Why is it that only anglosaxon central bankers can understand this point?

    Probably the greatest central banker in world history (albeit a Dutchman) was FDR. When the monetary policy experts told him that there was absolutely nothing he could do to raise farm prices, he ignored them with his Dutchess County noblesse. He decided, on the advice of a collection of land-grant college quacks, to leave the gold standard, and to raise the price of gold until farm prices rose as he desired. Each day he would set a new, higher, gold price. And lo and behold, the 1929-33 deflation reversed, and farm prices started to rise and farm foreclosures began to fall. Unemployment went down and the greatest bull market in history ensued. If you had bought stock on the day of FDR's inauguration, you would have doubled, and then tripled your money. The wonders of a successful inflation policy. (Note to Mario Draghi: is this too hard to understand?)

    Here is all that Kuroda-san has to do. First of all, stop talking about the size of your balance sheet; it's irrelevant. Just buy gold with yen until the price of gold starts to rise as desired. Once Mr. Kuroda starts to raise the price of gold, his nominal anchor, he will get inflation. It doesn't matter how big his balance sheet gets, or how much yen M2 grows. Going forward, the only policy objective of the BoJ should be to raise the price of gold.

    This is not gai-jin hocus-pocus: the BoJ did this in the thirties, as Bernanke has reminded them.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (3)
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  • Mustecky
    , contributor
    Comments (26) | Send Message
    I think I understand your point, that the target of Japans monetary easing is a higher inflation rate, not a specific monetary base size directly. And I agree that for the present situation in Japan that is a good strategy.


    What confuses me, is your recommendation that they buy gold!
    In the 1930s most currencies were on a gold standard. Since the Yen is not on a gold standard today, why does that make sense?


    6 Apr 2013, 11:50 AM Reply Like
  • Christopher Mahoney
    , contributor
    Comments (1314) | Send Message
    Author’s reply » The BoJ can't raise the price of JGBs any more than they already have: JGBs are extremely expensive. They could target a higher dollar price, but this would run afoul of Congress. Gold is a traditional instrument of monetary policy, and raising its price in yen is a simple and uncontroversial technique for creating inflation. Gold is a currency which is not issued by a government, and is therefore politically neutral.
    7 Apr 2013, 11:45 AM Reply Like
  • Mustecky
    , contributor
    Comments (26) | Send Message
    OK, That makes sense. Thanks. Rick
    9 Apr 2013, 10:40 AM Reply Like
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