Nonmarketable perpetual bond bleg

James Alexander directed me to a very interesting Bloomberg article:

Ben S. Bernanke, who met Japanese leaders in Tokyo this week, had floated the idea of perpetual bonds during earlier discussions in Washington with one of Prime Minister Shinzo Abe’s key advisers. . . .

He noted that helicopter money — in which the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them — could work as the strongest tool to overcome deflation, according to Honda. Bernanke noted it was an option, he said.

Though Honda said he thought Japan was already engaged in a strategy that involved helicopter money, he wanted to convey the idea to Abe and asked Bernanke to meet with the premier in Japan. While this didn’t happen in the spring, Bernanke joined central bank chief Haruhiko Kuroda over lunch this Monday and on Tuesday he attended a gathering with Abe and key officials, including Koichi Hamada, another influential economic adviser.

Bernanke at the Tuesday meeting said Japan should carry on with Abenomics policies by supplementing monetary policy with fiscal stimulus, according to Hamada. Bernanke told Abe that the BOJ still has instruments to further ease monetary policy, said Yoshihide Suga, Japan’s top government spokesman. The central bank didn’t reveal what Kuroda and Bernanke discussed.

I understand perpetual bonds (aka consols), but I don’t get the “non-marketable” part.  If the Japanese fiscal authorities financed their deficit with marketable consols, and the BOJ bought them in the free market, you’d have an ordinary open market purchase.  It would not be a helicopter drop unless tied to a simultaneous fiscal expansion.  But if tied to fiscal stimulus it would be a helicopter drop even if the bonds were not perpetual.  So is it the “non-marketable” aspect that makes it a helicopter drop?

If these bonds became a large share of the BOJ balance sheet, and if Japan ever exited the liquidity trap and rates rose above zero, then the BOJ might have to sell off the perpetual bonds to prevent hyperinflation.  But you can’t sell “non-marketable” securities—is that the idea?

Bond traders, stock investors and economists have been mulling the possible implications of Bernanke’s visit and the next steps to come in Abenomics. Amid intense speculation about the chances of helicopter money, and the certainty of further fiscal stimulus ordered by the prime minister, Japanese shares have rallied for four consecutive days while the yen has weakened.

Fiscal stimulus makes a currency appreciate, so the recent depreciation is more likely due to the anticipated monetary expansion.

PS.  A few months back Bryan Caplan suggested that governments issue marketable consols as a way of out the liquidity trap.  It’s impossible for the yield on consols to fall to zero:

Step 2: The central bank uses standard open market operations to bid up the price of consols until nominal GDP starts rising at the desired rate.

Notice: With regular bonds, the difference between 1% interest and .1% interest seems trivial.  With consols, it’s massive.  A fall from 1% to .1% multiplies the sale price of a consol by a factor of ten!  There is an even bigger difference between a 1% interest rate and a .01% interest rate.  That multiplies the sale price a hundred-fold.  Can we really imagine that this massive increase in the public’s net worth won’t translate into higher consumption and investment?  And if not .01%, how about .00001%?

The only limit, as far as I can tell, is that the central bank might inadvertently retire its national debt.  When the bond price gets high enough, everyone sells.  But this seems like a remote possibility.

I like this idea even better than the non-marketable approach.  I’m not certain that retiring the entire debt is a “remote” possibility, but then I don’t feel I have good intuition in this area.  If it is a remote possibility, then Bryan’s idea would seem to eliminate the zero bound problem.



35 Responses to “Nonmarketable perpetual bond bleg”

  1. Gravatar of Benjamin Cole Benjamin Cole
    14. July 2016 at 08:05

    I am a fan of QE, I like helicopter drops.

    If the perp-bonds are non-marketable I guess that implies the BoJ prints (digitizes) money, gives it to the national government by buying zero-Iinterest bonds and can never sell the bonds (which would withdraw the new digitized cash from circulation).

    If married to tax cuts, it probably works.

    Is it different than QE+national budget deficits?

