Seems you actually find my explanations easy to understand given the acumen in your post. Consider that you said the trade situation with Japan is like a Mexican standoff. That implies the disbalance has no tangible consequence. If trade disbalances matter, it is never evident why in that in every era the dollar will rise or fall without correlation with the marginal rate of disbalance.
It is necessary to separate the two. Currency relative valuations are determined by a society's yield with respect to another's. This efficiency parameter has nothing to do with trade. Trade is an exchange of goods. The net can be effected by the change in the exchange media during the transaction, but that occurrence is a posteriori to the material transaction. If we buy more from Japan than we sell, then we owe them some goods. We don't owe them some money unless they demand it. We don't have to pay if they demand money because we can just reduce the convertibility of dollar to yen. Devalue the dollar. This happens everyday at the margin at the Forex. Adjustments up and down depending on the anticipated degree of distrust that they will have in our potential to renege on payment.
Meanwhile, back at the ranch, trade and disbalances go on. The effect is buried in the white noise of price deviations on the Forex. One has to remember that the degree of distrust is actually built on the ability to pay, not the intent. If we are furiously inflating, Japan will start distrusting our ability to pay and either demand lots of money, raise prices on goods sold, or call in loans (sell T-Bonds).
If Japan sells T-Bonds en masse and the US is not growing rapidly or is deflating, the sales will not cause T-Bond prices to fall except instantaneously. T-Bonds yields reflect the expectation of future inflation not the short term transient state of markets. Fed funds reflect the short term state of markets including the effect of monetary policy. Fed funds cam be falling in yield while T-Bonds are rising. I believe that is what is going on now. There are growing inflationary pressures as reflected in T-Bond yields, but the FED is pumping through RPs to keep short rates down.
The BOJ senses that we are inflating. They are trying to nudge the dollar over the cliff, but at this point the cliff isn't very steep. Japan recognizes the post World War II frolic is over. They've corraled too much of the world's wealth to persist in this export game. But they're undecided and riding the fence. They fear direct pumping because the effect would be to cause the yen to rise against the dollar. It isn't the implied capital loss they would suffer from T-Bond prices falling since they still get the interest and the principal is a matter of yesterday's efforts, not tomorrow's. Rather Japan fears that their competitive trade position would weaken. They are hung up on this latest form of Mercantilism and don't know how to conduct a balanced economy. They fear the inflation potential of overt pumping. They fear a drop in their competitive position against what they perceive as their true enemies: other Asians. They see China doing to them what they did to us. If that happened the pumping would have the result of structural inflation in Japan especially in light of a growing left wing movement there. The outcome of all this fear is total confusion at every authoritative level in Japan.
The FED has to move against the POTENTIAL for inflation. They can't operate in the old mode. In the past when they got tangible price increases they'd gradually start tightening. The effect was to amplify the sympathetic business cycle vibrations to a point of chaotic breakdown. They can't go there now because guys like me know their cryptic game. They have to knock down rational expectations. They have to knock down the will to inflate. They have to knock down the thought in minds that something can be gotten for nothing. They have to knock down the prospect of wealth. The will to knock presumably exists in the minds of the FED members. If Janet Yellin is yellin' about looking under every rock for signs of inflation, you can't believe her that she will act. She will hesitate. They will hesitate because they would be acting without evidence. They will drag anchor because they think they are scientists. The lag from the drag is where the price of gold shines. |
