Re: Starting Point

["Gary Santos" <evs@xxxxxxxxxxxx>]

> > This is why, I think, their bond market is still intact. It would be
more difficult...< <
> Define 'difficult' in this context. The overnignt rate stays at 0 bid
until the boj votes higher rates.  its not an operational issue, it's a
political issue.<
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Yes, interest rates are under BOJ control. (I already have come around to
seeing this clearly. Thanks to you, Warren.) What I mean by difficult is
that if the Japanese public were not so nationalistic -- I have some Jap
clients whom I asked why they are still in those low interest bonds and not
in higher foreign bonds and they candidly answered that they *must* support
their own. You got to give it to them on this one -- the BOJ would not be
able to find as big a market locally. They would have to find a market
somewhere else and compete with higher rates.


>  for the BOJ to maintain rates so low if the markets did not cooperate,
soft money theory  notwithstanding.<
>> Until the boj votes for a higher rate it won't go up. And long term rates
wont go up until the mkt anticiaptes higher rates from the boj. (and that
anticipation may start happening today!)<<
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Recent Philippine experience is interesting. The weekly auction for 90-day
bills was cancelled twice because the submitted bids were deemed too high by
the Central Bank. "Let them drown in their liquidity," said Edeza the line
person in the CB in the news. I found that funny but right to the point.
There was a meeting called among the banks and the CB to thresh things out
as it would have gotten "out of hand" if this public incident turned into a
war which would attract international attention obviously -- banks drowning
in liquidity. Tests one's theory of private and public choice and rational
expectations, doesn't it? Anyway, rates are inching up now as it turns out
all the CB wanted was a more gradual increase and not 100 basis point jumps.
Inflation is also inching up by the way.




> And, I would think that employment will not necessarily be a sign of
saturation of net financial assets as stagflation is increasingly a credible
scenario.<
> >Hard for it not to be, pretty much by definition.< <
> (see "Full Employment and Price Stability)
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Please elaborate. Definitions are subject to realities. I think were are
going to experience cost push inflation and unemployment will not improve as
there is overcapacity.

> In fact,
> > all countries seem to
> > be in a situation where it will be fiscal suicide to
> > raise interest rates.
>
> Why not leave them a japan-like 0 permanently?
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Because I'm still stuck on the paradigm that interest rates must reflect the
risk in the economy at least on the long term. The future is too full of
uncertainty for a zero interest rate. One has to set aside some money to
answer for bad debts. Otherwise, we would have to keep on recapitalizing the
banking sector. Or, merge it with the central bank.



>
> > And, if inflation does show itself by cost push in
> > defiance to all efforts
> > to contain it, one will just have to wait until the
> > storm passes. Makes one
> > want to buy gold and real assets, huh?
>
> Not until govts monetize it again, or agg demand
> comes back.
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Agree. And, why not since interest rates are so low anyway?