    Seems the same to me except for the explicit promise to never sell the bonds

    I guess perp-bonds answer David Beckworth’s call that QE must be explicitly permanent to work.

  2. Gravatar of Brent Buckner Brent Buckner
    14. July 2016 at 08:15

    I think the “non-marketable” bit would make the expansion of the money supply permanent subject to the bond’s interest rate (consider if the interest rate on the perpetual non-marketable government bond were 0 – the BOJ would be exchanging base money in exchange for a ceremonial piece of paper).

  3. Gravatar of Sean Sean
    14. July 2016 at 09:38

    I’m fairly certain his bond math is wrong on price. Though I’d have to dig up my bond math book to figure it out.

    Ok here’s what I’m coming with on the value of these. It depends on what yield the consol is issued at. I assume its 0% in this situation. They are therefore a lot like cash. Essentially a $1 consol with 0% yield is a payment of $1 an infinite number of years from now.

    If you discount that $1 future payment its value today approaches $1 as the effective rate approaches $0. The $1 future payment would go to I believe infinity at any negative rate. At any positive rate I believe its worth $0. A lot like cash. If I have $1 and put it in a drawer never to look at it until a million years from now then at any positive inflation rate it would essentially be worth $0 at that time.

    The math changes significantly if the consols include a year interest rate payment. Then the math turns into a lot like stripped 30 year bonds.

  4. Gravatar of Sean Sean
    14. July 2016 at 09:43

    Ok read his article after posted and he assumed the consols include an interest rate payment so his math is right. A 0% yielding consol that makes yearly interest rate payments would be worth infinity.

    But I think he’s wrong to assume that these particle consols will include a yield. The Jap treasury isn’t going to be making yearly payments to the BOJ. A 0% yield is probably what they would issue and in that case its becomes a helicopter drop because the consols are essentially the same thing as cash.

  5. Gravatar of Randomize Randomize
    14. July 2016 at 09:44

    Brent is correct. The “non-marketable” aspect of the bonds would mean that the money used by the BOJ to purchase them would be a permanent addition to the base as the BOJ would never be able to resell the bonds and take the money back out of the market. As has been discussed in this blog, changes in the money supply work much better if people believe they are permanent.

  6. Gravatar of rayward rayward
    14. July 2016 at 10:05

    Why can’t we use the same technique to fund social security after disbursements exceed tax receipts? At least one Nobel winner (now deceased) has suggested that social security could help overcome the economic problems associated with high levels of inequality (low rates of return on productive capital, slow economic growth, etc.), although what he had in mind was higher social security benefits coupled with higher taxes on high incomes to fund them (which he thought politically possible because seniors vote, and with baby boomers soon to retire in large numbers there will be lots of voters who would support higher benefits). I’m one who believes that “investing” the social security surplus in government bonds is an accounting gimmick (or less charitably, a fraud), that it simply shifts to regressive payroll taxes a larger share of the burden for funding today’s government expenses. Looking not to far in the future, will the trust fund actually sell some of those bonds in the open market in order to fund the deficits in social security, the likely consequence of which in the current economic climate would not be good. Why not jettison the accounting gimmick is simply issue some non-marketable bonds to fund the deficits.

  7. Gravatar of sean sean
    14. July 2016 at 10:44

    Randomize – Agree with you in theory. Though the “non-marketable” bit doesn’t mean they can’t later turned into real bonds. But for the time being it seems permanent.

    Rayward – That would be inflationary for us. We really are not that far from 2% inflation. The point of Japan doing it is to push up inflation. We could hit our inflation target thru much simpler methods.

  8. Gravatar of Rajat Rajat
    14. July 2016 at 13:43

    I agree with Brent and Randomize. Presumably, the greater credibility of the permanence of money injections due to the BoJ’s purchase of such perpetual non-marketable bonds would mean that they will never (need) to make up a large share of the BoJ’s balance sheet? Isn’t this just like the Chuck Norris effect, but where Chuck splits a single wooden plank in everyone’s presence before offering to beat up the whole room?

