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Playing Around With Prices Is a Bad Idea

March 8, 2016

Playing Around With Prices Is a Bad Idea

Call me old fashioned, but I still think prices matter. I vividly recall the first time I studied those simple supply-and-demand graphs as a college freshman, and today, far too many years later, their basic logic remains undeniable. When prices are right, money flows to the most productive endeavors and economies work efficiently. When prices are wrong, crazy things eventually happen, with potentially dire consequences.

That’s why we should be very worried about Japan, where things are getting crazy. On March 1, the Japanese government sold benchmark, 10-year bonds at a negative yield for the first time ever. Think about that for a minute. The investors who bought these bonds not only loaned the Japanese government their money. They’re paying for the privilege of doing so.

Abenomics

Why would any sane person do such a thing? A government with debt equivalent to more than 240 percent of national output — the largest load in the developed world — should surely have to pay investors a tidy sum to convince them to part with their money, not the other way around. But the bond market in Japan has become so distorted that investors believe it’s in their interests to lend money at a cost to themselves. The only explanation is that prices in Japan have gone horribly, horribly awry, and that has made the illogical logical.

The culprit is the Bank of Japan. The entire purpose of its unorthodox stimulus programs — quantitative easing, negative interest rates — is, in effect, to get prices wrong: to press down interest rates below where they would normally go and force banks to lend money in ways they normally wouldn’t. The BOJ, in other words, is trying to alter prices to change the incentive structure in the economy in order to engineer certain results — to increase inflation, encourage investment and spark growth.

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