Bill Mitchell – The last eruption of Mount Fuji was 305 years ago

The Report obviously doesn’t comprehend what it means for a central bank to be the monopoly supplier of bank reserves in this case denominated in Yen.

There was a reference to this capacity in a 2004 paper written by Ben Bernanke, Vincent Reinhart, and Brian Sack – "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment."

The authors examine the future of monetary policy when short-term interest rates, the principle tool of monetary policy get close to zero (as they are now).

They discuss various strategies that a central bank can take to alter the composition of its balance sheet “in order to affect the relative supplies of securities held by the public.”

That is, the amount of bonds held by the non-government sector.

The authors noted that:

Perhaps the most extreme example of a policy keyed to the composition of the central bank’s balance sheet is the announcement of a ceiling on some longer-term yield, below the rate initially prevailing in the market. Such a policy would entail an essentially unlimited commitment to purchase the targeted security at the announced price.

And would completely control longer maturity yields – which means end of scary future a la the neo-liberal economists who seek public attention but cannot tell the same public the truth.

The above authors (Bernanke et al) also state (in a footnote on page 25) that:

In carrying out such a policy, the Fed would need to coordinate with the Treasury, to ensure that Treasury debt issuance policies did not offset the Fed’s actions.

Which means that the two arms of government operate as a consolidated policy sector and target the same aim – maximisation of public purpose.....

The authors also suggest that it is possible that:

… even if large purchases of, say, a long-dated Treasury security were able to affect the yield on that security, the possibility exists that the yield on that security might become “disconnected” from the rest of the term structure and from private rates, thus reducing the economic impact of the policy.

That is possible. The corporate rates which reflect risk as well as inflationary expectations might deviate.

The overall point is that when there are transaction costs and “financial markets are incomplete in important ways”, the central bank can influence “term, risk, and liquidity premiums — and thus overall yields.”

The authors note that historically the strategy has been successful in a number of countries and give examples. Among the examples, they consider the “historical episode” that became known as “Operation Twist”.

I considered the issue of how the central bank can control the bond yield curve at all maturities in this blog – Operation twist – then and now.

So there is never a situation where the bond markets can destroy a nation which has currency sovereignty. Never means NEVER.

Bill Mitchell – billy blog
The last eruption of Mount Fuji was 305 years ago
Bill Mitchell