  9. Gravatar of Gordon Gordon
    14. July 2016 at 14:16

    If you had a fear that inflation was getting out of control with the non-marketable perpetual bonds, would increasing the demand for base money via IOR or increased reserve requirements be sufficient to stem that inflation?

  10. Gravatar of Gary Anderson Gary Anderson
    14. July 2016 at 15:06

    Brent Buckner is absolutely right. I wrote an article today on Talkmarkets about perpetual bonds. I think they are against the law, as helicopter money was against the law. So, the BOJ is just talk, until we see real zero rate perpetual bonds:

  11. Gravatar of ssumner ssumner
    14. July 2016 at 15:48

    Sean, If there is no interest payment on the consols then the article is extremely misleading. It would be cash, not bonds. If that were the case, I’d discount pretty much everything else they said.

    Randomize, You said:

    “As has been discussed in this blog, changes in the money supply work much better if people believe they are permanent.”

    Much better, but unfortunately too well. You could have hyperinflation.

    Rayward, It would be really irresponsible to increase Social Security right now, given the future problems that the program faces.

    Rajat, I don’t think tying their hands on a future monetary base is at all credible. It’s better to add credibility in a more straightforward way, say with level targeting.

    Gordon, Maybe, but not necessarily.

  12. Gravatar of Gary Anderson Gary Anderson
    14. July 2016 at 16:28

    Real helicopter money does make a permanent increase in the money supply, but is not a continual Universal Basic Income. Lonergan says it is done within a window of 12 to 18 months, money given to everyone equally, and that increased base money stays in the money supply but the actual payments to people end.

    Zero interest bonds would be helicopter money, but as I said, it was reported that helicopter money was illegal in Japan, so zero interest perpetual bonds bought by the BOJ from the government surely would be illegal as well.

    Until we see helicopter money, we can’t believe it will come into being. Monetarists are really afraid, all over the world. They just can’t ride the genius of Friedman.

  13. Gravatar of Matthias Goergens Matthias Goergens
    14. July 2016 at 16:37

    The US could increase social security, eg by going to a generous basic income.

    The nice thing about nGDP level targeting is that the decision whether to do so or not could be done purely on classical grounds, ie direct cost / benefit, since the targeting neuters the effect of fiscal policy on GDP (and hence recession / recovery), doesn’t it?

    If the discussion about taxes and government spending can be had on that level, without complicating things by having to think about government spending creating jobs or not, I’d hope for a better quality of public discussion.

    Having said that: I think prevalent taxation systems anywhere in the world cause too much damage to the economy per dollar raised to make this proposal worthwhile. And on the spending side, overhauling public infrastructure is probably a better investment into total quality of life—just by improving the real economy—than increasing social security.

    From a purely real point of view, sensible investing in public infrastructure now should grow the economy by more than it costs; so in the long run, public `consumption’ spending like on basic income does not compete with infrastructure spending. The infrastructure spending will increase the pie.

    Scott, you wrote somewhere that nGDP targeting will make the world safe for laissez faire capitalism (—I assume by making economies behave approximately classical). I hope we get there, and that politics will follow.

    We’ve already seen a movement to (neo)liberal policies from perhaps the 70s to 90s or so. Sound monetary policy might make it possible again, and more thorough and permanently.

  14. Gravatar of Benjamin Cole Benjamin Cole
    14. July 2016 at 16:50

    Rayward–I enjoyed your comment and agree with the sentiments.

    There is one central banker in history, Takahashi Korekiyo, who implemented helicopter money, and that was in Japan in the Great Depression. It was a success.

    Sadly, Korekiyo was assassinated by militarists, who ramped up the helicopter program. That led to inflation, though not hyper-inflation.

  15. Gravatar of Gary Anderson Gary Anderson
    14. July 2016 at 17:03

    Nice info, Benjamin.

    The cat still has monetarists’ tongues when it comes to the problem of massive bond demand as collateral in derivatives markets, and the need for the Fed to keep interest rates low even though it has bad effects on the economy. And this just to preserve the collateral!

