American Consequences - June 2020

Mosler – the man who didn’t book a single loss for 15 years – has said he wouldn’t have made any money if he traded the markets using mainstream economics principles. Back then, 10-year Japanese government bonds (“JGBs”) yielded around 2%. Given Japan’s “unsustainable” debt levels, many global macro hedge-fund managers doubted the low yields would last. They believed that Japan’s debt was growing riskier, and the specter of inflation loomed. So they shorted JGBs, looking to profit from rising rates. However, the trade became known as the “widow maker.” The inexorable decline in rates has crushed anyone betting against the trend, which has continued despite an ever- growing debt load. The International Monetary Fund (“IMF”) estimates that Japan’s government debt-to- GDP will approach 250% this year. It’s an astounding figure that’s by far the highest debt-to-GDP of any developed country in the world. (By comparison, the IMF projects a U.S. debt-to-GDP ratio of around 130% at the end of the year.) The Bank of Japan – Japan’s central bank – has also bought vast quantities of JGBs through quantitative easing (“QE”). Conventional wisdom holds that Japan’s government has long been bankrupt and is “monetizing” its debt. This should have caused inflation to rise, the Japanese yen to collapse, and rates to skyrocket.

Working on a “rates” desk, Mosler studied the actions of the Federal Reserve and other central banks around the world. He developed a deep understanding of the mechanics of monetary policy, which is basically the process by which central banks control short-term interest rates. After leaving Bankers Trust, Mosler applied his insights at III. And then, in the mid- 1990s, Mosler sought to formalize his principles into a monetary theory. In 1994, he met with Bill Mitchell, an economics professor at the University of Newcastle in Australia. Mitchell was one of the only economists in the world who shared Mosler’s views of how the monetary system worked. Drawing upon the work of other famous economists – such as Abba Lerner and John Maynard Keynes – Mosler and Mitchell came up with the framework known as MMT. It may have been unorthodox, but MMT was a better model than conventional macroeconomics. Mosler – the man who didn’t book a single loss for 15 years – has said he wouldn’t have made any money if he traded the markets using mainstream economics principles.

AVOIDING THE ‘WIDOW MAKER’

In the mid-1990s, Japan’s government debt surpassed the size of its annual gross domestic product (“GDP”). And there was no end in sight for the spiraling debt load as the country started running persistently large budget deficits.

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