Tuesday, July 25th, 2017 MST

Japan: turning on the printing presses

There are many dangers–not to mention moral issues–of money created out of “thin air.” One of the dangers is that it distorts the markets and results in bad investments during “booms,” which inevitably turn to “busts.”  During the busts, the bad investments wash out.

Another is that it is easy to use.  The economy slows, and immediately there are cries from misguided Keynesians for a stimulus, which means printing press money.  Japan is a perfect example.

For some ten years, Japan has been printing yen to stimulate its economy.  The “printers in charge,” i.e., Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda, seem determined to print whatever is necessary to achieve the goals that they have set.  One is zero interest rates on 10-year Japanese government bonds.

Jared Dillian, editor of “The Daily Dirtnap” and contributor to Mauldin Economics’ “The 10th Man,” recently speculated in a Forbes article that Japan may be on the road to unlimited money printing.  His reasoning is sound.

Since “deflation” set in there, the Bank of Japan has been employing printing press money (I sometimes call it “digital money.”) to buy bonds to drive down interest rates.  Recently, the BoJ announced that it was prepared to buy an unlimited amount of bonds to keep yields close to zero percent.

As Dillian notes, “buying an unlimited amount of 10-year government bonds involves printing a theoretically unlimited amount of yen.”

Does Kuroda comprehend what he’s saying?  Would they really print an unlimited amount of yen to keep interest rates at zero?  Yes, and here’s why.

Japan was the first country in modern central banking era to implement quantitative easing, which basically is the creation of money for the purpose of buying government bonds, other debt instruments and–in the case of Japan–equities.

Japan’s early QE was relatively small by today’s standards, less than $20 billion a month, but grew to multiples of that.  The BoJ now owns (with money created out of thin air, I remind you) 40% of outstanding Japanese government bonds and is the majority holder of exchange traded funds (ETFs).

Just how far will Japan go?  Such massive increases in the money supply in other countries have resulted in currency crises.  So, will Japanese see the error of their ways and cease printing, or will they continue to print?

It is likely that they will continue to print until an obviously serious problem arises, such as rapidly increasing prices.  Right now, though, rising prices almost would be welcomed in Japan.   Their purpose for implementing QE was to fight deflation, falling prices.

What’s going on in Japan is symptomatic of central banking and central planning.  We’ve had QE programs in the U.S. and the eurozone, programs that have been declared successful.  Consequently, until a problem arises, the printing will continue, not only in Japan but the rest of the world as well.  This is a perfect climate to invest in gold and silver, and at current levels the metals are attractively priced.

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