    Surely you can shake them into speaking, Benjamin! If you can’t nobody can.

  16. Gravatar of Major.Freedom Major.Freedom
    14. July 2016 at 17:32

    Why is it that these kooky ideas of helicopter drops, somehow all consist of the helicopters above the Treasury only?

    Giving free money to psychopathic power hungry types in government, the very types that Sumner claims to distrust and in many cases dislikes? GOOD IDEA.

    Giving free money to market participants, the very types Sumner claims to trust? BAD IDEA.

    Sumner is no libertarian.

  17. Gravatar of Gary Anderson Gary Anderson
    14. July 2016 at 19:48

    Why is it that these kooky ideas of helicopter drops, somehow all consist of the helicopters above the Treasury only?

    That would not be bad if Japan gave money to day care workers or lower paid workers in society. But it is not as fair as helicopter drops to every citizen equally.

    The longer I am here, the longer I think personal ambition affects some market monetarists. They tout each other for Fed positions, etc. Kind of the little game they play.

    They won’t speak to anything controversial in need of answers. They just don’t want to rock the boat, Major. That is my opinion only. It may not be true in every situation. But it is kind of easy to see through it all, based on what is left unsaid, even more than what is actually said. JMO.

  18. Gravatar of Jerry Brown Jerry Brown
    14. July 2016 at 20:18

    Why would fiscal stimulus make a currency appreciate? I would have thought it could make it depreciate by possibly causing inflation if it caused excess demand at a time when output would not increase. Especially when associated with the helicopter drop scenario where interest rates will not rise as per the central bank conducting the helicopter drop. Or is it that fiscal stimulus at the right time will increase a country’s economy and therefore the Market valuation of its currency?

  19. Gravatar of Jerry Brown Jerry Brown
    14. July 2016 at 20:27

    Gary Anderson, I have never felt that way about the posts from Scott Sumner. Just my opinion also.

  20. Gravatar of Tom Brown Tom Brown
    14. July 2016 at 20:27

    Scott, remember that Brexit video I posted some time back that you liked? The same guy has come out with another than I think you might like. I thought it was pretty good.

  21. Gravatar of Gary Anderson Gary Anderson
    14. July 2016 at 20:54

    “Gary Anderson, I have never felt that way about the posts from Scott Sumner. Just my opinion also.”

    As I said, it is what is not said, than what is said. Scott has had a chance to discuss the new reality, the new normal, if you will, of low interest rates and the massive demand for sovereign bonds the world over. Dimon and Summers have both said that there is a shortage of the bonds. Derivatives, especially interest rate derivatives, use these bonds as collateral. They are like the new gold. Gold bugs can’t understand it, and apparently market monetarists can’t understand it either.

    I wanted answers regarding the relationship of monetarism to this new reality, since monetarism was formulated before the new normal.

    He won’t answer, and he wondered why, now, nobody at the Fed cares about NGDP targeting? I said that it is because the Fed only cares about robust demand for bonds. That is what floats their boat. I was the only one here to give him an answer and he won’t respond.

    So, he needs to become a collateral boy, you know, like Madonna is a material girl. Just kidding about that, but he does need to square his system with this new reality and I am not sure he can.

    If he can I would be the first to applaud. But he doesn’t care. It doesn’t matter to him that bond yield is now controlled by massive bond demand even more than by fear.

  22. Gravatar of bill bill
    15. July 2016 at 04:01

    Derivatives are a means to and end, not an end. Sure Dimon thinks there is a bond shortage for some collateral reasons. But that’s like saying the US housing stock is too small because we want can’t issue all the mortgages we wish to issue.

  23. Gravatar of Brent Buckner Brent Buckner
    15. July 2016 at 04:24

    Prof. Sumner, you wrote: “Rajat, I don’t think tying their hands on a future monetary base is at all credible. It’s better to add credibility in a more straightforward way, say with level targeting.”

    I think the force of law behind perpetual non-marketable instruments would have more credibility than the BOJ announcing that it is adopting level targeting. (In part that may be why you raised the hyperinflation issue with Randomize – because tying the hands of the BOJ by using perpetual non-marketable instruments would be so credible.)

