Advertising in the modern age is an extremely difficult task with all the clutter and noise. If you hadn’t noticed, it leaves many products experimenting with packaging in order to sell “new and improved.” The “easy pour spout”, for instance, became commonplace as if the old manner of detergent weren’t easy or comfortable to begin with. I seriously doubt that any single person ever failed to buy a product because they thought to themselves that it was difficult to get out. That was never the point, of course, as all the company wants to accomplish is to advertise “new and improved” regardless of whether you think it is either of those words.
There is more than a little condescension in the tactic, as the advertisers and producers know that people aren’t fooled, rather the purpose is to subconsciously interject the idea. My personal favorite in the genre is the “wide mouth beer can.”
Coors Light launches the industry’s first vented wide-mouth can. The built-in vent and a new 8-percent wider opening combine to produce a smoother pour and reduce the vacuum, or “glugging,” effect.
No beer drinker anywhere ever cursed the “glugging” effect, vowing never to buy another Coors Light until the problem had been sufficiently alleviated. Nor had any Bud Light drinkers decided they would switch to Coors’ version solely because of the reduced vacuum. It is absurd, but some very smart people think it effective regardless of that quotient.
The question is whether the same packaging farcicality is portable from wide mouth beer cans to monetary policy. I’m not joking. If you go to the Bank of Japan’s website, they have prepared a FAQ on what most are calling NIRP but what the Bank has itself dubbed, “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate.” I was a little disappointed that the header for the piece didn’t vibrantly disclaim “new and improved monetary policy” with an “easy pour bank reserve format.” For a smoother monetary transition to portfolio effects and credit expansion, the BoJ has provided for an 8-percent wider virtual currency opening, creating a smoother financial flow to reduce any residual liquidity vacuum from the regular old QQE.
It truly is just that inane and bizarre. NIRP isn’t even NIRP, at least in any straightforward sense. Instead, the BoJ is using their equivalent of the IOER in order to enforce negative “reserve” rates – similar also to the ECB’s deposit account. But the new negative policy will only be applied in a three-tiered matrix. The first is the “Basic Balance” where a +0.1% rate will be paid on all existing “reserve” balances. A rate of 0.0% will be applied to “Macro Add-on Balances” that are reserve balances either required or byproducts of other monetary programs. The last, the only NIRP, is the “Policy-Rate Balance” that will capture any new reserves placed with BoJ due or not to more and more QQE.
It’s another tacit admission that QQE didn’t work; as the “Basic Balances” are those that QQE (and the prior nine or ten QE’s) created that ended up doing exactly nothing. The entire point of QQE (or any QE) was that it would substitute riskless securities with bank reserves so that banks will make the choice to further convert those new bank reserves into something more economically useful – loans in particular. Nowhere QE has been tried has this been accomplished. Even in the US, lending has been sparse and the great corporate bubble effected mostly by the non-banking bond market (especially at the start).
Deciding that the Bank could not punish its banking network for its own past futility, BoJ will only apply pressure to its future futility. The reason is that banks have liquidity preferences under wholesale finance terms that are overriding whatever spillover monetary policy intends. This is not theoretical; it is easily observed everywhere negative rates are being used, especially Europe. The choice in Europe isn’t between a negative deposit rate on idle “reserves” and lending (or buying some ABS), it is between the negative deposit account and interbank “money” at different terms. If the ECB “pays” -30 bps for idle reserves, a bank can then still forgo lending and move to Eonia at “only” -17 bps; or maybe 3-month Euribor at just -15 bps.
The point is that all the ECB has accomplished in terms of mobilizing “reserves” is to change the packaging of idleness. As we see throughout European money markets, more and more longer-dated (for money markets) tenors are sinking as that is exactly the choices being made for all this “liquidity.” And thus it becomes non-liquid liquidity as the maturities only shift.
