8 to 12 trillion new Yen per month? Stick a fork in it.

On Dec 30th the Bank of Japan announced that it will start making 8 to 12 trillion new Yen per month.  To get an idea of the scale of this, the Government of Japan averages less than 5 trillion per month in taxes collected.

On Apr 4th 2013 the BOJ announced it would double the monetary base in 2 years.      This came to around 50-70 trillion Yen per year for 2 years.  The monetary base seemed to go up about 0.6% every 10 days.

However, as we started to near the end of the 2 year time period a new policy was  announced on Oct 31st of 80 trillion Yen per year with no end date.   This was 10 to 30 trillion Yen per year more than previously.  The monetary base seemed to go up around 1% every 10 days.

If the Dec 30th rate stays fixed for the whole year, then multiplying by 12 gives a new yearly target of 96 to 144 trillion Yen.  After the initial 2 year period is over, in Apr 2015, instead of stopping it now seems they will be printing about twice as fast.  The monetary base should go up well over 1% every 10 days.

However, one familiar with how these things work, or able to spot a trend, should not expect a fixed 8 to 12 trillion Yen per month for the whole year but instead to see more increases in the rate of Yen printing.  If you did not spot the trend, read the previous 3 paragraphs again.  :-)

No, Japan Cannot Stop Printing Yen

The official story is that Japan is printing like crazy just because they want more inflation and that they will stop when they get to 2% inflation.   The story makes it seems like the government and central bank have things under control.   Like they are making the markets do what they want.   The vast majority of articles I read on the net seem to accept this official story as truth, but it is not true.

With 5 year bonds paying 0.03% interest, the rational investors are getting out of JGBs.   The central bank is probably the only net buyer.  The central bank is making about 80 trillion new Yen per year and buying bonds when total taxes collected are about 50 trillion yen per year.  This is an enormous amount of new money.

They have been increasing the base money supply by around 1% every 10 day reporting period.  You have to be a fool to buy bonds paying 0.03% interest per year in a currency where the base money supply is going up around 1% every 10 days.

If we average over the last 4 months, the Yen is losing around 1% per week compared to the dollar.  You have to be a fool to buy a 5 year bond paying 0.03% interest in a currency losing about 1% per week.

The Japanese government is spending about twice what they get in taxes.    Nobody likes spending cuts and nobody likes tax increases.  Not enough voters or politicians will view this as a problem as long as they can print money for the difference.   You have to be a fool to buy bonds in a country that spending twice what they get in taxes and running the printing presses to cover the difference.

However, if they let interest rates go up in an attempt to attract bond buyers the interest on the debt would be more than the taxes collected.   This makes it clear they are going to have to print money and so the money that you get back when the bond comes due will not be worth as much as the money you bought the bond with.  You would have to be a fool to buy bonds from a government where the interest on their debt was more than their total taxes.

Not only do you have to be a fool to buy JGBs, you have to be a fool to hold them or roll them over.   So not only do they have to print Yen to cover the deficit, but also the bonds coming due.   The government has previously issued bonds more than twice the total GNP and much of it is short term.  As it comes due they have to pay the bond holders.   The only way they can get money to pay previous bonds is by first selling a new bond, since taxes don't even cover spending.  The only way they can sell a new bond is if the central bank prints Yen and buys the bond.   Governments never default on debts in a currency they can print.  They print.

Japan has entered a death spiral where the more people that get out of JGBs the more Yen they have to print but the more Yen they print, the more people get out of JGBs.  This death spiral is a positive feedback loop that once started is very hard to stop.

Recently Krugman got in a limo with Abe and advised him to delay a tax increase and do more money printing (he would really have said "stimulus").  Krugman may soon wish he had not gotten his name attached to the mess that is coming.

Even at 120 Yen per dollar, we are talking trillions of dollars worth of bonds.   Fools with money will hardly make a dent in this.   The central bank will keep being the buyer of only resort.  The central bank must keep printing no matter if it lets interest rates go up or if they keep interest rates down.    They have past the point of no return.  They can not stop at 2% inflation.  Yen printing is out of control.   It is no longer possible to halt it.   

Payment for Additional Hyperinflation Explanations

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I count 49 different explanations for hyperinflation in my collection as of Sat Dec 20th, 2014.

I think it is fun that there are so many different, yet reasonably, ways of thinking about how hyperinflation works.   Given how many I have found so far, I am sure there must be more good explanations out there.  If there are other economic theories with different explanations for hyperinflation I would really like to add them to my collection.

I have decided I will pay $30 by paypal or BitCoin to someone who comments here with a new explanation that in my judgement is different from any in the existing collection but is as good or better than the average explanation so far.   It should fit the experimental evidence for at least many historical hyperinflations.

I am not looking for different reasons that governments spend more than they get in taxes and will not pay for such things.  Saying "supply shock", "war", "corruption", "external debt",  "drop in taxes", "incompetence", "madness", etc does not earn anything.

I am looking for more good theory for the mechanics of how hyperinflation works.  The why, the how, the process of hyperinflation.    See existing explanations for an idea of the type of thing I am looking for and to be sure you are not submitting something already in my collection.

Please forward this offer to anyone you think might be willing and able to submit an explanation.

This offer starts today, Dec 20, 2014.    I can afford at least 10 new explanations and even 5 good explanations every month.  I may reduce this offer for future submissions if they come much faster than that.  If I don't get many I may up the offer and if so the increase in payment will also be retroactively extended to previous winners.    

To submit an explanation just comment below.   The full explanation must be in the comment but it is good to also include a link to a source if you have one.

This is Not Natural

For the last 3 months the Yen is losing on average around 1% per week:

Yet the yield on 2 year Japanese Government Bonds (JGBs) is negative.  You have to pay the government to take your money.   The 5 year yield is 0.05%.   This means after 5 years you get a total of about 0.25% interest.   This is about what the Yen loses in the average day recently.

They are printing at a rate of 80 trillion yen per year and buying mostly JGBs, much more than the total taxes collected.   This has driven up JGB prices far into bubble territory.  These yields are absolutely nuts.  It is not natural.   Only massive central bank money creation and bond buying makes these kinds of numbers possible.   These are not free market rates.  Sane people are not buying JGBs at these yields with the value of the Yen falling fast.   The insane central bank must be the only buyer.

 Bubbles always fail somehow.   Since the Japanese government could not afford rational interest rates on their debt, I expect the central bank to keep interest rates down.   However, to do this they have to make new Yen so fast that they will destroy the currency.