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How your theory explain Japan? Are they extraordinarily good with money? The interest rate is chosen by the central bank, not by "the market" [1]. A different

How your theory explain Japan? Are they extraordinarily good with money? The interest rate is chosen by the central bank, not by "the market" [1]. A different issue is who try to influence that decision [2]. [1] - http://bilbo.economicoutlook.net/blog/?p=40250 http://bilbo.economicoutlook.net/blog/?p=40250 [2] - http://bilbo.economicoutlook.net/blog/?p=32029 http://bilbo.economicoutlook.net/blog/?p=32029

Arnt 8y ago
That wasn't my phrasing... but isn't Japan's debt mostly bought by Japanese? https://www.statista.com/statistics/756192/japanese-government-bonds-by-type-of-holders/ https://www.statista.com/statistics/756192/japanese-governme... lists foreigners as holding 5%. From the Japanese point of view, Japanese bonds are extraordinary in that they carry no currency risk. (Does the central bank usually set the interest rate? Why do lenders accept that decision?)
- RobertoG 8y ago
  When you say that Japan's debt is mostly bought by Japanese it sounds like it's a particularity of the Japanese people. That's not the case. Who is buying that debt is really the Central Bank of Japan, so, it's really a political decision. Yes, the central bank have a target interest rate and operate to keep it inside their chosen parameters. Lenders accept that decision because they have not other option. From http://bilbo.economicoutlook.net/blog/?p=40937 http://bilbo.economicoutlook.net/blog/?p=40937 : "That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework. The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big [..]"
pas 8y ago
There are multiple interest rates. The FFR (Federal Funds Rate) is the target interest rate for interbank reserve money. (The effective FFR is the average of the actual rates of those transactions between banks.) And there's the interest rate for Treasury bonds (T-bills) determined via bond auctions. Now, usually the Fed uses those bonds as collateral to conduct its open market operations that influence the effective FFR to keep it close to the target FFR, but the Fed does not bid on Treasury bond auctions. Of course if the central bank intervenes and floods the market with cash (and takes assets as collateral, such as bonds) then banks are likely to turn to the Treasury and buy bonds with cash. And the real constraint is of course inflation. The ECB basically does this to keep interest rates low for Eurozone member countries. Anyway, the central bank can do whatever it wants, but if there were too much inflation no one would want to operate a bank there, so eventually there would be no primary market for gov bonds. (That said the usual Bloomberg/FT/Reuters cries are laughable about how bad poor banks have it with near zero rates.)
gammateam 8y ago
the truth is that their theory is totally wrong, and has a whole crowd of people in this thread trying to extrapolate on top of it. these particular bond yields are not a reflection of "how good a country is with money", this is only a discussion in developing nations and their yields are already 8-20% so this whole discussion is moot.

Arnt 8y ago

That wasn't my phrasing... but isn't Japan's debt mostly bought by Japanese? https://www.statista.com/statistics/756192/japanese-government-bonds-by-type-of-holders/ https://www.statista.com/statistics/756192/japanese-governme... lists foreigners as holding 5%. From the Japanese point of view, Japanese bonds are extraordinary in that they carry no currency risk. (Does the central bank usually set the interest rate? Why do lenders accept that decision?)

RobertoG 8y ago
When you say that Japan's debt is mostly bought by Japanese it sounds like it's a particularity of the Japanese people. That's not the case. Who is buying that debt is really the Central Bank of Japan, so, it's really a political decision. Yes, the central bank have a target interest rate and operate to keep it inside their chosen parameters. Lenders accept that decision because they have not other option. From http://bilbo.economicoutlook.net/blog/?p=40937 http://bilbo.economicoutlook.net/blog/?p=40937 : "That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework. The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big [..]"

pas 8y ago

There are multiple interest rates. The FFR (Federal Funds Rate) is the target interest rate for interbank reserve money. (The effective FFR is the average of the actual rates of those transactions between banks.) And there's the interest rate for Treasury bonds (T-bills) determined via bond auctions. Now, usually the Fed uses those bonds as collateral to conduct its open market operations that influence the effective FFR to keep it close to the target FFR, but the Fed does not bid on Treasury bond auctions. Of course if the central bank intervenes and floods the market with cash (and takes assets as collateral, such as bonds) then banks are likely to turn to the Treasury and buy bonds with cash. And the real constraint is of course inflation. The ECB basically does this to keep interest rates low for Eurozone member countries. Anyway, the central bank can do whatever it wants, but if there were too much inflation no one would want to operate a bank there, so eventually there would be no primary market for gov bonds. (That said the usual Bloomberg/FT/Reuters cries are laughable about how bad poor banks have it with near zero rates.)

gammateam 8y ago

the truth is that their theory is totally wrong, and has a whole crowd of people in this thread trying to extrapolate on top of it. these particular bond yields are not a reflection of "how good a country is with money", this is only a discussion in developing nations and their yields are already 8-20% so this whole discussion is moot.