Newbie macroeconomic question to anyone knowledgeable
- Thread starter Pluralsight
- Start date
Well.. if you would've read and thought about post #9 you could've come to the same conclusion and stuck to 1 page....
And you could have gotten that answer everywhere off the net. And I showed you that aside signage whether you look at usdjpy or jpyusd is irrelevant when you compute correlations. You could see the same correlations long before Japanese QE programs began and you could also witness the same breakdowns in correlations before, precisely because causation is lacking. During a flight to safety both instruments correlate but at other times they don't because there are times the US dollar is bought more than the yen for fundamental reasons. That reason can be yield differentials (spot but more often out the curve).
I have often wondered about this. I am not a bond trader. I'm guessing you are, as you seem knowledgeable re bond markets.
Here is what I have wondered about. Is it that Japanese savers can't find the bonds to buy or is it that they don't want them with interest rates so low.
During QE, the Central Bank (Fed or BOJ, as the case may be) is a ready buyer on the secondary market. But I am having trouble understanding why they would want to intentionally crowd out other buyers, particularly other domestic buyers, or is that just an unintended consequence?
Naturally, during contractionary phases the demand for bonds may decline so that if the Treasury embarks on a program of issuing new bonds to fund domestic stimulus spending there may be upward pressure on interest rates, exactly the wrong thing in a recession or deflationary period! With the Central Bank in the secondary market as a ready buyer, the Treasury can count on there being a buyer without having to offer higher yields. In fact, as we've seen, rates can be held very low; yet at the same time, would the Central bank want to crowd competing domestic buyers out of the secondary market? I would think not. Ideally, other buyers are needed so that the price discovery mechanism can function --but I wonder how well it functions during massive QE.
It would seem to me, assuming I am correct in my thinking, that the Central bank would just as soon buy fewer bonds in preference to money from bank deposits being used to purchase Treasures, as the later would also have the net effect of moving idle money into the economy. The later would reduce cash savings and increase savings in the form of bonds, albeit bonds outside direct control of the central bank.
In an attempt to try and make some sense of this, I might be able summarize by saying that to me it would seem the ideal is to have the central bank step in just to the extent needed to absorb the additional bonds sold by the treasury to finance expanded government spending on stimulus, while holding interest rates very low, but no more.
What is your thinking here?
In is my none too humble opinion that a good working knowledge of basic macroeconomic principles is one of the keys to successful trading and investing except perhaps short term trading, where it is not so important, but still helpful.
But I would caution you regarding using anything from "zerohedge" as reliable. You've got to seriously question everything you read there, even if it seems to make sense.
Crowding out of private investors from the govt bond mkt is one of the ways QE operates, in fact. This is the so-called "portfolio channel". Whether this is specifically the stated intention of the CB depends on the program.
As to what you describe as "ideal", this is sorta what people talk about when they talk about "helicopter money". It would, effectively, make the central bank a willing arm of the government, which might not actually be all that great.
You got an answer from Martinghoul, my own very simplistic idea of why this happens would be that the BoJ buys all these government bonds, because no Japanese saver is buying them, because of 0 interest rate and weak economy. So probably it's not they intentionally want to crowd out other investors, there's just too few investors.
This is emphatically not the case. Japanese savers and institutions acting on their behalf have always bought and will continue to buy and own JGBs.
I was just making an assumption, I stand corrected. However wouldn't it be correct to assume, that even if Japanese investors and funds are buying bonds, they are not doing it in a volume that the BoJ would want for its economic stimulation target, and that's why it steps in with massive buying?
Edit: I just thought of something. About the crowding out, could it be that the BoJ would wish for the Japanese to invest their money in something else in the economy which might bring growth, instead of in the bond market?
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I actually didn't know anything about zerohedge, one of my friends showed him to me in twitter and I fell upon this article.