The Next Crash?

There are two variables of interest to any central bank eying monetary intervention … quantity and price. The Federal Reserve for instance can target the price of credit or its quantity; reflected in its two main policy tools, the Fed funds rate target and quantitative easing/tightening. I’ve long argued that of the two, the former is far more destructive. The former fixes the price of credit, the latter targets quantity. Because price signals form the neural network of a financial system, price fixing obliterates the flow of vital information … it’s the monetary equivalent of sticking a penny in the fuse box … you might get the juice flowing again, but at the risk of burning down the house.

For this reason, so-called “yield curve control” – a euphemism for price fixing not only short term borrowing and lending but also longer maturities – is a dangerous game. The Japanese central bank has been playing Russian roulette with the Japanese government bond market, and now finds itself in the crosshairs. A little noticed Zero Hedge article calls attention to the dark corner the BOJ has boxed itself into:

Bank of Japan Spends A Record $81 Billion To Avert Collapse, But $10 Trillion JGB Market Is Now Completely Broken

The BOJ is doing is level best to make the rest of the world’s central banks look like models of sanity and prudence. Either the yen collapses, the Japanese bond market collapses, or both. The outcome is unknown, but this eastern OK Corral standoff is one worth paying attention to. When the guns go off, the shock will be felt around the world.