The whole affair, Europe, Japan and, as Janet Yellen is learning the hard way, the US is an experimental result in the negative against QE in any case. As I wrote last week when the BoJ first presented its stupidity:
This is hysteresis, an unnecessarily complicated word that essentially means an economy cannot move without external strength of monetary policy; you have to unleash enough force to get even small rock to roll down an incline. The bigger the rock, the more force necessary to get it rolling. That was the point of the “Q” in QE. The term itself was meant to convey the supposedly objective mathematics at work, harnessed by experts displaying immense technical knowledge. That economists working in central banks could precisely measure and determine the size of the rock and the degree of the slope so that they could exactly, quantitatively calculate the exact force necessary to start the forward rolling progress.
If you now need to repackage QQE with some additional inane features, the first “Q” was never legitimate to begin with. And with Europe and elsewhere proving inarguably the indolence of bank “reserves” as QE or QQE’s byproduct, there was never any “E” either. So the Japanese are supplementing their QE with NIRP while the Europeans last year supplemented NIRP with QE. One is a “big mouth” can, the other the “wide mouth” can; and neither holds any beer.
But that doesn’t mean the system is neutral for the experiment; quite the contrary. Japan is as Europe, becoming flooded with negative bond rates and all sorts of similar distortions in basic credit and finance. For its part, the BoJ in its FAQ that I referenced above won’t even answer the basic question as to whether it will buy JGB’s at negative rates. They avoid it entirely with pabulum:
Under “QQE with a Negative Interest Rate,” the Bank will pursue monetary easing by making full use of possible measures in terms of three dimensions, combining quantity, quality, and interest rate. It will lower the short end of the yield curve by slashing its deposit rate on current accounts into negative territory and will exert further downward pressure on interest rates across the entire yield curve, in combination with large-scale purchases of JGBs.
Why do they ask themselves a question that they ultimately refuse to answer? Because they know it is a pressing topic for those outside this disaster trying to make sense of which planet this is. And it only gets weirder. The Ministry of Finance canceled for the first time ever plans to auction JGB 10s through Japan Post Bank to retail and non-financial investors because the “winning” bids will undoubtedly come in (from financials) more than a few basis points below zero. There will still be variable rate tenders available, but that only reinforces the indiscretion.
Further, Nikkei reports that several companies are considering (or already have) postponing their bond offerings. You would think that companies would be rushing to sell as much debt as possible in such a negative environment, but as the government auction suggests there might not be much non-financial appetite for paying for the “privilege” of holding a risky debt security (what, then, does the interest rate actually mean? It wouldn’t be what basic finance demands, that is for sure). Further, companies would also have the unappealing choice of what to do with the proceeds of those debt sales, negative or not.
Why issue 2- or 3-year paper to take advantage of a slightly negative rate if you then have to further pay for the “license” of storing said cash/liquidity until it is actually needed or used. In other words, if you can float bonds at -5 bps in “yield” and get paid to borrow but then are faced with -10 bps in the interim and have to pay for holding cash, why bother? If you think this is some nutcase, sci-fi dystopian fantasy, consider that only three days after suggesting and implementing tiered-NIRP that the BoJ is already hinting at more! This is not investing, credit, money, finance, etc., it is pure lunacy. No central bank can command the economy to spring to some regression-defined level using all the monetary tactics of the asylum. The entire financial system is on the verge of turning inside out, but nobody will tell the central bankers to stop the madness.
When these global central banks first experimented with these kinds of measures, they seemed plausible in that basic sense of easing as if there were a “printing press.” What we see now far more clearly is that there is no such thing and that there never was under the wholesale format; that banking and monetary plumbing is far more dense, compact and complex than ever perceived by economists who still think there is a printing press (and that all they need to do is threaten to use it). That’s what these nefarious monetary schemes amount to, repackaging attempts that will play upon expectations first – another mathematical quantification that has befouled the whole suite of monetary policy.
“Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate” is the big-mouth can of monetary policy. But while repackaging-type advertising is ultimately harmless, in the monetary version it is as if the BoJ determined the only way it could achieve the 8% wider mouth was if the entire can were instead made of pure lead flecked with uranium and cyanide. Why won’t the economy grow?