Quantitative easing, or how to blow up the economy
The dangers of handing the power to print money to central bankers should be obvious. In the present fiat currency regime, under which paper money is printed without any backing from hard assets such as gold, central bankers can easily get carried away by
And when they do, they print money like there’s no tomorrow. But central bankers like to blame their money printing on the politicians, who seek to please their electorate with welfare benefits and populist spending by running government deficits year in, year out. When the economic cycle takes a turn for the worse, and the fiscal position begins to falter, the politicians turn to the central bankers to crank up the printer. In this era of digital money, central bankers can print in the trillions without any reservations.
Japan’s announcement last Friday that it was expanding its quantitative easing (QE) programme from ¥60 trillion-¥70 trillion to ¥80 trillion is another display of sheer arrogance, if not madness. The measure has propped up the stock market. But the yen has tumbled to a seven-year low. The measure is a desperate attempt by Japan to use its monetary bazooka to blow the economy out of deflation. But it also means that the Bank of Japan will monetise all Japanese government bonds, which will be issued at ¥10 trillion a month. With the BoJ nationalising the government bond market, what are the implications for bond prices and the interest rate structure? At the same time, Japan’s Government Pension Investment Fund – the world’s biggest at $1.3 trillion – has moved to increase its asset allocation to equity from 12 per cent to 25 per cent of its portfolio. With government debt running at 240 per cent of gross domestic product, Japan is in no-man’s land now. Aren’t the financial bubbles big enough already? Will they pump them up till they reach the moon? Japan has been experimenting with QE for many years, and it has failed to put the economy back on track. The reason QE isn’t working is that it doesn’t address the structural problem of indebtedness and eroding competitiveness. So why do the Japanese keep on repeating the same mistake?
Japan’s decision to expand its QE follows the US Federal Reserve’s announcing the end to its QE last month. After six years of QE, the Fed has increased its balance sheet by $3.5 trillion to $4.5 trillion. The Fed’s QE might have helped shore up asset prices, but it has not solved the fundamental problem of overwhelming indebtedness. The Fed can’t throw good money after bad. The end of QE turns off the abundant flow of liquidity that was massaging the stock market. But don’t worry: Japan has come to the rescue with its QE to keep the game of musical chairs going. And if the BoJ were to run out of ammunition, the European Central Bank will hit the trigger on its printing press. And if that’s not enough, the Bank of England, which ended its QE programme last July having printed 375 billion pounds, might offer another helping hand. If enough is never enough, waiting in reserve are the Bank of Canada and the Reserve Bank of Australia.
If money printing, whose effect is to debase the currency, was a genuine solution for economic fundamentals then every country would be doing it. History shows that nations that have printed money without restraint or discipline have ended up in economic disaster, from the Weimar Republic to Zimbabwe. So where are we heading? You can bet that the industrial world, which is facing a deflationary spiral now, will hit inflation and then hyperinflation down the road if they let central bankers continue to churn money out of thin air to save the banks, boost stock prices and indirectly finance the government budget deficits.
