A Samurai, a Knight, and a Yankee | by Arthur Hayes | Jul, 2022

  1. The central bank caps the yield on one or more government bond maturities.
  2. The central bank stands ready to print money, which expands the money supply, so that it may purchase bonds in a quantity sufficient to reduce yields to below the cap.
  3. If the market believes that the yield should be higher than the YCC cap, then the central bank starts printing money until it either purchases all bonds outstanding, or the market stops demanding a yield above the cap.
  4. This process expands the money supply and thereby weakens the fiat currency, due to the increased supply vs. real goods / services and other currencies.
  1. America is committed to defeating Russia primarily using economic sanctions, which means its allies must refrain from purchasing Russian food and energy.
  2. Japan and the EU must pursue YCC to save their banking and political systems.
  3. The inflation driven by YCC is exacerbated by Russian food and energy sanctions.
  4. To keep their plebes from revolting, Japan and the EU need help from their ally, the US, to reduce their domestic inflation.
  5. Therefore, if America is to do right by her allies, she must find a way to print USD and purchase Japanese and EU bonds, or reduce the divergence in policy rates by starting to cut the Federal Funds rate.
  6. Printing USD to buy Japanese and EU bonds and/or cutting the Federal Funds rate weakens the dollar, and will add trillions worth of liquidity to the financial system. This fiat money will find its way into all-risk assets. PARTY TIME!
  1. The population grows such that more activity is generated, and more taxes are paid.
  2. A new technology or energy source is invented or discovered that dramatically increases the productivity of the current stock of workers. This raises the economic potential of society, and by extension, future tax revenues.
  3. The government defaults by:
  • A) Issuing its own currency to nominally pay back the debt, creating inflation in the process.
  • B) Outright cancelling debt via some sort of jubilee.

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