Pro Perspectives 12/20/22

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December 20, 2022
Over the past two weeks, we've had another round of global interest rate hikes, and broadly more rhetoric about the resolve of central banks to do whatever it takes to bring inflation down to their targets.
It's well coordinated.  Global central banks coordinated emergency level policies.  Now they are acting in coordination on the other side (exiting emergency policies).  Even the Bank of Japan has joined in.   
As the last major central bank still at negative rates, and still gobbling up assets (not just domestic, but global assets) with freshly printed yen, the BOJ made a move overnight that may set the table for an exit of ultra-stimulative, emergency level (negative rate) policy.  This, after they've been fighting off a deflationary vortex for the better part of two decades.  Inflation has arrived in Japan, and at three decade highs.  It's time to move (on monetary policy).   
That said, Japan has the most bloated balance sheet — among the biggest sovereign debt burden in the world. The tolerance for higher rates is limited.  But vulnerability to rising debt service costs isn't specific to Japan.  It's universal at this point, with the ballooning of global debt that came with two major global crises over a twelve-year period. 
Everyone is in the same boat.  That's why they are all coordinating policy.  And that policy seems to be, rates up (within the zone of tolerance), and, as you go, fight off shock risks with intervention (coordinated, if need be).  We've seen it in Europe and the UK already.  The ECB and BOE had to, early on in the tightening cycle, step in and manipulate their respective sovereign debt markets, to preserve solvency.
Clearly, it can work, for a while.  But it's unsustainable.  And global austerity isn't a viable solution to resolve the debt problem, at this stage. 
With that, as we've discussed for quite a while in my daily notes, it continues to look like the world's most powerful central banks and governments are moving toward a new currency and debt regime (central bank-backed digital currencies and likely some sort of global debt restructuring).