    I think the BOJ could use permanent non-marketable instruments to pursue an NGDP level target. Having the interest rate vary based upon NGDP (level) would be a possible refinement.

  24. Gravatar of James Alexander James Alexander
    15. July 2016 at 04:51

    Jerry Brown
    In an IT regime world, like the one we are in now, fiscal stimulus will be offset by tighter monetary policy leading to currency appreciation. Central banks are trapped.

    Fiscalists have to specify what world they would like to be in instead and then discussion can commence whether it is optimal.

  25. Gravatar of José Romeu Robazzi José Romeu Robazzi
    15. July 2016 at 06:02

    All, consols with zero coupon are basically nothing, therefore this is actually outright debt monetization. The BoJ won’t be able to resell something that has no cash flows attached to it, therefore they should just cancel them imediatelly after purchase.

    I like the idea of selling consols with coupon payments, even if the price is through the roof, just because one can resell them later, and market participants can price them.

    For a change, I agree with Major Freedom, if you want to monetize, buy private assets as well, it will work…

  26. Gravatar of Randomize Randomize
    15. July 2016 at 09:44

    Dr. Sumner,

    In this case, hyperinflation would mean that they missed their target. As long as they were gauging some market-based indicator (like TIPS spreads) when they made their bond purchase, it’s hard to imagine they’d miss that badly.

    On a side note, have we ever defined hyperinflation? Is it a one-time jump (which I would expect from a single purchase of one of these assets) or would it be a long-term trend resulting from a “regime” of asset purchases? The latter seems like it would be pretty easy to avoid with a regime change.

  27. Gravatar of Jerry Brown Jerry Brown
    15. July 2016 at 22:02

    James Alexander,
    Thank you. I can see how the central bank might try to offset a fiscal expansion that became inflationary by raising interest rates. And can somewhat see how the higher interest rates might cause a currency to appreciate. But isn’t the initial fiscal expansion almost by definition bound to depreciate the currency to the extent that it creates more demand for goods and services?
    So I am thinking that the fiscal expansion causes a depreciation first off, that might be counteracted by the central bank if it chose to do so. But why would it do that if it was the one creating the helicopter money in the first place?

  28. Gravatar of James Alexander James Alexander
    16. July 2016 at 03:59

    Jerry Brown
    The market believes that the Fed targets expected inflation. A fiscal expansion will be simultaneously offset by monetary tightening, it’s what the market will expects, so it will happen. There are no steps in this game, it all happens at once.

    If the Fed makes the market understand it is targeting something else, then it will be targeting something else.

  29. Gravatar of ssumner ssumner
    16. July 2016 at 05:59

    Jerry, The standard view is that fiscal deficits increase interest rates which appreciate the currency. If combined with monetary expansion you might get depreciation—but then I’d say the monetary expansion is what did it.

    Brent, I don’t think that “force of law” would be very credible. Laws can and would be changed to prevent hyperinflation.

    Jose, It’s hard to believe Bernanke meant zero interest perpetual bonds. That would be a bizarre proposal.

    Randomize, You said:

    “In this case, hyperinflation would mean that they missed their target. As long as they were gauging some market-based indicator (like TIPS spreads) when they made their bond purchase, it’s hard to imagine they’d miss that badly.”

    You missed the point. If you are trying to tie their hands, then they cannot target NGDP. If they could, then you would have failed to have tied their hands.

  30. Gravatar of ssumner ssumner
    16. July 2016 at 06:33

    Thanks Tom, That was fun.

  31. Gravatar of Jerry Brown Jerry Brown
    16. July 2016 at 06:44

    James Alexander, thank you again for the explanation. But I am definitely from way out on the ‘concrete steppes’ and saying that what the market expects is what will in fact happen , while it may be true, does not satisfy my curiosity. It is too much like saying things happen because God wants them to happen. This might be a good argument if you already believe in God, but it is a bad explanation to those who aren’t sure.

