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“Fed Watch” is a macro podcast for bitcoiners. In each episode we discuss current events in macro from around the world with an emphasis on central banks and currencies.
In this episode, Christian Carrolls and I cover developments in Japan with respect to Yield Curve Control (YCC); In the US, with respect to growth and inflation forecasts; And in Europe, in connection with the concern about fragmentation. At the end of the episode, we celebrate the 100th episode of “Fade Watch” by reviewing some of the guests and calls we’ve made in the show’s history.
big trouble in japan
The economic woes in Japan are legendary at the moment. They have suffered from several lost decades of low growth and low inflation, addressed by some of economics’ best experts (perhaps that was the mistake), by the best monetary policy instruments of the day. None of this has worked, but let’s take a minute to review how we got here.
Japan entered a recession/depression after their huge wealth bubble burst in 1991. Since that time, Japanese economic growth has averaged about 1% per year, with low unemployment and very little mobility. This is not negative gross domestic product (GDP) growth, but it is minimal to keep the economic pulse.
To address these issues, Japan became the first major central bank to introduce quantitative easing (QE) in 2001. This is where the central bank, the Bank of Japan (BOJ), will buy government securities from banks in an attempt to correct any balances. Sheet problems, clearing the way for those banks to lend (aka print money).
That first attempt at Qi failed miserably, and in fact, growth fell from 1.1% to 1%. The Japanese were reassured by Western economists such as Paul Krugman, who claimed that the BOJ failed because it “didn’t reliably deliver what it promised.”[d] To be irresponsible.” They should turn them into inflationary concern by shocking the inflation/growth expectations of the people.
The second round of monetary policy in 2013 was dubbed “QQE” (quantitative and qualitative easing). In this strategy, the BOJ would create “shock and astonishment” at their recklessness to buy not only government securities, but also other assets such as exchange-traded funds (ETFs) on the Tokyo Stock Exchange. Of course, this also failed.
The third round was added in 2016 to the YCC, where the BOJ would increase the yield on 10-year Japanese government bonds (JGBs) to the extent of plus or minus 10 basis points. In 2018, that limit was raised to plus or minus 20 basis points, and in 2021 to plus or minus 25 basis points, where we are today.
YCC Fight
As the world now deals with a massive price hike triggered by an economic storm, the government bond yield curve in Japan is pushing upward, testing the BoJ’s resolve. So far, the roof has been torn down several times, but it is not completely broken.
The BOJ now owns more than 50% of all government bonds, on top of the vast majority of ETFs on their stock exchange. At this rate, the entire Japanese economy would soon be owned by the BOJ.
The yen is also falling against the US dollar. Below is the exchange rate for how many yen in one US dollar.
Federal Reserve DSGE Forecast
Federal Reserve Chairman Jerome Powell went before Congress this week and said the US recession was not his “base case” despite nearly all economic indicators crashing in the past month.
Here, we take a look at the Fed’s own Dynamic Stochastic Normal Equilibrium (DSGE) model.
The New York Fed DSGE model has been used to forecast the economy since 2011, and its forecasts have been made public continuously since 2014.
The current version of the New York Fed DSGE model is a closed economy, representative agent, rational expectation model (though we deviate from rational expectations in modeling the impact of recent policy changes on the economy, such as average inflation targeting). The model is of medium scale, in that it includes many aggregate variables such as consumption and investment, but it is not as detailed as other, larger models.
As you can see below, the model is predicting negative GDP from Q4 of 2022 to Q4, as well as 2023 GDP. It tests my own guess and expectation that the US will experience a long but modest recession, while the rest of the world will experience a deep recession.
In the chart below, I point to the benchmark of low growth and low inflation in the aftermath of the global financial crisis (GFC), a criterion shared by Japan.
European anti-fission cracks
A week after “Fed Watch” viewers, listeners and readers of the European Central Bank (ECB) President Christine Lagarde showed dismay at repeated anti-fission questions, EU heavyweight, Dutch Prime Minister Mark Rutte, Come like a bull. China shop.
I read parts of a Bloomberg article where Rutte claims that it is up to Italy, not the ECB, to stop the credit spread.
What’s the bigger concern about fragmentation anyway? The European Monetary Union (EMU, aka Eurozone) is a monetary union without a financial union. ECB policy should operate with different amounts of indebtedness in different countries. This means that ECB policy on interest rates will affect each country within the union differently, and more indebted countries such as Italy, Greece and Spain will bear the greater burden of rising rates.
The worry is that these credit spreads will lead to another European Debt Crisis 2.0 and perhaps even a political fracture. The issue could force countries to leave the Eurozone or the European Union.
A look at 100 episodes
The final part of this episode was spent looking at some of the predictions we made and the great calls. However, it didn’t go according to my plan, and we got lost in the weeds. Overall, we were able to highlight the success of our unique theories put forth by this show in the bitcoin space:
- a strong dollar
- Bitcoin and USD Stablecoin Dominance
- America’s Relative Decentralization Makes the Country Better for Bitcoin
- Recession on China and Europe
We also highlight some of the specific calls that have been spotted, which you will need to listen to the episode to hear.
Despite being unpopular among bitcoiners, I wanted to highlight these things to show the success of my conflicting views. The show is an important voice in the bitcoin scene as we are stirring up and ridiculing narratives to discover the truth of the global monetary system.
Charts for this episode can be viewed here.
It does for this week. Thanks to the viewers and listeners. If you enjoy this content, please subscribe, review and share!
This is a guest post by Ansel Lindner. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.