Sep

16

 This is the perfect time for Palindrome to recreate his "breaking the Bank of England" feat in reverse by buying the yen and breaking the Bank of Japan. He will probably need 100 times more capital, but he seems to have a few more friends in high places so this shouldn't be a problem. Palindromic code name for the operation? "BOJ Soros Job".

Anatoly Veltman writes:

How can a sovereign Central Bank ever be defeated in their resolve to keep their own currency from further appreciation? My (maybe simplistic) argument: what can prevent it from infinitely supplying its own currency to market gluttons?

Current important situations: what will hamper BOJ's and SNB's efforts to halt the rise of the Yen and Swiss Franc respectively? Future academic study scenarios: if Bank of China were to attempt to reign in renminbi– what would all relevant parties do, in what sequence and to what degree (please save moral suasion part, I'd like to follow the actual hard/soft payment process); what could/would Australia do to halt their currency (in case of ever-rising natural resource prices)?

Rocky Humbert agrees:

Anatoly, EXACTLY! A country with a Fiat currency and resolve has the ability to sell UNLIMITED amounts of its currency using so-called "unsterilized intervention." Or, as Chairman Bernanke explained it in 2002/2003, there is "something called a printing press." However, the opposite statement is not correct– i.e. a country with a fiat currency does not have the ability to purchase/support its currency ad infinitum. That's why Mr. Rogan's point is wrong– the Bank of England's attempt to support the Pound is not analogous to the BOJ's attempt to weaken the Yen.

I've frequently wondered why the MOF/BOJ haven't done this over the years. Other than morality and sound money principles, my best answer is that the bulk of their debt is held by Japanese. And the unlimited printing of a currency will (eventually) harm the (domestic) Japanese debt holders. 

Alex Forshaw adds:

FX intervention has a permanently distortive effect on domestic prices in the immediate term, to the extent that it is deployed in domestic positive-velocity assets (eg domestic bonds)FX intervention has a permanently distortive effect on global prices to the extent that it is deployed in foreign positive-velocity assets (eg China shorting its own currency to buy USTs)… which over time filters into domestic prices if the intervention is sustained for long enough b/c of impact to raw materials prices that filters through the chain.

Stefan Jovanovich comments:

What a few innocent skeptics wondered in 1910 is the question that a century of higher-minded thinking still cannot answer: why must the central premise of monetary authority be that all legal tender prices clear simultaneously throughout the world? Wouldn't that result in (1) the abandonment of domestic gold exchange rights of U.S. citizens and those foolish enough to put their faith in the U.S. dollar and (2) a banking theocracy? The Swiss are discovering the dubious charms of bi-metallism, but they are asking the right questions. 


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