Central bank interventions and price discovery
Many people like to say that we have free markets in the world. But do we really?
The Global Financial Crisis in 2008 had a number of long lasting effects and in many senses was never fully resolved. Many of the economic problems of today are the result of the problems of the GFC not being resolved, kicking the can down the road has been easier than resolving some of the root causes of what is going wrong with the economy. One such way of kicking the can down the road is intervening in the markets using things like Quantitative easing.
Price discovery problems
A while ago I came across a rather shocking piece of information.
In 2020 the Nikkei 225 was more than 60% owned by the Bank of Japan.
I was reminded of this fact recently when some announcements were being made that the BoJ was reducing its Nikkei 225 purchases.
This extreme level of intervention raises some very serious questions around the structure of the markets and if we even have free markets at all.
In the Western political climate the assumption that we have free markets often goes by unquestioned. But I think when we see such outlandish intervention into markets, like the Nikkei being mostly owned by the central bank, we should be questioning those assumptions. In Japan's case price discovery has been put on hold indefinitely by this intervention. I think it would be entirely intellectually dishonest to claim otherwise. A lack of good price discovery will come with a number of economic downsides as the overall economic efficiency of an economy will be negatively impacted by a lack of price discovery.
With more countries starting to go in the direction of declining demographics we have the circumstances that occurred in Japan a few decades ago starting to occur elsewhere. What Japan did in response to deflationary demographic trends was to intervene in the markets such that deflationary price movements were to not occur in nominal terms. Many reasons are given for this but the end result is that price discovery has been impaired there for decades. With more interventions into markets being seen in the rest of the world we might start to see these impacts elsewhere too.
Japanese bond market today
Recently there's been a lot of talk about the Bank of Japan trying to keep bond yields under control. I do wonder what price these would have a in a free market?
This post is part 17 of the "MonetaryPolicy" series:
- Finally getting around to publishing some monetary policy articles
- Fast things happen slowly then quickly
- Politics of unproductive debt
- Futures markets lower prices, both in good and bad ways
- Why do stable coins matter
- Why is so much financial advice bullshit
- Bank bail ins
- Where is money created
- Bastiat on legal systems and morality
- Transitory inflation means permanent purchasing power reduction
- Problems with Celsius
- Crypto's Lehman moment
- Crypto crash update May 2022
- The myth of the unbalanced government budget
- The 2006 debasement of NZ coinage
- Demand destruction anecdotes
- Central bank interventions and price discovery *
- Luna a modern case of hyperinflation
- Collateral crisis psychology