    So if you say there are no steps in this game aren’t you also saying that you just have to believe in the powers of the “Market”?

  32. Gravatar of Jerry Brown Jerry Brown
    16. July 2016 at 08:41

    Professor Sumner, I realize my question was somewhat off the topic you were discussing in the post and I thank you for the reply. I think I understand how the standard view about fiscal deficits raising interest rates works and I think it is correct- if we were talking about lets say, the State of New York.

    If for some reason New York wanted to run a giant deficit funded fiscal expansion it could only do that by borrowing dollars in the market for borrowing dollars. This giant increase in demand for borrowing causes interest rates to rise, which then causes the value of the dollar to rise. But then New York starts spending this giant amount of borrowed dollars on ‘things’, which increases demand for ‘things’, which depreciates the value of the dollar in terms of these ‘things’. So the demand for the money for the fiscal expansion appreciates the currency, but the actual spending of the money in the fiscal expansion depreciates it.

    But the State of New York is not The United States of America. It does not issue its own dollars like the U.S. does. It does not have its own central bank like the U.S. does. New York can’t skip steps in its fiscal expansion the way the federal U.S. government can if it wants to. It seems to me that the U.S. can skip right through the whole part about the borrowing raising interest rates appreciating the currency staircase right to the level of the demand increasing fiscal expansion spending depreciation of dollar staircase if we really want to. So I have doubts about the standard view that deficit funded fiscal expansion at the federal level will cause an appreciation of the currency.

    It’s pretty obvious at this point that I live out on the concrete steppes and that the steps are important to me, because when I miss one (happens often) I tend to fall down and bang my head.

  33. Gravatar of ssumner ssumner
    17. July 2016 at 06:32

    Jerry, Again, I think you need to separate the fiscal and monetary aspects of the plan, and look at their impact separately.

  34. Gravatar of Jerry Brown Jerry Brown
    17. July 2016 at 13:19

    I thought I was separating the fiscal impact from the monetary impact in my N.Y. example. Or at least I was trying to do that. Maybe I don’t know what you mean? I am pretty lost now and quite possibly just wrong, but let me try one more time. Maybe I am misunderstanding what constitutes the fiscal policy aspects and what constitutes monetary policy aspects?

    In my understanding, fiscal policy is most government spending and taxing. Monetary policy would be what the Fed does. Things like creating money, loaning money to banks, setting capital and reserve requirements and other regulations for banks, and maintaining the payment system, but mostly with the idea of targeting the interest rate on risk-free bonds in the hope that this will keep the value of the government’s currency somewhat stable. I used to think they also cared a lot about unemployment, but not sure about where that falls on their list of priorities anymore.

    So in my state of N.Y. example, I kind of assume that New York has no monetary policy because it doesn’t have its own central bank. So therefore I assume that it only has fiscal policies. But I picked New York because I think it is big enough to effect the rest of the nation if it decided to do some kind of giant fiscal expansion (lets say 500 billion dollars to be ridiculous) and might actually have the capability to do it. I mean they could probably sell Central Park for what the entire state of Rhode Island is worth. Maybe half of Connecticut too.

    So for the sake of argument say N.Y. decides to rebuild all its roads and bridges and schools and sewer systems next year and decides they want to borrow that money now. Is the borrowing aspect considered monetary policy? Or would that still be considered an aspect of fiscal policy? Or is only the Feds reaction (if any) to the impact of the borrowing $500 billion considered monetary policy.

    And on the spending side of this $500 billion- is it reasonable to assume it would have an effect on prices for labor and materials and on employment and call all of that a fiscal policy impact?

    So anyways, where am I going wrong? Is it when I assume N.Y. has no monetary policy? Is it my definitions of fiscal and monetary policy?

  35. Gravatar of ssumner ssumner
    18. July 2016 at 13:12

    Jerry, You said:

    “Is the borrowing aspect considered monetary policy? Or would that still be considered an aspect of fiscal policy?”

    Fiscal, not monetary.

    And no one would loan New York the amount of money required to fix all their infrastructure.

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