Central banks and respective governments are running out of magical tricks to pull out of the hat.
As already done in America [government takeover of the banking industry (government bailout) and health industry (“Obamacare”)], the next step is the nationalization of industries in other developed nations like we’re seeing now in Japan.
This paves the way for communist rule by stealth, but most people don’t see this so long as the shopping malls are remain open and they can still drink their beer while watching the NFL.
Despite its much longer experience with monetary stimulus, Japan’s economy remains listless and has continuously flirted with recession. In spite of this failure, Japanese leaders, especially Prime Minister Shinzo Abe (and his ally at the Bank of Japan (BoJ), Haruhiko Kuroda), have recently doubled down on all prior bets. This has meant that the Japanese stimulus is now taking on some ominous dimensions that have yet to be seen here in the U.S. In particular, the Bank of Japan is considering using its Quantitative Easing budget to buy large quantities of shares of publicly traded Japanese corporations.So for those who remain in doubt, Japan is telling us where this giant monetary experiment leads to: Debt, stagnation and nationalization of industry. This is not a destination that any of us, with the possible exception of Bernie Sanders, should be happy about.
The gospel that unites central bankers around the world is that the cure for economic contraction is the creation of demand. Traditionally, they believed that this could be accomplished by simply lowering interest rates, which would then spur borrowing, spending and investment. But when that proved insufficient to pull Japan out of its recession in the early 1990s, the concept of Quantitative Easing (QE) was born. By actively entering the bond market through purchases of longer-dated securities, QE was able to lower interest rates across the entire duration spectrum, an outcome that conventional monetary policy could not do.
In 2010 the BoJ began buying positions in Japanese equity Exchange Traded Funds (ETFs). These securities, which track the underlying performance of the broader Japanese stock market, are one step removed from ownership of companies themselves. After five years of the policy, the BoJ now owns more than half the entire nation’s ETF market. But that hasn’t stopped it from expanding the program. In 2014, it tripled its ETF purchases to $3 trillion yen per year ($25 billion), and the program may be tripled again in the near term. In just another example of how QE is a boon to the financial services industry, Japanese investment firms are currently issuing new ETFs just to give the BoJ something to buy.
However, these purchases have not proven to be particularly effective in doing much of anything, except possibly pushing up ETF share prices. But even that has been a mixed blessing. ETFs are supposed to be the cart that is pulled along by stocks (which function as horses). But trying to move the market by buying ETFs creates a whole other level of potential price distortions. It also tends to limit the impact to those holders of financial assets, rather than the broader economy. For this reason the BoJ is now contemplating the more direct action of buying shares in individual Japanese companies.
Such purchases would allow the Japanese government to accumulate sizable voting interests in some of Japan’s biggest companies. Equity ownership would then allow, according to an economist quoted in Bloomberg, the Abe administration to demand that Japanese corporations adhere to the government’s priorities for wage increases and heightened corporate spending. The same economist suggested, this “micro” stimulus provided by government controlled corporations may be more effective in spurring the economy than “macro” purchases of government bonds.
Many American observers will take comfort in their belief that the United States has already concluded its QE experiment and that we are heading in the opposite direction, toward an era of monetary tightening. This greatly misjudges the current situation.
The U.S. economy is slowing remarkably, and despite the continuous assertions by the Fed that rate hikes are likely in the very near future, I believe we are stuck just as firmly in the stimulus trap as Japan. The main difference between the U.S. and Japan is that Japan began this “experiment” from a much stronger economic position. Japan was a creditor nation, with ample domestic savings and large trade surpluses. In contrast, the U.S. started as the world’s largest debtor nation, with minimal savings, and enormous trade deficits. So if Japan, with its superior economic position, could not extricate itself from this trap, what hope does the United States have?
So this is the endgame of QE: Exploding debt, financial distortion, prolonged stagnation, recurring recession, and the eventual government takeover of industry and the economy. This appears to be the preferred alternative of politicians and bankers who simply refuse to let the free markets function the way they are supposed to.
If interest rates were never manipulated by central banks and QE had never been invented, the markets could have purged themselves years ago of the speculative bubbles and mal-investments. Sure we could have had a deeper recession, but it also could have been much shorter, and it could have been followed by a far more robust and sustainable recovery.
Full article: QE’s Creeping Communism (Euro Pacific Capital)