It is a peculiarity of the present age that a nation may become so accustomed to the sound of its own bells that it forgets entirely the existence of a neighbouring steeple. So it stands with the Federal Reserve of these United States, an institution that commands the devotion of traders, journalists, and the anxious holders of retirement accounts with a fervour I can only describe as theological — and yet, as of this midsummer of 1826 by the reckoning of a more innocent era, or 2026 by the calendar of our present disorder, the institution whose deliberations bear most directly upon those same accounts is convened not in Washington but in Tokyo.
The Bank of Japan has for many years conducted itself as what one might term a patient creditor of last resort to the American sovereign, absorbing with considerable regularity the instruments of public debt that Washington has seen fit to emit in quantities that would have astonished any treasurer of a previous century. Japan's holdings of United States Treasury obligations stand, at present reckoning, among the largest held by any foreign nation — a sum so vast that its patient accumulation has, for decades, assisted the sovereign in borrowing at rates more modest than its fiscal conduct might otherwise have warranted. In my own Wealth of Nations, I observed that the interest of the borrower is always to obtain money at the lowest possible rate; it requires a willing lender of great discipline to make this possible at scale.
That willing lender now shows signs of reconsidering its office. The Bank of Japan, having maintained an extraordinary posture of accommodation — purchasing its own sovereign's debt with a persistence that has suppressed the yield on Japanese instruments to near-nothing for the better part of a generation — has begun, with the measured deliberation of a careful merchant revising an unprofitable ledger, to withdraw that accommodation. As Japanese yields rise toward rates that any sensible investor might regard as worth having, the capital of Japanese institutions finds reason to return home. The demand for American paper slackens accordingly.
The consequences for the American holder of a retirement account are not obscure. When the natural purchaser of Treasury obligations becomes a reluctant one, the price of those obligations must fall until a new buyer appears, or the rate offered rises sufficiently to attract him. Either event costs the sovereign more to borrow, and what costs the sovereign more to borrow passes, by the familiar channels of the public finances, into every corner of the domestic economy. The price of established equities, so large a portion of the modern retirement fund, does not reside in a world separate from the cost of money; it is, in a very precise sense, a calculation that depends upon it.
There is, I confess, a certain instruction in the spectacle of a great commercial nation that has contracted the habit of funding its present consumption upon the forbearance of a foreign creditor, and that now discovers, with some surprise, that the forbearance of a foreign creditor is not a permanent condition of nature. The Theory of Moral Sentiments concerns itself at length with the dangers of inattention — the tendency of men to attend to what is near and visible while the distant cause works its effect unremarked. A central bank meeting in a city twelve time-zones removed is, it appears, sufficiently distant to escape the attention of the multitude, until it is not.
The prudent steward of household savings would do well, I submit, to acquire at least a passing familiarity with the deliberations of that eastern counting-house. The bell has been ringing for some time.