Paper money approaches its logical end-point

If this report is to be believed, Japan is planning to create, in the near future, a zero-coupon perpetual bond.

Value of the Principal to be repaid: zero

Value of the coupons to be paid out over the life of the bond: zero.

The hope is that financial institutions will take up these perpetual bonds and use them as collateral, in place of the diminishing stock of long-dated coupon-paying bonds that they use now and which are in short supply because of the Bank of Japan’s quantitative easing policy.

Why anyone would accept as collateral a piece of paper with absolutely no monetary payments attaching to it is beyond me. You might as well trade ‘Meiji Chocoretto’ wrappers as collateral.

Meiji Chocoretto bars themselves wouldn’t be a good substitute, because the 100-yen worth of chocolate in them has more value than the BoJ’s zero-coupon perpetual bond.

In case you haven’t yet realised: the central bankers in Europe, Japan, China and the United States are in an absolutely desperate position. And they are losing (more, more). Their ammunition – coloured pieces of paper that they get everyone to pretend is money – has succumbed to the Law of Diminishing Returns and is no longer effective in facilitating credit growth. There is no theoretical basis to what they are doing. They are just making it up as they go along, clinging to long-superseded beliefs about how the financial system operates, and hoping that their plans work.

They won’t. This is going to end really, really badly for a lot of people.



About Stebbing Heuer

A person interested in exploring human perception, reasoning, judgement and deciding, and in promoting clear, effective thinking and the making of good decisions.
This entry was posted in Flotsam and Jetsam, Poor reasoning, Strat. Assumptions v. Tac. Indicators. Bookmark the permalink.

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