The Road Never Travelled

Once again, another year has passed and we are now inundated with the end of year projections as to what will happen in 2014. We generally find these projections without merit, but we have a particular distaste for such guesstimates given the self-reinforcing behavior that currently overwhelms todays capital markets. Early on in these various monetary science experiments market participants looked at the potential mismatch between objectives and the measures taken. Today, however, it would appear that this analysis has fallen by the wayside along with any concern over the possible unintended consequences.  There is no longer talk of whether we should be going down this path, but rather what will be the harm if we shift to another path. Forget the fact that the current path may take us in directions or places we never imagined. Many scoff at comparisons between today’s Central Bank actions and those of the Central Bank of Japan during the 90s and beyond. However, recent comments by the BOJ Governor should validate those comparisons. In a recent FT interview, the BOJ Governor remarked that they were the first to enact quantitative easing back in 2001, and even though it has essentially accomplished nothing, they continue to push forward with a program to double (at least) its holdings of JGBs. The recent actions by the BOJ are driven by a desire to break the deflationary spiral that has existed in Japan for over a decade, the question however becomes at what price. If Inflation comes purely as a result of a rapidly depreciating currency, and does not necessarily translate into wage growth then the “benefits” of inflation for the population in general is moot. More importantly, the BOJ Governor also does not rule out using other more radical tools should the current ones prove, yet again, unsuccessful. What also stands out from this interview is the  disconnect between what is happening on the monetary side and what is occurring on the fiscal side. The Governor acknowledges the potential for a sharp rise in rates as a result of their current strategy, however he soft peddles the effect such a rise would have on Government finances. The BOJ has travelled down this QE path for years, but rather than shifting to another possibly more advantageous side road, they have instead chosen to simply proceed at a higher rate of speed. If the definition of insanity is doing the same thing over and over and expecting different results, choose rational thought: Buy Stuff.