Quantitative Easing – to the unwashed – has a benign ring to it. Say aloud, “Quantitative Easing.” Not frightening at all, right? Nothing like “Default,” which conjures up some really scary potential outcomes.
Actually, to many investors who comprehend the nature of the problems the world faces, quantitative easing provides emotional relief. After all, haven’t the Keynesian economists reassured us that all the world’s central banks have to do is get the money supply “just right” and good times are here again.
To cynics, this is called the “Goldilocks Theory,” where the Papa Bear’s porridge was too hot, the Momma Bear’s porridge too cold but the Baby Bear’s just right. Money creators (the world’s central bankers) are still trying to determine if the money supply (sometimes called “liquidity”) is too little, too much or just right.
Apparently, many central bankers (and persons in positions to influence central bank activity) think their money supply is too small. One such person is Shinzo Abe, who is expected to be elected Japan’s next prime minister. Abe has called for “unlimited” stimulus by the Bank of Japan. Only a few weeks ago, the BoJ announced a stimulus program equivalent to about $1 trillion. Still, Abe wants it to be unlimited.
Japan’s economy, which is the world’s third largest by most measures, is now in its third decade of stagnation, despite previous Keynesian ploys, the most notorious being the BoJ’s forcing interest rates to near zero and public works projects. The conventional thinking is that if the Bank of Japan can get the money supply just right, Japan’s economy will turn around.
Apparently, Shinzo Abe doesn’t think that $1 trillion will get the job done and is prepared to print until the temperature is just right. Such reasoning is worldwide, and this blog will revisit this issue in future posts. In my opinion, the money creation has just started, and investors need to remain on top of this issue.
Liberal governments the world over have no other choice but to print money. If they give even a hint of the kind of austerity needed to sort out this mess, we would all have rioting in the streets like Greece. And notice that happened although Greece has not tightened enough to close its budget gaps. Can you imagine what would happen if they really tackled the overspending?
And believe me, the rest of Europe and the US has taken notice about what happens when you tighten even a little. No politician in this country will seriously take-up the austerity banner, only smoke and mirrors while the the printing press runs full-bore.