Graham Summers from GainsPainsCapital writes:
We’ve long maintained that Japan is ground zero for the “QE works vs QE doesn’t work” debate.
The Fed’s economic models, and 99% of the economic models employed by Central Banks in general, believe that monetary easing can bring about an economic recovery. The primary argument for this crowd if QE has thus far failed to produce a recovery is that the QE efforts have not been big enough.
And then there’s Japan. In a nation with GDP of $5.96 trillion, the Bank of Japan has launched a $1.4 trillion QE effort: a monetary move equal to 23% of Japan’s GDP.
To put this into perspective, this would be akin to the US’s Federal Reserve announcing a QE effort of over $3 trillion.
Suffice to say, Japan’s QE most certainly should be considered “enough” by even the most pro-QE supporter. But the very problem is that it does not appear to be having the intended effects.
The following is an article from the Wall Street Journal. I’ve highlighted a few choice items for your review:
At Koeido Co., a 156-year-old sweets maker based in this city in southwest Japan, chairman Shuichi Takeda says he feels the country may finally be coming out of a 20-year funk.
Sales of Koeido’s sweet millet dumplings are holding up. The company is spending around 80 million yen ($800,000) to renovate two shops—a sign of how Japan’s economy is showing signs of life, lifted in part by a flood of easy money from the central bank that has boosted stocks and helped spur growth.
But with future demand unclear, and costs for imported sugar rising, Koeido still isn’t bullish enough to take out bigger loans to replace equipment or expand its business—even though banks are begging it to borrow more.
“The economy doesn’t necessarily get better just because of monetary easing,” says Mr. Takeda. “And you don’t borrow just because rates are low.”…
It is an attempt to literally crowd banks and other investors out of the market and force them to put their money to work in other ways—through loans or investments in real estate, for example—to help stimulate the economy…
“The idea that the Bank of Japan will buy bonds, and then the extra money will start flooding into corporate or retail loans—that’s just a theoretical exercise,’‘ says Chugoku’s Mr. Miyanaga. “Most important is [for the government] to hurry up and produce a concrete growth strategy, which will spur private economic activity.”
I want to point out that the individuals who are expressing basic common sense views about monetary policy and the economy are businesspeople who run actual businesses, NOT academics.
This is what happens when academic monetary theory meets reality: theory proves to be just that theory.
There are some perceived benefits (the markets rally) from the easy money high. But the inevitable hangover is usually intense (see 2000-2001 and 2007-2008).
So stocks rally for now. But eventually this will end. In fact it may come sooner rather than later.
Remember 2008? Everyone said everything was just fine… right up until the Crash hit.
We’re seeing the same warnings in the markets now.