On the perfect asset class for open market operations

The main idea: a Central Bank limiting open market operations to the acquisition and issuance of its own shares would suffer few of the issues that plague the current alternatives. 

0. Posts on this blog are ranked in decreasing order of likeability to myself. This entry was originally posted on 06.07.2022, and the current version may have been updated several times from its original form.

1.1 Those of us who prefer monetary matters to be managed by open market operations instead of interest rates are presented with the issue of asset quality.

1.2 Will there be enough assets of good quality to buy to increase monetary supply as much as one may need to? Isn’t buying treasuries just monetizing debt? Even if not, the whole debate around treasuries being money anyway is still live and, worst case scenario, open market operations are just buying money with money.

1.3 Moreover, isn’t buying stocks, market intervention? Buying up insane quantities of mortgage-backed securities sure seemed like bailing out people under cover of monetary policy. And what if even stocks of MBS dry up?

1.4 There’s always foreign exchange, my favourite. But some counties take real offense when you drive their currency up.

1.5 Anyways - and more relevant to today’s issues - what if the time comes to pull the base back and you find that your asset base is of scarce quality. You may find that those MBS can only be sold for cents on the dollar which, besides the obvious losses, would take away all power to adjust the monetary base by open market operations.

1.6 Finally, even if your asset quality has kept, some assets would just cause pandemonium if actually sold. Without going as far as Moldbug does, the BoJ really could crash the whole economy if it decided to sell their assets.

1.7 Enough nonsense, what the solution? What’s the asset class that always keeps, and always initiates such a feedback loop that the more you buy, the higher the value of stock outstanding, and vice versa? Hint.

1.8 Why, the Central Bank’s own stock of course!

1.9 You decide to increase the money supply, so you buy your own stock outstanding, causing  the value of the remaining stock to go up in exact proportion. There’s as much to buy as there was before! A normal firm buying back stock depletes its assets, but for the Central Bank cash is just another liability, so no harm done.

1.10 Or maybe it’s time to fight inflation, just issue more stock to the public, and watch the value outstanding…do nothing, remain exactly the same. Lol.

1.11 So, time for Central Banks to set aside 50% - 1 of their shares for trading, and issue some of these to the public whilst buying up some other (good value) assets. Once is circulating, you’ll be able to run open market operations with reference to your own stock only.

1.12 An issue I can foresee is that this stock could itself be monetised, making the buying and selling anaemic. Not sure how to prevent this except by relying on the variation of the stock-price which is naturally much greater than a bond’s.

1.13 And if you make this stock preferred, i.e. eligible to receive at least a set dividend amount (to be financed by normal profits or just money creation were these fall short) we go back full circle to the system I discussed in section six here.

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