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Thursday, November 6, 2014
David Stockman on Japan's New QE Program
Former Reagan Budget Director David Stockman weighs in on the announcement of a massive new QE program by Japan just as the US Fed is ending its QE program. The size of the program is astounding. It raises a couple of questions. Is this where the US will also end up eventually later on? Will Japan be the trigger point for another global financial crisis? Below are some quotes from his article and then a comment.
"This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters——Messrs. Morimoto, Ishida, Sato and Kiuchi—-are only semi-mad."
"Never mind that the BOJ will now escalate its bond purchase rate to $750 billion per year—-a figure so astonishingly large that it would amount to nearly $3 trillion per year if applied to a US scale GDP. And that comes on top of a central bank balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%."
"The scheme is so insane that the surge of markets around the world in response to the BOJ’s announcement is proof positive that the mother of all central bank bubbles now envelopes the entire globe."
"Whether it attains its 2% inflation target or not, its is blindingly evident that the BOJ has destroyed every last vestige of honest price discovery in Japan’s vast bond market. Notwithstanding the massive hype of Abenomics, Japan’s real GDP is lower than it was in early 2013, while its trade accounts have continued to deteriorate and real wages have headed sharply south."
"So there is no recovery whatsoever—-not even the faintest prospect that Japan can grow out if its massive debts. The latter now stands at a staggering 250% of GDP on the government account and upwards of 600% of GDP when the debts of business, households and the financial sectors are included. And on top of that there is Japan’s inexorable demographic bust—–a force which will shrink the labor force and squeeze even further its tepid growth of output as far as the eye can see."
"Having slashed its historic holdings of JCBs, the GPIF will now double it allocation to equities, raising its investment in domestic and international stocks to 24% each."
"Stated differently, 50% of GPIF’s $1.8 trillion portfolio will flow into world stock markets. On top of that—the BOJ will pile on too—-tripling its annual purchase of ETFs and other equity securities. This is surely madness, but the point of the whole enterprise explains why the world economy is in such extreme danger."
"That’s right. Its 2% on the CPI…..come hell or high water. There is not a smidgeon of evidence that 2% inflation is any better for the real growth of enterprise, labor hours supplied and economic productivity than is 1% or 3%. Its pure Keynesian mythology. Yet all the world’s central banks are beating a path toward the same mindless 2% inflation target that lies behind this morning’s outbreak of monetary madness in Japan."
-despite recent warnings about financial asset bubbles building from the IMF and BIS, Japan is ready to ignore those and pump more enormous stimulus into stocks worldwide
-Stockman notes that Japan's actions create a threat to to world economy and that Central Banks everywhere are determined to get inflation moving higher
What we want to point out here is that a lot of this new stimulus money from Japan is targeted to "flow into world stock markets". This will perhaps allow stock market rallies to continue awhile longer and get the US Fed off the hook for awhile. But eventually if this bubble pops in Japan, they will be forced to rapidily sell off all these stocks they will be buying. Remember that a problem anywhere can lead to a problem everywhere in the highly interconnected global economy. This action may buy some more time, but also sets up Japan to possibly be the sacrificial lamb if things go south. We'll follow it.