Will 2015 Be "The Big One" For JGB's?

Well, 2014 was not a banner year for JGB bears. But based on the theory that things can only get better, it is looking like 2015 could be the year that the great JGB collapse starts. Stay tuned!

Happy New Year from bondeconomics.com!

For The Japanese MoF, "Debt Service" Does Not Mean "Interest Costs"

There has been a widespread inability to comprehend how the Ministry of Finance ("MoF") uses the term "debt service" in the English translations of its documents. For some unfathomable reason, the MoF includes the rollover of debt issues as part of its "debt service" figure. [Update: This seems to based on the usage of "debt service" as defined for external debt.] As a result, foreign analysts that complain about a high "debt service to revenue" ratio are missing the point. (I would note that I had not seen this error in broker research amongst Japan specialists.)

Happy Holidays!

Happy Holidays to you and yours from bondeconomics.com!

Monetary Impotence And The Triumph Of The Fiscal Theory Of The Price Level

There has been an ongoing debate about how monetary policy interacts with the zero bound on interest rates. Paul Krugman has recently posted an article, "The Simple Analytics of Monetary Impotence (Wonkish)", in which he gives a simplified Dynamic Stochastic General Equilibrium (DSGE) model which he says demonstrates something about monetary policy when at the zero bound. When I look at the model, it appears that there are internal contradictions to his suggested solution. Instead, it appears that the model solution is determined by the Fiscal Theory of the Price Level (FTPL). When it comes to DSGE models, it appears that all roads lead to the FTPL.

Thin December Markets And Fed Statement Madness

The Federal Open Market Committee (FOMC) concluded its two-day meeting, and gave the world a textual disaster. The FOMC continues to point towards rate hikes starting in mid-2015. Although there have been worries in markets that we are headed towards a repeat of 1998, the FOMC is unlikely to buy into those theories (possibly until it is too late).

The 'Widowmaker' And Yen Crash Theories

There has been a recent shift amongst those predicting the collapse of the Japanese economy to switch away from the so-called "widowmaker trade" - short Japanese Government Bonds (JGBs) - towards forecasts of a collapse in the Japanese yen (pictured above). Although this may result from learning a lesson from roughly two decades of failed "JGB collapse" predictions, I suspect that this is the result of learning the wrong things. Being structurally short the yen is hardly the safest trade in the world either.

What Can We Learn From Austrian Economics?

Although they are now thin on the ground within academia, 'Austrian' economists are ubiquitous in the financial markets and across the internet. (They are called Austrian because many of the founders of the school of thought were originally from that country.) Since Austrian economics is a fairly pure 'free markets' doctrine, it is politically attractive to many in finance, which partially explains its appeal. But the question is whether it offers any insights that give an 'edge' to analysts? I recently read "Paper Money Collapse: The Folly of Elastic Money" by Detlev Schlichter, and I am somewhat unconvinced about the amount of insights that are on offer.

Peak Oil And The Cycle

One of the things that are often misunderstood about "Peak Oil" is that it is not a prediction that oil prices will rise up in a straight line. Recent events have definitely thrown cold water on that interpretation. I will make a brief explanation why "Peak Oil" is not proven incorrect by the latest price swoon, and some comments on the economic effect of cheaper oil. I do not know whether the positive or negative effects are greater for the United States, but I think the reaction of the Canadian dollar provides a good read on the situation in Canada.

Perché il mercato dei Titoli di Stato giapponesi ha ignorato il downgrade di Moody’s

In case that made sense to you, I just wanted to let you know that Luca Pezzotta translated my Moody's article into Italian.

Fiscal Policy Links

Some comments on a couple of few good recent articles on fiscal policy.

Why The JGB Market Ignored Moody’s Downgrade

Moody’s rating agency downgraded Japan to A1 from Aa3 on December 1st. The non-reaction by the JGB market was a cause for some amusement; once again stern warnings by ratings agency analysts are essentially being laughed at. This is not complacency on the part of bond market participants, rather it reflects the fact that the rating agencies have no sensible methodology to deal with currency sovereigns.